How to deliver effective, acceptable and non egregious tax planning solutionsTony Wickenden

Technical ConnectionTechnical Connection

Tony Wickenden, Technical Connection

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each case is essential.

ADVICE IMPERATIVES

TONY WICKENDEN

TECHNICAL CONNECTION

YOUR MOST PRECIOUS COMMODITY

BUT WHERE DOES IT GO?

IF ONLY I HAD TIME ……

Focus on what consumersconsumers want, value and will pay

for

FINANCIAL ADVICE: FUNDAMENTAL QUESTIONS

Who will pay for it?

Why will they pay for it?Why will they pay for it?

What will they pay for?

What attributes will financial advisers need to demonstrate to succeed

How with they engage

(with thanks to JP Morgan)

WHO WILL BUY?

85% of those with household income £50k + (£6m)

93% of those with household income £150k - £250k

….but how will they buy …and how much will they pay?

“TASK BASED” OR ONGOING ADVICE MODEL?

40 % of prospective advice users state “task based” as their preferred means of engagement

13% f ti d i ld id “ i f ”13% of prospective advice users would consider “ongoing fees”

WHY WILL CLIENTS PAY FOR ADVICE?(HOWEVER IT’S DELIVERED)

Recognition of the limits of their own knowledge

The adviser has expertise that the consumer doesn’t possess or can’t get by “googling”

The adviser makes them aware of the need/risk/opportunity

WHAT ATTRIBUTES ARE NEEDED FOR ADVISER SUCCESS?

Demonstrable knowledge, expertise,

understanding, empathy Track record

Complete client focus

Pro-activity Enthusiasm / motivation

SO WHAT WILL THEY PAY FOR?

Basically, what they perceive as “difficult / complex”

Pensions planningp g

Investment planning:

personal , trustee , corporate

Tax planningInvesting for children

Estate planning / management

EXPERTISE / TIMESAVING

Other than “straightforward”

protectionMortgages

AND ON TAXATION SPECIFICALLY….

62% of 55 – 65 year olds are worried about tax

69% of those with £100k - £150k investable are worried about tax

57% want financial adviser input to minimise tax

21% cite estate management/planning21% cite estate management/planning as a concern…. 66% of these say they would want professional advice to address this concern

AND IF WE ARE TALKING ABOUT TAX ….

You can’t have missed that it’s in the news

Tax and tax planning polarises opinions

Government committed to action

S So……….

What’s going on?

Anti Tax Avoidance

A LOT!

General anti-abuse rule (consultation)

£50 000/25% income tax relief cap £50,000/25% income tax relief cap (consultation)

“Enhanced DOTAS” :more advance information and negative publicity

(lifting the lid on tax avoidance)( g )

Continued HMRC success in tribunal/court cases

Public opinion (Times campaign)

MIND THE GAP

35bn (HMRC)( )

120bn (Tax Research)

THE HISTORY

Lord Clyde in the “Duke of Westminster” Case 1929:

No man in the country is under the smallest obligation, moral or other, so y g , ,to arrange his legal relations to his business or property as to enable the

Inland Revenue to put the largest possible shovel in his stores.

The Inland Revenue is not slow, and quite rightly, to take every advantage which is open to it under the Taxing Statutes for the purposes of depleting

the taxpayer’s pocket. And the taxpayer is in like manner entitled to be astute to prevent, so far as he honestly can, the depletion of his means by

the Inland Revenue.

GAAR BACKGROUND

Strong “morality fuelled” media

press re

“Something must be done”

Judges having to strain the

interpretation of written law to “fill in

the gaps” andpressure do e the gaps” and enforce parliament’s

intention.

THE “AARONSON TEST”

Everyday tax planning NOT affected unless the arrangement was:

Abnormal

Was contrived to achieve that

result

Achieved an “abusive” result

WHAT IS “NORMAL” THEN?

One that was substantially (or entirely) tax motivated

ABNORMAL

ACTION NEEDEDACTION NEEDED( ACCORDING TO THE GOVERNMENT)

GAAR

An effective deterrent against artificial and abusive tax avoidance“

“

artificial and abusive tax avoidance.

Removing the need for future Targeted Anti-Avoidance provisions.

Enabling simpler future legislation

“

“ “

“

“

Enabling simpler future legislation

Influencing the culture of tax planning.

“

“

“ “HMRC / TREASURY “WEAPONS” TO DATE

When the legislation appeared to permit what g pp pparliament didn’t intend to be possible:

1.

