Personal Taxation Gaps 74 - 78

Personal Taxation Gaps 74 - 78

Personal Taxation Analyse the taxation of investment as relevant to the needs and circumstances of individuals and trusts: Gaps 79 - 88 Eddie Grant, FPFS Chartered Financial Planner CII accredited Adviser DISCLAIMER This gap fill session is of a general nature and is not a substitute for professional advice. No responsibility can be accepted for the consequences of any action taken or refrained from as a result of what is said.

Gap fill process Reflective statements Gap 88 - main uses of lifetime gifts and trusts in IHT planning Gap 87 - enterprise investment schemes (EIS) Gap 86 - venture capital trusts (VCTs) Gap 85 - real estate investment trusts (REITs) Gap 84 - onshore and offshore life assurance policies Gap 83 - onshore and offshore collectives, investment companies Gap 82 - child trust funds (CTFs) Gap 81 - individual savings accounts (ISAs) Gap 80 - pension arrangements Gap 79 - cash, fixed interest, securities, equities and property Gaps

Gap 79 - Direct investments cash and cash equivalents, fixed interest, securities, equities and property. Learning Point: analyse the taxation of investment as relevant to the needs and circumstances of individuals and trusts. Capital Gains Investment Bonds Dividends Savings Non-Savings Taxation Stack

Capital Gains Additional Rate 50% Higher Rate 40% Basic Rate 20%

Personal Allowance 0% Investment Bonds Dividends Savings Non-Savings Taxation Stack NonSavings

Capital Gains Additional Rate 50% 50% Higher Rate 40% 40% Investment

Bonds Dividends 20% Personal Allowance 0% 0% NonSavings Savings 10%

Savings Non-Savings Taxation Stack 20% Basic Rate Savings income Interest from banks and building societies. Interest distributions from authorised unit trusts. Interest from gilts and other securities, including corporate bonds. The interest content of purchased life annuities. Discounts, e.g. on deep discount bonds.

Onshore taxed at source at basic rate Grossing up Savings Income 400 received net of basic rate tax / 0.8 = 500 gross Or X 1.25 = 500 gross Savings 50% Additional Rate Tax band 150,000 Taxable Income 40% High Rate Tax band 34,370 Taxable Income

20% Basic Rate Band 10% Savings Rate Reliefs and Allowance Taxation of savings Computation Earnings Total 29,000 Taxation of savings Computation

Total Earnings 29,000 Building society interest gross 15,000 net / 0.8 18,750 Total 47,750 Taxation of savings

Computation Total Earnings 29,000 Building society interest gross 15,000 net / 0.8 18,750 Total 47,750

Less personal allowance (8,105) Income on which tax is calculated 39,645 Taxation of savings Computation Total Income on which tax is calculated

39,645 34,370 @20% 6,874 5,275 @40% 2,110 Total tax 8,984 Taxation of savings Computation

Total Income on which tax is calculated 39,645 34,370 @20% 6,874 5,275 @40% 2,110 Total tax

8,984 3,750 tax deducted at source offset against 8,984 Cash deposits Non-tax payers complete R85 to receive interest gross Interest paid gross on National Savings deposit accounts UK tax not deducted from offshore bank accounts EU Savings Directive withholding tax 35% from 1 July 2011 can be offset against UK tax liability No tax deducted if offshore bank allowed to declare interest to HMRC Interest must be shown on tax returns Demutualisation

Cash Bonus Cash payment for giving up membership rights Disposal for CGT but likely to be within exemption If no membership rights given up then no CGT liability Free Shares Issue of shares are free of CGT and Income Tax Acquisition costs are nil for CGT purposes NS&I Deposits Investment Account Aged 7 or more own right

Under 7 on behalf of Interest paid gross No notice no penalty Suitable for non-tax payers NS&I Deposits Easy Access Account Aged 11 or more own right Interest paid gross

Tiered interest No notice Telephone or cash card Minimum 100 balance NS&I Deposits Direct Saver Account Aged 16 or more own right Interest paid gross No notice

Telephone or online Minimum 1 balance Maximum 2 million NS&I Certificates Fixed interest issues Five and two year term certificates (not currently available) 15,000 maximum initial investment Free of tax Interest Linked Held over 1 year redemption is indexed-linked

