STEP - Tax Led Investments

Alex Nicklin- Financial Planner & Wealth Manager5 March 2015

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Risk Warning

• Tax Led Investments are potentially higher-risk, longer-term and less liquid investments; investors may get back less than expected and may have difficulties selling their investment

• Tax Led Investments should only be considered once other planning opportunities have been fully explored

• The levels and basis of taxation may be subject to change and may impact negatively on any Tax Led Investment

• Any tax treatment depends on the individual circumstances of each investor and may be subject to change

• These investments may lose their tax status through decisions made by the investment manager

• You are encouraged to seek independent tax advice before considering these investments

• Tax Led Investments should form only a small part of the client’s portfolio

This presentation/article/document is solely for professional advisers and should not be construed as investment advice 

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Agenda

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1. Tax Led Investments

1. What are they?

2. VCT, EIS, and BPR compared

3. Risks and risk mitigation

4. Who benefits?

2. Tax Led Solutions

1. Before and after retirement

2. Estate planning

3. Tax planning

3. Tax Led Service

1. How do we select suitable investments?

Tax Led Investments – what are they?

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VCT EIS

Introduced in 1995 Introduced in 1994

PLCs Listed on London Stock Exchange

Unquoted (including AIM)

Gross assets of ≤ £15 million before and ≤ £16 million after investment

Gross assets of ≤ £15 million before and ≤ £16 million after investment

≤ 250 employees ≤ 250 employees

Investee companies can receive ≤ £5 million per 12 months

Investee companies can receive ≤ £5 million per 12 months

Investee companies need HMRC approval

Investee companies need HMRC approval

VCT need to maintain qualifying status to give tax benefits to investors

EIS needs to maintain qualifying status to give tax benefits to investors

Evergreen or planned exit Evergreen or planned exit

Generalist, AIM, Specialist, Technology

Generalist, AIM, Specialist, Technology

Company only Company, Fund, Portfolio Service

Tax Led Investments – Comparison

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Benefits VCT EIS BPR

Maximum investment £200,000 £1 million Unlimited

Minimum holding period

5 years 3 years 2 years

Initial income tax relief 30% 30% 0%

Carry back No Yes No

Capital gains tax deferral

No Yes No

Tax free income Yes No Forestry only

Tax Free capital gains Yes Yes Forestry only

Free of inheritance tax No Yes Yes

Loss relief No Yes Possibly

Tax Led Investments – examples

VCT EIS BPR

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Text separate from box

Text separate from box

Tax Led Investments – what risks?

Risks Risk mitigation

Investment Risk• Smaller and less mature companies

Investment Risk• Due diligence• Diversification of investments

Liquidity Risk• Minimum holding period of 2,3 or 5 years• Limited secondary market

Liquidity Risk• Planned exit EIS• VCTs with buy-back policy• BPR with minimum 6 month liquidity

Regulatory Risk• Changes to tax treatment• Changes to qualifying rules

Regulatory Risk• Understanding FCA and HMRC policy• Anticipating rule changes

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Tax Led Service – who benefits?

FCA DefinitionNet Investable assets exclude• Primary residence or any money raised through a loan secured on that property;• Any rights under a qualifying contract of insurance; or• Any benefits (in the form of pensions or otherwise) which are payable on the termination of service or on death or retirement 

FCA Developments• Potential to increase the HNW criteria in line with USA and EU

Exceptions• Clients may invests more than 10% of their net assets when this does not impact on their (long-term) cash flow and/or capacity for loss

Minimum criteria Towry FCA

Client categorization Ordinary Retail Investor

Ordinary Retail Investor

Annual income £150,000 (HNW £100,000)

Net investable assets £1 million (HNW £250,000)

Minimum investment £60,000 (N/A)

Ability to reclaim income tax relief

30% (N/A)

Asset allocation 10% (N/A)

Risk appetite Speculative (N/A)

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Tax Led Investments – EIS Loss Relief

EIS Investments Investment 1 Investment 2 Investment 3 Investment 4 Investment 5 Total

Investment 10,000 10,000 10,000 10,000 10,000 50,000

30% income tax relief 3,000 3,000 3,000 3,000 3,000 15,000

Net cost 7,000 7,000 7,000 7,000 7,000 35,000

Performance -100% -50% 0% +50% +100% 0%

Proceeds - 5,000 10,000 15,000 20,000 50,000

Loss/gain -7,000 -2,000 3,000 8,000 13,000 15,000

Loss relief @ 45% 3,150 900 - - - 4,050

Net loss/gain (£) -3,850 -1,100 3,000 8,000 13,000 19,050

Net loss/gain (%) -38.5% -11% +30% +80% +130% +38.1%

Above calculations based on a 45% taxpayer receiving loss relief at their marginal rate.

