There are some key dates in the UK financial planner's diary but none more so than April 5. Why do we often leave it so late to maximise allowances in tax-efficient funds or to benefit from a tax break or relief? Probably it is the threat of losing something that often persuades us to take action eventually.
Pension and Isa business will comprise most of the investments made over the next couple of months. However, Isa investments must not exceed £7,000 each year and pension contributions must not exceed a proportion of net relevant earnings.
Does this mean your clients cannot access any other asset-backed investments that will benefit from gross roll-up? Surely, there is another home for the excess cash in the investor's (taxed) bank account.
Income, capital gains and inheritance taxes add another complication to year-end planning. A well selected fund or share can fully use the annual CGT allowance. The £3,000 annual IHT exemption on gifts can be cleverly used but only goes a small way to helping lessen the overall investment problem. Is there an alternative and complementary choice?
Of course, the answer is yes. The offshore market has continued to grow successfully over the last decade. With even greater gains being realised over recent times and with tax deferral and other financial planning opportunities, a gross roll-up fund is of great appeal to the UK investor.
The investor is spoilt for choice when selecting an investment vehicle. Offshore bank accounts offer favourably higher rates of return than their UK counterparts and have the bonus of gross interest adding to the account. However, the ability to use offshore bank accounts to benefit from deferring liability to income tax is limited.
Offshore asset-backed investments such as unit trusts, ICVCs and Sicavs offer an alternative opportunity for the UK-resident investor. For UK tax purposes, the legislation divides these funds into two groups – distributor and non-distributor.
Offshore funds are framed in a similar way to UK unit trusts and Oeics. A UK investor in a distributor fund is subject to income tax on income and CGT on realised capital gains. However, a UK investor in a non-distributor fund is subject to income tax on both income and realised capital gains. To qualify for the more favourable distributor fund status, a fund must meet certain tests including distributing at least 85 per cent of its income. However, taxation is also dependent on whether the investor is domiciled in the UK.
This raises another opportunity to be considered when planning for year-end and future tax mitigation. Are you aware of your client's domicile status? How often do you ask the question on a fact-find?
A non-UK-domiciled individual will be liable to tax on income remitted to the UK from offshore bank accounts and funds, which is an important point to remember when maximising income allowances at the end of the tax year. Non-distributor funds offer a deferral of tax until it suits the investor to pay the tax and realise the gain. However, the gain is calculated on CGT principles so requiring longer periods of non-residence to avoid tax.
Offshore bonds add another dimension when assessing end-of-tax-year planning. You can avoid the often overlooked age allowance trap by withdrawals from these non-income-producing assets. Investors can switch funds from the aggressive to the cautious and conversely without triggering CGT bills. They can also realise gains in future years when their tax rates have lowered because of retirement or a lifestyle change.
Another consideration for tax planning must be the weather! A greater number of clients are looking to retire or buy property abroad which, with careful planning around the number of days resident and non-resident, may help dramatically to lessen tax liabilities.
The extra services offered by offshore providers add another angle. This is an opportunity that may be exploited. Offshore trust companies and their services enable successful tax and financial planning for almost all clients investing offshore.
In 1999, the Inland Revenue received over £2bn from IHT. This came from UK-domiciled individuals on their worldwide assets and by non-UK-domiciled individuals on their UK assets. They could have avoided a significant part of this by planning the ownership of assets and the use of potentially-exempt or even chargeable lifetime transfers. Add to this the use of an excluded property trust for the non-UK-domiciled individual, who may become domiciled in the future, and the opportunities to minimise liability to IHT are significant.
For IHT purposes, an individual is deemed to be UK-domiciled after residence for 17 out of 20 years. This rule continues to catch people out because it works by reference to tax years. For example, an individual arriving in the UK on April 4, 2000 will become UK domiciled on April 6, 2015 – only 15 years and two days.
There are other opportunities, too. Organising your clients' wills correctly would currently save £93,600 in potential IHT. Potentially-exempt transfers should be exploited coming into a new Budget and tax year end. The legislation offers various opportunities to preserve access to capital without affecting the rules on gifts with reservation of benefit.
After addressing all these issues for your clients as individuals, there may be further opportunities for your clients who trade as owner-managed businesses.
In summary, the days of dark glasses and suitcases full of cash associated with offshore investment are long gone. Investor protection in jurisdictions such as the Isle of Man is at least as good as that offered in the UK and arguably better in certain instances.
The offshore arena offers as many innovative and tax-efficient investment vehicles as the UK but without the rigid contribution limits imposed by UK legislation.