NS&I Income and Growth bonds Paid net of basic rate One, three and five years 500 to 1 million 90 days loss of interest Savings income NS&I Childrens Bonus Bond Anyone over 16 can purchase for under 16 Encashed by 21 years old Tax-free 3,000 maximum per child, per issue. Fixed Interest Securities No liability to CGT

losses not allowable Gilts - loans to the UK government Fixed rate of interest paid gross twice yearly Accrued interest taxable if gilt holding exceeds 5,000 Fixed Interest Securities No liability to CGT losses not allowable Gilts - loans to the UK government Fixed rate of interest paid gross twice yearly Accrued interest taxable if gilt holding exceeds 5,000 Local Authority bonds - loans to local government at a fixed rate of interest interest paid twice yearly net of 20% tax, capital repaid if held to maturity Fixed Interest Securities

No liability to CGT losses not allowable Gilts - loans to the UK government Fixed rate of interest paid gross twice yearly Accrued interest taxable if gilt holding exceeds 5,000 Local Authority bonds - loans to local government at a fixed rate of interest interest paid twice yearly net of 20% tax, capital repaid if held to maturity Corporate bonds - loans to companies that bear interest for a fixed term when the capital is repaid interest paid net of 20% tax Fixed Interest Securities Permanent Interest Bearing Shares (PIBS) - loans to building societies Fixed rate of interest paid gross twice yearly

Fixed Interest Securities Permanent Interest Bearing Shares (PIBS) - loans to building societies Fixed rate of interest paid gross twice yearly Deep discounted or Zero Coupon Bonds Pay nil or very little interest Both bonds are offered for sale at a large discount Profits taxed as Income Acquisition and sales costs are allowed as expenses and losses can be offset against income tax in the year of encashment Shares Confer ownership rights Voting rights Capital growth

Dividends Grossing up Dividend Income 400 received net of 10% tax credit / 0.9 = 444.44 gross Tax credit 1 10% 10p Tax Credit NonTaxpayer

Nonreclaimable Tax credit 1 1 10% 10% 10p Tax Credit NonTaxpayer 10p Tax Credit

Basic Taxpayer Nonreclaimable Tax credit 1 1 1 32.5% 10% 10%

10p Tax Credit NonTaxpayer 10p Tax Credit Basic Taxpayer Nonreclaimable 22.5p 10p Tax Credit Higher Taxpayer

Tax credit 1 1 1 32.5% 10% 10% 10p Tax Credit NonTaxpayer 10p Tax Credit

Basic Taxpayer Nonreclaimable 22.5p 1 42.5% 32.5p 10p Tax Credit 10p Tax Credit

Higher Taxpayer Additional Taxpayer Additional Rate Taxpayer 400 dividend declared /0.9 Gross Dividend = 444.44 10% tax credit = 44.44 32.5% of 444.44 = 144.44 Tax total tax paid = 188.88 42.5% 32.5p

10p Tax Credit Additional Taxpayer Taxation of dividends Computation Total Earnings 40,000.00 Dividend 5,000 / 0.9

5,555.55 Total 45,555.55 Less personal allowance Income on which tax is calculated (8,105) 37,450.55 Taxation of dividends Computation Income on which tax is calculated Total

37,450.55 of which Non-savings 31,895.00 Dividends 5,555.55 Taxation of dividends Computation Income on which tax is calculated Total 37,450.55

of which Non savings 31,895.00 Dividends 5,555.55 Dividends 34,370.00 3,080.55 2,475.00 Higher Rate

Basic Rate Taxation of dividends Computation 31,895.00 Non-Savings @ 20% 2,475.00 dividends @ 10% Total 6,379.00 247.50 3,080.55 dividends @ 32.5% 1,001.78 Total tax

7,628.28 555.55 tax deducted at source offset against 7,628.28 Capital Gains Additional Rate 50% 50% 42.5% Higher

Rate 40% 40% 32.5% 20% 10% Investment Bonds Dividends Basic Rate

20% 10% Savings Personal Allowance Non-Savings Taxation Stack 0% 0% NonSavings

Savings Tax Credit NonReclaimable 10% Tax Credit NonReclaimable Dividends Let property Profits taxed as non-savings income. Overseas property income taxed separately from UK property income. Expenses and capital allowances can be deducted.

Assessable to Income Tax in the year the profit arises via self-assessment. Any loss is automatically carried forward and set against future lettings profits. Subject to CGT on sale. Expenses, Allowances and Reliefs Deductible expenses Capital Allowances Reliefs

Repairs and maintenance (not cost of alterations or improvements) Interest payable on borrowing for the purposes of the property letting Landlords energy saving allowance up to 1,500 Legal fees, professional charges, insurance premiums, utility bills if paid by the landlord Capital allowance deducted as an expense Plant & Machinery allowance is available for capital expenditure on equipment installed

Not available for furniture used in residential property CGT rollover CGT holdover IHT Business Property Residential Property Wear and tear 10% of annual rent can be offset against profits Can claim for replacement fixtures Renewals Claim the cost of renewing or replacing furniture