New targeted anti-avoidance legislation to prevent abuse

2.

Assessment/challenge through tribunals/courts (pressing for a “substance

over form” ruling)over form ruling)

GAAR

Applying to:

Income tax Corporation tax CGT PRT IHT SDLT NIC

GAAR

TAX ARRANGEMENTS

+

ABUSIVENESS

+

TAX ADVANTAGES

GAAR

“Tax arrangements”

Is it reasonable to conclude that the obtaining of a tax advantage was the main purpose or one of the main purposes of the arrangements?“ “

GAAR - abusiveness

Tax arrangements the entering into or carrying out of which cannot reasonably be regarded as a reasonablecourse of action having regard to all of the g gcircumstances, including:

(a) The relevant tax provisions including

- principles on which provisions based

- policy objectives- policy objectives

- any shortcomings that the arrangements intend to exploit

(b) The substantive results of the arrangements

(c) Any other arrangements of which arrangements form part

For example

Arrangements result in:

GAAR - abusiveness

Taxable income, profit, gains being significantly less than amount for economic purposes

deductions or losses for tax greater than for economic purposes

Transactions or agreement for a value significantly different

GAAR can alter tax consequences if those claimed are manifestly those that would not have been countered by Parliament

RESULT: HIGHLY SUBJECTIVE - CONSIDERABLE UNCERTAINTY

FINANCIAL PLANNING

GAAR should not affect “the centre ground ofGAAR should not affect the centre ground of tax planning”

Opportunities to reinforce to power andOpportunities to reinforce to power and effectiveness of “acceptable” financial planning

IF THE CAP FITS

IF THE CAP FITS

(W.E. 6.4.2013)

Limiting the amount that can be claimed by an individual to

The greater of 25% of income

and

£50,000

Limits apply to year of claim and any earlier year to which the relief claimed is allocated

IF THE CAP FITS

Only reliefs that are used to reduce the yamount of general income subject to tax

and not currently capped.

IF THE CAP FITS

C ht N t ht

Trade loss relief against general income (sideways)

Reliefs that are not excluded

Charitable giving

Reliefs with their own cap (VCT, EIS, ISA, Pension etc)

Caught Not caught

and do not have their own “caps”

( C , S, S , e s o etc)

LIFTING THE LID ON TAX AVOIDANCE SCHEMES

Measures to improve “advance information” available to HMRC about tax avoidance schemes including revising and extending the DOTAS provisions

To ensure that where tax avoidance schemes are identified the public knows about the risk using them.

Tax avoidance represents nearly 14% of th UK t It i l i th t

LIFTING THE LID ON TAX AVOIDANCE SCHEMES

the UK tax gap. It involves using the tax law to gain an advantage that Parliament never intended and frequently involves

contrived, artificial transactions that serve little or no purpose other than to reduce p p

tax liability. And it enables some taxpayers to gain an unfair advantage,

undermining confidence in the tax system.

Tackling tax avoidance:

LIFTING THE LID ON TAX AVOIDANCE SCHEMES

Anti-avoidance strategy (March 2011)

• Preventing avoidance at outset (GAAR as deterrent)

• Detecting it early where it persists (DOTAS)

• Countering it through challenge by HMRC (GAAR)

Improving public information about schemes

LIFTING THE LID ON TAX AVOIDANCE SCHEMES

Greater awareness

Working with representative bodies and tax agents (e.g.. Law Society and SDLT avoidance)

“Naming and shaming”

“Spotlight” and social media

Potential to build on FSA mis-selling rules

WHICH SIDE OF THE LINE?

GAAR

AVO I DAN

Mitigation

Planning

Abuse x

Evasion x

NCE

?

THE KEY TESTS FOR A TAX PLANNING STRATEGY

ACCEPTABLE TAX PLANNING

ABUSIVE/UNACCEPTABLE AVOIDANCE

THHE

LIN

Reasonable response to legislation

Reliant on clear legislation *

Genuine economic consequences

The opposite!

NE

consequences

THE CONUNDRUM

Advisers need to focus on actions/services that l d b

To be effective (and marketable) the tax planning needs to be outside of the GAAR and

Tax planning and tax saving is valued

are valued by consumers

planning needs to be outside of the GAAR and seen as “OK”.

THE OPPORTUNITY

Through informed communication and pro activity:pro-activity:

Explain/summarise/ HMRC/Government anti-avoidance action and why its being taken

Distance “acceptable” financial pplanning anticipated and permitted by legislation from “unacceptable” tax avoidance

CURRENT OPPORTUNITIES TO PLAN FOR

Investors

Parents

Trustees

Pension planners

Business owners

In an acceptable “non-egregious “way…. and taking full account of anti- avoidance and adviser

charging.