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Tax Led Solutions – before retirement

VCT ExampleClient restricted by lower pension contribution levelsConcerned over income levels in retirementFinancial planning indicates gap in retirement funding of £300,000Adviser recommends £75,000 in VCTs per year for 4 years

Investment £75,000Income Tax relief £22,500After 4 yearsVCT Portfolio £300,000Income @ 5% p/a £15,000Tax relief is re-invested in SIPP and ISA of client (and spouse)

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Tax Led Solutions – before retirement

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Tax Led Solutions – tax planning

£30,000 £30,000

£100,000 £100,000 £100,000

Year 1 Year 2 Year 3

£100,000

Year 5

£100,000

Year 6

£100,000

Year 7

£30,000 £30,000 £30,000 £30,000

EIS Investment

30% income tax

Rolling EIS investment program

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Tax Led Solutions – before retirement

EIS Example

•Client not started a retirement plan yet•Client restricted by lower pension contribution levels•Financial planning indicates gap in retirement funding of £785,000•Adviser recommends £70,000 in EIS per year for 24 years using 4-year rolling EIS investment programme

Investment £70,000Income Tax relief £21,000Pension contribution £26,250 (gross)ISA contribution £6,563

After 24 years Retirement fund of £787,500EIS Portfolio of £280,000

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Tax Led Solutions – at retirement

Tax Free Retirement

The client•has a SIPP valued at £1.2 million•qualifies for state pension•takes £300,000 (25%) and draws down balance at £60,000 p/a•will have annual taxable income of £56,000 (excl personal allowance)•will have a net income of £49,000 and an income tax bill of £16,000•The adviser recommends £56,000 in EIS per year indefinitely using 4-year rolling EIS investment programme

Investment £56,000Income tax relief £16,800Annual tax free income £65,000

NB All figures are approximate

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Tax Led Solutions – after retirement

Flexible Drawdown and EIS

•Client has a SIPP valued at £300,000 and £285,000 spare cash•Client is suitable for flexible drawdown•Financial planning indicates no need for funds•Client is concerned about paying 45% income tax on drawdown•Client also concerned about paying 55% in inheritance tax•Adviser recommends £100,000 drawdown per year for 3 years•Adviser recommends £150,000 in EIS per year for 3 years

Drawdown £100,000 Investment £55,000 (proceeds)£95,000 (spare cash)£150,000

Tax charge £45,000 Tax break £45,000Net cost NIL

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Tax Led Solutions – estate planning

Tax Led Gifting

•Client is 75 years old and has 2 children•Client holds £100,000 in VCTs providing £5,000 tax free income•Financial planning indicates no need for income•Total estate value £1 million•Adviser recommends gifting of VCTs 50/50 to children

•After 7 years estate worth £900,000•Client has saved £40,000 on IHT•Children have each received £17,500 tax free income over 7 years

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Tax Led Solutions – estate planning

Estate Planning and EIS

•Client is 70 years old•Client has an estate worth £2 million•Client pays £30,000 per year in income tax on pension (and other) income•Client is concerned about inheritance tax liability•Adviser recommends a series of conventional estate planning solutions•Client becomes concerned about losing too much control•Adviser also recommends an EIS investment

Investment: £200,000Income tax relief: £60,000IHT relief: £80,000

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Tax Led Solutions – School Fees

Tax Efficient School Fee Planning

•Client is concerned about future school fees for his child•Adviser recommends £85,000 in EIS per year for the duration of the child’s education using 4-year rolling EIS investment programme•After the child finishes their education the client discontinues the re-investment programme (or continues this into retirement)

Investment: £85,000Income tax relief: £25,500School fees: £25,000

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Tax Led Solutions – tax planning

Profit extraction Do nothing (£) Invest in EIS (£)

Company profit before tax 100,000 100,000

Corporation tax @ 20% (20,000) (20,000)

Company profit after tax £80,000 £80,000

Extract dividend £80,000 £80,000

Invest in EIS (£80,000)

Dividend income tax @ 25%

(£20,000) (£20,000)

EIS income tax relief @ 30%

£24,000

Return of EIS funds after 3 years

£80,000

Net cash in bank £60,000 £84,000

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Tax Led Solutions – BusinessInvestment Relief

Investment Management ServicesCore services

Client Value

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Tax Led Service – selection process

• Application of minimum selection criteria to whole of market

• Product Selection Committee

Product Selection Committee

VCT EIS

No capital growth No capital growth or single companies

≥ 7 year experience ≥ 4 year experience

≥ £10 million AUM ≥ £3 million AUM

≥ 10 investee companies ≥ 4 investee companies

< 5% initial; < 4% annual < 5% initial; < 3% annual

Dividend & buy-back policy HMRC Advance Assurance

≥ 84% rating by Tax Shelter Report

Reviewed by Tax Shelter Report

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Questions?

@Towrywealth

Towry Ltd,

3rd Floor, Portwall Place,

Portwall Lane

Bristol

BS1 6NA

www.towry.com

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Thank you