Must offset any gains made from selling items first Property profits - basis of assessment Arising basis Accounts have to be prepared for the actual tax year although HMRC usually accepts accounts to 31 March instead of 5 April. Tax is payable under the self-assessment rules Property profits - basis of assessment Trading income substantial services i.e. laundry, cleaning, one meal a day

Possible tax relief on pensions CGT rollover, holdover and IHT relief Rent a room 4,250 relief no expenses or taxed on income less expenditure basis Only UK Not Selfcontained Only Residential Furnished holiday lets

Furnished Situated in the UK or EEA Let on a commercial basis Available for let minimum 210 days per year Actually let for a minimum of 105 days May be under same occupancy for more than 31 days as long as such periods do not exceed 155 days per Tax Year. Does not need to be a holiday resort Furnished holiday lets Advantages Disadvantages Treated as a trade

Losses only against same business Pension contribution Long term buy to let CGT reliefs Question Q David, an additional rate taxpayer received a net dividend of 684 on a parcel of shares he owns. How much ADDITIONAL tax will he owe? A 304

B 247 C 171 D 95 Answer A David, an additional rate taxpayer received a net dividend

of 684 on a parcel of shares he owns. How much ADDITIONAL tax will he owe? A 304 B 247 C 171 D

95 684 / 0.9 = 760 @ 32.5% = 247 more to pay Multi Response Question Q Tim owns a furnished holiday letting. In order to be able to pay pension contributions on the income derived from this activity, the letting must: A be situated in the UK only B

be let to individuals who are on holiday only C not be let for more than 155 continuous days to the same individual in a tax year D be furnished and let on a commercial basis E be situated in an acknowledged holiday resort F

be let for at least 105 days in a tax year. This can be averaged with other properties Multi Response Question A Tim owns a furnished holiday letting. In order to be able to pay pension contributions on the income derived from this activity, the letting must: A be situated in the UK only B be let to individuals who are on holiday only

C not be let for more than 155 continuous days to the same individual in a tax year D be furnished and let on a commercial basis E be situated in an acknowledged holiday resort F be let for at least 105 days in a tax year. This can be

averaged with other properties Gap 80 - indirect investments - pension arrangements Learning Point: Analyse the taxation of investment as relevant to the needs and circumstances of individuals and trusts. Tax privileges Tax input relief Tax freedom on capital and most income Up to 25% tax-free

Tax-free death benefits Contributions and fund Up to age 75 100% earnings up to 50,000 3,600 1.5 million Lifetime Allowance Tax relief Net pay Relief at source Self-assessment

Carry forward Unused annual allowance (50,000) Proceeding three tax years Must be a member of a registered pension scheme Set order Fill current year then earliest year Retirement income 25% of fund tax-free Pension Commencement Lump Sum Scheme pension, lifetime annuity, capped drawdown, flexible drawdown Death before crystallisation usually free of all taxes under lifetime allowance Question

Q Peter is a member of an occupational pension scheme and Rachel contributes to a personal pension. Both are higher rate tax payers. How do they receive their tax relief? A Peter receives tax relief by extending the basic rate band B Rachels personal pension plan operated the net pay arrangement and highest marginal rate relief is given at source

C Peter pays his personal pension net of basic rate tax D Rachel pays her personal pension net of basic rate tax and receives higher rate tax relief by extending the basic rate band Answer A Peter is a member of an occupational pension scheme and Rachel contributes to a personal pension. Both are higher rate tax payers. How do they receive their tax relief?

A Peter receives tax relief by extending the basic rate band B Rachels personal pension plan operated the net pay arrangement and highest marginal rate relief is given at source C Peter pays his personal pension net of basic rate tax D

Rachel pays her personal pension net of basic rate tax and receives higher rate tax relief by extending the basic rate band Gap 81 - indirect investments - Individual Savings Accounts (ISAs) Learning Point: Analyse the taxation of investment as relevant to the needs and circumstances of individuals and trusts. Indirect investments Individual Savings Accounts (ISAs). Eligibility ISA Resident and Ordinarily Resident Aged 18 and over Stocks and Shares ISA

Non-Resident Crown Employee Aged 16 and over Cash ISA Junior ISA Launched 1st November 2011 ISA one option Tax-efficient savings vehicle One option Overall maximum 11,280 Stocks and Shares ISA Maximum investment

11,280 ISAs two options Tax-efficient savings vehicle Two options Overall maximum 11,280 Cash ISA Maximum investment 5,640 Stocks and Shares ISA Balance ISA limit

Subscription limits Tax Year Cash Limit Stock & Shares Limit Total Subscription Junior ISA Limit 99/00 to 07/08 (mini)

