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Alternative thinking

Isas and other Uk and offshore tax-effective investments which could be considered as pension alternatives

Tony Wickenden Tax Planning

Last week, I looked at the potentially serious capacity that 50 per cent and (effective) 60 per cent income tax rates have to accelerate interest in tax planning among clients who, to date, may not have been so interested. I suggested that 50 per cent tax, or even the threat of it might come to represent “a tipping point” to tax planning action that 40 per cent may not have been.

I considered, of course, how effective an Isa could be as a “pension alternative” for those hit by the special annual allowance charge. OK, no “front-end” relief but no tax on income and gains and no tax on “removed” benefits or limitation on when and how they can be removed.

Just recently, interest has been increasing in the possible merits of qualifying regular-premium life policies. Like the Isa, there will, of course, be no tax relief on the contribution but, unlike the Isa, the UK life fund will be subject to tax. However, the benefits (after the qualifying period) will be tax-free as lump sum cash or, subject to satisfying the necessary conditions, as “income”.

Of course, any qualifying savings plan would need to be clearly seen to be client-beneficial from a charges and fund choice standpoint as well as being tax-efficient.

As well as the Isa and qualifying savings plan, other UK and offshore tax-effective investments could also be considered as pension alternatives, especially those generating capital gains subject to tax on realisation at the low rate of 18 per cent. The only problem with this is how long this rate will be around for. For all pension alternatives, if there is income tax or an increased CGT rate to consider on the extraction of benefits, this, plus possible fund taxation and no tax relief on the investment, is likely to make such alternatives financially unappealing despite the introduction of the special annual allowance charge.

Despite this, some investors may be prepared to accept the less competitive financial position in return for the greater flexibility over, and access to, the invested funds that these pension alternatives deliver. However, before making this decision, they should be aware of the extent of the potential financial difference in making such a choice. More need for informed advice.

A lot more could and, I am sure, will be said but let us leave pension alternatives at that for now. How about strategies to avoid 50 per cent tax (and 40 per cent tax for that matter?)

Well, even without a great deal of ingenuity, a checklist of strategies to run through with a client could create an excellent basis for a meeting.
This list could include:

  • Ensuring that taxable income is minimised. Isas and capital gains-oriented collectives look appealing although with the latter it will be important to carefully consider any additional investment risk that may be being assumed by focusing on growth at the expense of income
  • Considering tax-deferred investments that give some control over the timing of the tax liability. Obvious examples here include UK and offshore bonds. Investors would not be assessed on portfolio income as it accrued to the life fund – only on chargeable event gains when triggered. And there are the usual bond exit planning strategies to consider.
  • For couples, ensuring that income-producing investments are owned by the lower taxpayer makes obvious sense. This strategy can be applied to bank accounts, collectives and investment bonds.
  • For those in business, paying the lower earner a salary justified by work done (so as to satisfy the “wholly and exclusively” test for deductibility) is worth thinking about. And where each of a couple have a stake in the business as partners or shareholders, splitting profit distribution by profit sharing or dividend payment looks especially attractive following HMRC’s defeat in the Arctic Systems case and the withdrawal of the proposed “remedying” legislation.
  • And for any high-earning shareholder/director, paying dividends before April 6, 2010 can make sense so as to trigger a 32.5 per cent rather than a 42.5 per cent tax charge.

These are just a few easy- to-explain strategies which, combined with the likely enthusiasm for increased tax planning that the coming higher taxed world will bring, could produce some very effective and mutually bene-ficial outcomes for clients and advisers alike.

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