Low hanging fruit

-Your

Your future

-You as an asset

class

business as an asset class

-Your family

There is still plenty of opportunity to implement tried and tested strategies

to minimise tax.

Supercharging returns through (acceptable) tax alpha

tax

Performance within your control

“SHOW ME THE MONEY”…

• KEEP MORE

• SAVE MORE

• REALISE MORE

Investors

Opportunities

• Personal allowance maximisation

• Personal allowance “reclamation”

• Age allowance and CB maximisation

• Deferment

• Tax Alpha through intelligent wrapper choice

The benefit of deferment

Change:

50 45% f 6 4 201350-45% from 6. 4. 2013

Opportunity:

Income deferment for investorsIncome deferment for investors

Intelligent wrapper choice

ITS ALL ABOUT “SUITABILITY”

• A high risk that suitability cannot beA high risk that suitability cannot be demonstrated with resulting poor outcomes

• COBS 9.2.1 A firm should take reasonable steps to ensure that a ppersonal recommendation or decision to trade is suitable for its customers

• ..and the “legacy” issue…..

FACTORS AFFECTING “OUTCOMES” IN RELATION TO WRAPPER CHOICE

• Yield

• Interest

• Capital gain

ANDAND

• Investment term

• Amount invested

• Withdrawals

AND

• Fund taxation

• Investor tax rates (current/future)Investor tax rates (current/future)

• Exemptions

AND

• Access

• IHT

• Pension/ISA contribution capacity

THE INVESTOR

• For bigger investments wrapper choice gg ppcan make a big difference

• It’s the “variables” that can affect the outcome

• Consider “wrapper allocation”• Consider wrapper allocation

WRAPPER ALLOCATION

WRAPPER SELECTION DETERMIEND BY VARIABLES ▪

Terms ▪ Yield ▪ Growth ▪ Tax

WRAPPER ALLOCATION

MODEL SEVERAL LIKELY/POSSIBLE COMBINATIONS

OF VARIABLESOF VARIABLES

WRAPPER SELECTION DETERMIEND BY VARIABLES ▪

Terms ▪ Yield ▪ Growth ▪ Tax

WRAPPER ALLOCATION

CONSISTENT WRAPPER OUTCOME:

ONE WRAPPER

MODEL SEVERAL LIKELY/POSSIBLE COMBINATIONS

OF VARIABLESOF VARIABLES

WRAPPER SELECTION DETERMIEND BY VARIABLES ▪

Terms ▪ Yield ▪ Growth ▪ Tax

WRAPPER ALLOCATION

CONSISTENT WRAPPER OUTCOME:

DIFFERENT WRAPPER

OUTCOMES: ONE

WRAPPERWRAPPER

ALLOCATIONS

MODEL SEVERAL LIKELY/POSSIBLE COMBINATIONS

OF VARIABLESOF VARIABLES

WRAPPER SELECTION DETERMIEND BY VARIABLES ▪

Terms ▪ Yield ▪ Growth ▪ Tax

PROTECTION FOR INVESTORS

• Closing the wealth gap

• ISA (IHT) protection

TRUSTS AS INVESTORS

• 50% - 45% income tax rate from 6.4.2013

• Consultation on Relevant Property Regime• Consultation on Relevant Property Regime

TRUSTS

• 50% - 45% income tax rate from 6.4.2013

• Consultation on Relevant Property Regime• Consultation on Relevant Property Regime

Opportunity:

• Trustees treated as additional rate taxpayers for income tax

Use CGT exemption of £5 300• Use CGT exemption of £5,300

• Use tax shelters: SP Bonds

• Collaborate with professional advisers in advising on trustee investments

PENSION DEATH BENEFITS: Planning under new rules

UNCRYSTALLISED:

75

UNCRYSTALLISED: IHT FREE

INCOME TAX FREE55% TRC

• USE “PHASED” TO MINIMISE CRYSTALLISATION + MAXIMISE

• MAXIMISE TFC + GIFT

• MAXIMISE DRAWDOWN (FLEX?) GIFT AS

MAXIMISE UNCRYSTALLISED IHT FREE , OR

• DRAW FROM OTHER

INVESTMENTS

(FLEX?) GIFT AS NORMAL EXPENDITURE

• USE INCOME TO FUND

LIFE COVER IN TRUST

THE PARENT/GRANDPARENT

The challenges … well, two of them!