3,000 4,000 7,000 n/a 99/00 to 07/08 (maxi) 3,000 7,000 7,000

n/.a 08/09 to 09/10 3,600 7,200 7,200 n/a 2010 / 2011 5,100

10,200 10,200 n/a 2011 / 2012 5,340 10,680 10,680 3,600 2012 / 2013

5,640 11,280 11,280 3,600 Maximum ISA contribution since launch 109,560 Tax Treatment Free from Capital Gains Tax and Income Tax maybe foreign withholding tax on overseas investments 10% tax credit non-reclaimable

Cash held in a stocks and shares ISA liable to 20% charge before crediting account No reporting on self-assessment required Junior ISA Available to children who missed out on the Child Trust Fund. So children qualify if they were: Born on or after 3rd January 2011. Under 18s born before September 2002. Maximum 3,600 per Tax Year. Cash and Stocks & Shares versions available. Parents, family and friends can contribute. Account converted to a normal ISA at age 18. Question Q

Robert and Ann are married with 4 children, Sarah aged 22, Clive aged 17, Sally aged 11 and Sue aged 4 How much can they contribute to ISAs as a family? A 33,840 B 46,680 C 39,480 D

43,080 Answer Q Robert and Ann are married with 4 children, Sarah aged 22, Clive aged 17, Sally aged 11 and Sue aged 4 How much can they contribute to ISAs as a family? A 33,840 B 46,680

C 39,480 D 43,080 Robert, Ann, Sarah 11,280 each Clive 5,640 + 3,600 Sally 3,600 Sue nil Gap 82 - indirect investments - Child Trust Funds (CTFs) Learning Point: Analyse the taxation of investment as relevant

to the needs and circumstances of individuals and trusts. Child Trust Fund 31 August 2002 31 July 2010 HM Government 250 HM Government 50 st

Ended 3rd January 2011 Child Trust Fund Happy 18th Birthday New-born 1200 per annum could be added Now 3,600 in line with Junior ISA Child Trust Fund Savings Shares

Stakeholder Age 13 Lower Risk 1.5% cap Tax treatment Income Tax free 10% tax credit cannot be reclaimed Capital Gains Tax free 100 parental rule does not apply Question Q Sue and Trevor have 3 children, Sam born 31st August 2000, Ellie born 31st August 2004 and Rebecca born 31st August 2010. Which children are eligible for the Child

Trust Fund and how much? A Sam, Ellie and Rebecca are eligible to 250 each B Sam and Ellie are eligible to 250 and Rebecca is eligible to 50 C Sam is not eligible and Ellie and Rebecca are eligible to 250 each D

Sam is not eligible, Ellie is eligible to 250 and Rebecca is eligible to 50 Answer Q Sue and Trevor have 3 children, Sam born 31st August 2000, Ellie born 31st August 2004 and Rebecca born 31st August 2010. Which children are eligible for the Child Trust Fund and how much? A Sam, Ellie and Rebecca are eligible to 250 each B

Sam and Ellie are eligible to 250 and Rebecca is eligible to 50 C Sam is not eligible and Ellie and Rebecca are eligible to 250 each D Sam is not eligible, Ellie is eligible to 250 and Rebecca is eligible to 50 Gap 83 - indirect investments - onshore and offshore collectives and investment companies

Learning Point: Analyse the taxation of investment as relevant to the needs and circumstances of individuals and trusts. Indirect investments Offshore Collectives Offshore jurisdictions Channel Islands, Isle of Man, Luxembourg SICAV Similar to UK OEICs UCITs EU directive setting common standards for schemes May be marketed in EU member states Reporting funds Disclosure to HMRC

UK investors must be told their share of the funds income Dividends liable to Income Tax Although do not need to distribute income Taxed at 10%, 32.5% or 42.5% Gains liable to Capital Gains Tax Normal CGT rules apply Taxed at 18% or 28% Non-reporting funds If not a Reporting fund, then it is a NonReporting fund Capital Gains Tax principles apply But no Capital Gains Tax exemption Taxed against Income Tax not Capital Gains Tax

20%, 40% and 50% Comparison of tax treatment Reporting Non-reporting UK Investors Income accumulated Lower dividends tax Income roll up CGT liability

Non-resident investors Gross income Non-remitted Excluded property Question Q A B C D Carlos is resident in the UK but is non-UK domicile. He has an offshore collective that has received Reporting

status. Which of the following statements in relation to Reporting funds is INCORRECT? Dividends from Reporting funds are taxed at a rate of 10%, 32.5% and 42.5% The annual CGT exemption cannot be set against a gain on an offshore Reporting fund Profits on the eventual encashment of a Reporting Fund are subject to CGT at either 18% or 28% UK investors are subject to Income Tax on their share of the funds income, whether it is distributed or not Answer A A B

C D Carlos is resident in the UK but is non-UK domicile. He has an offshore collective that has received Reporting status. Which of the following statements in relation to Reporting funds is INCORRECT? Dividends from Reporting funds are taxed at a rate of 10%, 32.5% and 42.5% The annual CGT exemption cannot be set against a gain on an offshore Reporting fund Profits on the eventual encashment of a Reporting Fund are subject to CGT at either 18% or 28% UK investors are subject to Income Tax on their share of the funds income, whether it is distributed or not

Gap 84 - indirect investments - onshore and offshore life assurance policies Learning Point: analyse the taxation of investment as relevant to the needs and circumstances of individuals and trusts. Taxation of onshore life policies Qualifying policies Regular premium policies for at least 10 years Corporation Tax within the fund Free from tax on encashment Non-Qualifying policies Single premium investments Corporation Tax within the fund Liability to tax on chargeable events

UK investment bond fund taxation Real gains 20% Including indexation Rent 20% UK dividends 10%* Foreign dividends 20% Interest 20% *UK Dividends received net of 10% tax credit non-reclaimable

Chargeable Events Tax liability only occurs on Chargeable Events and when a gain arises Death of last survivor Final Encashment Withdrawals over 5% cumulative Adding Life Assured Assignment for money or moneys worth No need to show on tax return Calculate gain Step 1 = Surrender proceeds Step 2 + Plus all withdrawals Step 3 Minus Initial investment

Step 4 Minus Previous chargeable Gains = Total Gain Tax-deferred income Ability to withdraw up to 5% tax-deferred income per policy year Maximum tax-free is up to original investment Year One Two Thre e Four

Five Six Twent y Cumulative 5% 5 10 15

20 25 30 100 Total Income taken 5% 10% 15%

20% 25% 30% 100% No immediate tax charge but deferred until chargeable event Partial withdrawals Year One Two

Three Four Cumulative 5% 5 10 15 20 Total Income taken 5%

10% 15% 23% Chargeable Gain 0% 0% 0% 3%

Chargeable events on part surrenders occur at the end of each policy year, rather than each time a surrender is made, based upon policy owner at end of policy year Example Event Total 01/01/07 initial investment 10,000 31/12/07 partial surrender (within 5% rule)

500 31/12/08 partial surrender (500 over 5% rule) 1,000 01/12/12 surrender 14,000 Event Total = Surrender value 14,000

+ All withdrawals 1,500 - Initial investment - Previous chargeable gain = Chargeable gain at maturity 10,000 500 5,000 Capital Gains Additional Rate

50% 50% 42.5% 30% Higher Rate 40% 40% 32.5%

20% 20% 10% Investment Bonds Dividends Basic Rate 20% 10%

Savings Personal Allowance Non-Savings Taxation Stack 0% 0% NonSavings Savings Tax Credit NonReclaimable

10% Tax Credit NonReclaimable Dividends 0% 0% Onshore Bond Onshore bond top slicing Higher rate Basic rate

Bond top slicing Higher rate Basic rate Bond top slicing HRT Higher rate Basic rate Onshore slice 50% Additional Rate Tax band 15,000 Gain after 3 Years

150,000 Taxable Income 40% High Rate Tax band 34,370 Taxable Income 31,370 Taxable Income after allowance and relief Reliefs and

Allowance Onshore slice 50% High Rate Tax band 5,000 Slice 5,000 Slice Income 40% High Rate Tax band 5,000 Slice 31,370 Taxable

Income after allowance and relief 150,000 Taxable 34,370 Taxable Income Reliefs and Allowance Onshore slice 50% High Rate Tax band

150,000 Taxable Income 40% High Rate Tax band 2,000 Slice in HRT 3,000 Slice in BRT 34,370 Taxable Income 31,370 Taxable Income after allowance

and relief Reliefs and Allowance Onshore slice 50% High Rate Tax band 150,000 Taxable Income 2,000 Slice in HRT 40% High Rate Tax 2,000 Slice in HRT

band 2,000 Slice in HRT = 6,000 of the 15,000 Gain @ HRT 34,370 Taxable Income 31,370 Taxable Income

after allowance and relief Reliefs and Allowance Policies under trust Friendly Society Policies Qualifying policies which are exempt from Income Tax and Capital Gains Tax Fund is exempt (excluding dividend 10% tax reclaim) Maximum annual premium 270 or 300 p.a. if regular monthly premiums Available in own name 18 70 (child policies also available)