1 Th i i t f hi h1. The increasing costs of higher education

2. The increasing difficulty of “getting on the property ladder”

Both very high priority/anxiety for many parents/grandparents

THE PARENT/GRANDPARENT

Getting the right “bricks in the wall”

i t tOffshore bond

Collectives

Own ISA?

in trust or assigned

Appropriate trust

+

+

Junior ISA ? control/access

PROTECTION FOR PARENTS

Guaranteeing:

• School fees

• Higher education costs

• First home purchase

SME Owners

Business investment

Tax Deferment

Succession planning

“Exit planning”

INVESTING FOR COMPANIES

Change:

2012: 24% (25%) Marginal rate: 25%( ) g

2013: 23% (24%)

2014: 22% (23%)

Opportunity:

• Income deferment ..but care …access to cash , loan relationship rules / entrepreneurs’ relief

• SME as asset class: “Risk and reward”

LRR

P i t i t d d Precise tax impact depends on company’s accounting practice

Historic cost basis or fair value?

LRR : Post 08 Bond

Historic cost basis

A company that meets the definition of “small” in the Financial Reporting

Standards for Smaller Entities (FRSSE) may prepare its accounts on the historic cost

basis. Two of the following 3 criteria need to be met before a company can apply theto be met before a company can apply the

FRSSE Standards:1.Turnover is £6.5 million or less.

2. Balance Sheet value is £3.26 million or less.3. Average number of employees is 50 or less.

The benefit of deferment

Change:

50 45% f 6 4 201350-45% from 6. 4. 2013

Opportunity:

Income deferment for business ownersIncome deferment for business owners

Succession and “exit”

“MY BUSINESS IS MY PENSION”

• Through sale

• As a Going Concern

Nevertirees“

“Barclays Wealth survey says...

Over sixty per cent of“Over sixty per cent of British millionaires (and this is likely also to apply to SME owners) say they plan never to retire.

§ They are shunning traditional retirement and instead

“

and instead continuing to work, start businesses and take on new projects in their later years

“

Important Unimportant

ADVISER OPPORTUNITY

ent

Urg

ent

No

n u

rge

INHERITANCE TAX

• Nil rate band : £325k until 5.4.15- then CPI increases

• Non Dom spouse exemption to increase

• Charitable legacy provisions; Post 5.4.2012 deaths

(Fi Bill 2012 S h 32 S h 1A IHTA 1984)(Finance Bill 2012 Sch 32: Sch 1A IHTA 1984)

ESTATE PLANNING FOR INVESTORS

And for investors its about making the right choices

(Assuming your joint estate exceeds 2 x NRB)

ADVISER CHARGING AND FINANCIAL PRODUCTS IN TRUST

• Products subject to discretionary gift truststrusts

• Loan trusts

• Discounted gift trusts

ADVISER CHARGES AND TAX IN RELATION TO FINANCIAL PRODUCTS IN TRUST

The basic model

Paid from trust? TRUSTPaid from trust? Poss GWR but

likely “carve out”

Charge for initial

advice

Paid from Paid by

FINANCIAL PRODUCT

CASH ACCOUNT

Possible tax (2)(3)

SettlorNo tax

Paid from own funds:

No tax (VAT?)

Paid by Settlor?

Further gift

(Poss N.EXP)

Charge for ongoing advice

PROTECTION FOR ESTATE PLANNERS

• Meeting the liability to IHT

• Loan trust booster

• DGT booster

RLP

T d d tibl / t bl i Tax deductible /non taxable premium

No impact on AA/LTA

Non (income) taxable sum assured

IHT Freedom (Discretionary Trust) IHT Freedom (Discretionary Trust)

Care : No tax avoidance motive

1. Attention

THE POWER OF PROACTIVITY

2.Interruption

34.Action (Communication)

3.Permission

Relevant Current Frequent

Effective Communication

99 problems...

...But a pitch ain’t one

Comprehensive technical support andComprehensive technical support and business generation for financial planners

• Techlink Professional • Accredited CPD• Advanced examination support

ASK C l t d t h i l t• ASK; Case related technical support• Business Generation Initiatives• Techlink Communicator• Dynamic client facing website content for

advised and non –advised markets.

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CONTACT

www.technicalconnection.co.uk

www.techlink.co.uk

Tony Wickenden

tk @t d ktkw@tecconn.demon.co.uk

Tony.wickenden@technicalconnection.co.uk

0207 405 1600