Annuities Purchased Life - return of capital tax-free (purchase price divided by the number of years the annuitant is expected to live at outset) - interest element taxed as savings income with tax deducted at basic rate Purchased annuities certain - return of capital tax-free (purchase price by number of payments) - interest element taxed as investment income with tax

deducted at basic rate Annuities Pension Annuity - taxable in full as income under PAYE Annuities for beneficiaries under trusts or wills taxed in full as investment income with basic rate deducted from the whole annuity payment

Structured Settlements - Damages or Personal Injury annuity can be paid directly without deductions of tax and becoming liable to tax Immediate Needs Annuity Tax-free if based upon impaired life and paid to care home directly Offshore bond fund taxation Real gains 0%

Including indexation Rent 0% Dividends With holding tax on some dividends Interest 0% *UK Dividends received net of 10% tax credit non-reclaimable Capital Gains Additional Rate

50% 50% 42.5% 30% 50% Higher Rate 40% 40%

32.5% 20% 40% 20% 10% Investment Bonds Dividends Basic Rate

20% 10% Savings Personal Allowance Non-Savings Taxation Stack 0% 0% NonSavings

Savings Tax Credit NonReclaimable 10% Tax Credit NonReclaimable Dividends 0% 20% 10% 0%

0% Onshore Bond Offshore Bond Time apportionment Number of days policyholder was resident in the UK Number of days policy has run Time apportionment Number of days inside the UK 2,737 days = 75% x Gain

Policy run for 3,650 days Personal portfolio bonds 1998 Budget HMRC introduced penal rules 15% compound growth assumed Deemed gain is calculated on top of normal tax charge No top slicing Question Q A B Gavin has taxable income of 30,370 and surrenders an offshore investment bond after 5 complete tax years. The

gain is 25,000. How much tax is due on the surrender? 6,000 C 2,000 3,000 D 8,000 Answer A A

B Gavin has taxable income of 30,370 and surrenders an offshore investment bond after 5 complete tax years. The gain is 25,000. How much tax is due on the surrender? 6,000 C 2,000 3,000 D 8,000

25,000 / 5 years = 5,000 slice 4,000 @ 20% x 5 years = 4,000 1,000 @ 40% x 5 years = 2,000 Gap 85 - indirect investments - Real Estate Investment Trusts (REITs) Learning Point: analyse the taxation of investment as relevant to the needs and circumstances of individuals and trusts. Special purpose vehicles Limited partnership or exempt UK unit trust Allow investments from SIPPs SASSs and Charities Designed for specific projects Geared up to 90% Normally no income but capital gain potential

Shares in listed property companies More liquid Different to direct property holdings Diversified Quality of management Level of borrowing Value of the property portfolio Stock market fluctuations Property share movement

Real estate investment trusts Tax transparent investment companies allowing access to commercial and residential property investments Closed ended, listed on the stock market To be exempt from Corporation Tax 75% of gross profits from property letting Interest on borrowing has to be at least 125% covered by rental profits REIT distributions 90% rental profits must be paid to investors Exempt profits Classed as property income, paid net of 20% tax Can be reclaimed

Non-Exempt Profits Classed as dividend income Non-reclaimable 10% tax credit Insurance company property funds Regular and Single contributions Unit linked Not geared Property collectives Unit trusts, investment trusts and OEICs Utilise Capital Gains Tax Property security funds Invest in property companies and REITs Question

Q For a REIT to be exempt from Corporation Tax: A Interest on borrowing has to be at least 75% covered by rental profits and 60% of gross profits must come from property letting B Interest on borrowing has to be at least 125% covered by rental profits and 90% of gross profits must come from property letting C

Interest on borrowing has to be at least 125% covered by rental profits and 75% of gross profits must come from property letting D Interest on borrowing has to be at least 90% covered by rental profits and 75% of gross profits must come from property letting Answer A For a REIT to be exempt from Corporation Tax A

Interest on borrowing has to be at least 75% covered by rental profits and 60% of gross profits must come from property letting B Interest on borrowing has to be at least 125% covered by rental profits and 90% of gross profits must come from property letting C Interest on borrowing has to be at least 125% covered by rental profits and 75% of gross profits must come from property letting

D Interest on borrowing has to be at least 90% covered by rental profits and 75% of gross profits must come from property letting Gap 86 - indirect investments - Venture Capital Trusts (VCTs) Learning Point: analyse the taxation of investment as relevant to the needs and circumstances of individuals and trusts. Venture Capital Trusts Launched 6th April 1995 Encourage investment in small higher-risk trading companies Similar to investment trusts

Tax relief Aged 18 and over 30% tax reducer up to 200,000 per tax year Example: If Income Tax liability on total income of 15,000 and invest 70,000 into VCT maximum Income Tax relief is 15,000 not 21,000 (70,000 x 30%) Tax relief Income Tax relief withdrawn within 5 years (except disposal to spouse / civil partner or investor death) Tax-free dividends up to 200,000 per tax year CGT exempt with no minimum holding period

VCT qualifying rules Not a close company and must be listed on an EEA stock exchange Income derived from shares or securities 70% of investments by value in qualifying unlisted companies 10 million in any one company Non-Qualifying companies Land and financial instruments Financial activities, property development, or providing legal or accountancy services Leasing or letting assets on hire, except certain ship-chartering activities Royalties or licence fees, except patents or know-how, where most of it has been created by the company (or one of its subsidiaries) Farming, market gardening, or forestry

Operating or managing hotels, guest houses, hostels, or nursing or residential care homes Providing services to another company in certain circumstances where the other company's trade consists to a substantial extent in excluded activities Shipbuilding, producing coal or steel Multiple response Q Claire is interested in a Venture Capital Trust and has heard the following statements from her friends. Which ones are CORRECT? A VCTs are CGT-free after 5 years

B 30% tax reducer up to 200,000 C Income Tax relief withdrawn within 5 years D 80% of investments by value in qualifying unlisted companies E Capital Gains Tax liability can be held over into a VCT

Multiple response A Claire is interested in a Venture Capital Trust and has heard the following statements from her friends. Which ones are CORRECT? A VCTs are CGT-free after 5 years B 30% tax reducer up to 200,000 C

Income Tax relief withdrawn within 5 years D 80% of investments by value in qualifying unlisted companies E Capital Gains Tax liability can be held over into a VCT Gap 87 - indirect investments - Enterprise Investment Schemes (EISs) Learning Point: analyse the taxation of investment as relevant to the needs and circumstances of individuals and trusts.

Enterprise Investment Schemes Launched 1st January 1994 Designed to help smaller higher-risk trading companies Tax reliefs to raise funds Tax Relief 30% tax relief on qualifying investments up to 1,000,000 per tax year Tax reducer deduction from tax liability Carry back 1 year Must be liable to UK Income Tax Qualifying companies Under 15 million gross assets Under 250 employees

Carry on qualifying trade for at least 3 years UK established and unlisted (AIM included) Maximum fund raising from EIS is 10 million Excluded (i.e. non-qualifying) trades land shares leasing banking futures insurance legal

hotels property oil forestry Withdrawal of relief Lost if disposed of within 3 years (except wife, civil partner and death) Withdrawn if investor receives value within 1 year before and 3 years after CGT Deferral Ability to defer a chargeable gain by reinvesting in qualifying EIS

No maximum 58% tax relief (30% Income Tax and 28% CGT) Reinvestment one year before and three years after Seed EIS Business Angels 25 or fewer full time employees Gross assets under 200,000 and 150,000 maximum investment 30% maximum share holding in any one company if tax relief 50% Income Tax Relief Question Q

Stewart has a Capital Gains Tax liability of 100,000 and an Income Tax Liability of 20,000. If he invests into an Enterprise Investment Scheme he can: A Defer up to 20,000 Capital Gain and get up to 20,000 Income Tax relief B Defer up to 100,000 Capital Gain and get up to 30,000 Income Tax relief C Defer up to 20,000 Capital Gain and get up to 30,000

Income Tax relief D Defer up to 100,000 Capital Gain and get up to 20,000 Income Tax relief Answer A Stewart has a Capital Gains Tax liability of 100,000 and an Income Tax Liability of 20,000. If he invests into an Enterprise Investment Scheme he can? A Defer up to 20,000 Capital Gain and get up to 20,000

Income Tax relief B Defer up to 100,000 Capital Gain and get up to 30,000 Income Tax relief C Defer up to 20,000 Capital Gain and get up to 30,000 Income Tax relief D Defer up to 100,000 Capital Gain and get up to 20,000 Income Tax relief

Gap 88 - the main uses of lifetime gifts in basic IHT mitigation; the main uses of lifetime trusts in basic IHT mitigation. Learning Point: analyse the taxation of investment as relevant to the needs and circumstances of individuals and trusts. Wills Over 29.5 million Britons are currently without a will Unbiased October 2011 Determine the assets and liabilities of the estate Collect in the assets of the estate and pay any debts Obtain Grant of Probate Settle any tax liability Distribute the assets as instructed in the will

Tax has to be paid before grant of probate can be issued Intestacy Deeds of Variation To change the terms of the will/intestacy after death for family/IHT purposes within 2 years If all heirs are over 18 and sane The deed must satisfy the following conditions: Must refer to the will being varied Signed by all those who would or might have benefited from the original provisions Must contain a statement that the variation is to have effect for There must be no consideration for money or moneys worth Nil rate band

Excess @ 40% 325,000 Taxed at 40% Spouse taxed at 0% Beware non-UK domiciled spouse (55,000) nil rate band Nil Rate Band balance taxed at 0% 325,000

Sharing assets Spouse / Civil Partner estate equalisation Transferable nil rate band Discretionary trusts Unconditional Consider the surviving spouse Transferable nil rate band 215,000 Estate Dies 01/01/199 7 No Gifts

On 1st death Transferable nil rate band 430,000 Estate Audrey 215,000 Estate Dies 01/01/199 7 No Gifts

On 1st death On 1st death Transferable nil rate band (NRB) 700,000 Estate 430,000 Estate Dies 01/04/2012 Available NRB 325,000 Audrey 215,000 Estate

Dies 01/01/199 7 No Gifts On 1st death Plus 100% NRB (325,000) On 1st death 650,000 Combined 130,000 IHT Saved

On 2nd death Partial nil rate band (NRB) 500,000 Dies 01/04/2012 Available NRB 325,000 322,500 Audrey 215,000 50% NRB

Dies 01/01/1997 107,500 Gifts On 1st death Plus 487,500 Combined 65,000 IHT Saved On 1st death On 2nd death

Multiple marriages partial nil rate band (NRB) Dies 01/04/2010 available NRB 325,000 Plus Dies leaves 50% NRB Dies leaves 50% NRB Dies leaves 25% NRB 100% NRB

maximum 1st Husband Spencer 2nd Husband Adam 3rd Husband David On 2nd death Potentially Exempt Transfers Opportunity for large gifts Life cover to protect gift liability

PET considerations BPR Income Pension 2006 CGT Chargeable Lifetime Transfers 7 year planning opportunity Appreciating assets Care: Initial, Periodic and Exit charges Business Property Relief Business Property Relief and Agricultural Property Relief

2 year qualifying period Transfer Death within 2 years Problem with Business Assets Cannot be a binding contract for sale Secured loans transferred to domestic property Tenanted farmland 50% or 100% Care re. non-trading activities e.g. investments Lifetime gifting less attractive as CGT dies with owner Personal exemptions Annual exemptions

Up to 3,000 a year - not on death Small gifts 250 per recipient Other Son / Daughter 5,000 Grandchildren 2,500 spouse on prospective marriage, 2,500 Other person 1,000 Gifts: - in consideration of marriage - to charities

- for education & maintenance - to political parties - to spouse/ civil partner - normal expenditure - death on active service Trust options Lifetime Gift Strategy 7 year gift cycle Outright gifts Value of nil rate band Q In 2009/10 Harold gifted 1,500 to his nephew under the lifetime transfer rules. In 2010/11 he gifted 3,000 to his

brother. The MAXIMUM Inheritance Tax exempt amount he can gift to his sister in 2011/12 is: A 4,500 B 1,500 C 6,000 D

3,000 A In 2009/10 Harold gifted 1,500 to his nephew under the lifetime transfer rules. In 2010/11 he gifted 3,000 to his brother. The MAXIMUM Inheritance Tax exempt amount he can gift to his sister in 2011/12 is: A 4,500 B 1,500

C 6,000 D 3,000 Q On Luke's death in May 2011 his estate was valued at 875,000. He left 50,000 to charity and split the remainder of his estate equally between his wife and daughter. Assuming he has made no lifetime transfers how much will his daughter receive once the Inheritance Tax bill is settled?

A 282,500 B 247,500 C 362,500 D 377,500 A

On Luke's death in May 2011 his estate was valued at 875,000. He left 50,000 to charity and split the remainder of his estate equally between his wife and daughter. Assuming he has made no lifetime transfers how much will his daughter receive once the Inheritance Tax bill is settled? A 282,500 B 247,500 C

362,500 D 377,500 875,000 - 50,000 Charity = 825,000 825,000 / 2 = 412,500 412,500 - 325,000 NRB = 87,500 87,500 @ 40% = 35,000 IHT 412,500 - 35,000 = 377,500 Gaps

HANDOUT NOTES DISCLAIMER These notes have been produced for the guidance of delegates at the PFS gap fill session for which they were prepared and are not a substitute for detailed professional advice. No responsibility can be accepted for the consequences of any action taken or refrained from as a result of these notes or the talk for which they were prepared. The tax and legislation information contained in this document is based on Just Asked Ltd current understanding as at May 2012 and

may change in the future. HM Revenue and Customs (HMRC) practice, and the laws relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

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