lumin news Issue 6 / Autumn 2022

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Page 2 lumin news 6 / autumn 2022 The tax efficiencies of offshore bonds Offshore bonds can be a valuable tax planning tool for high earners who regularly exhaust their annual pension and ISA allowances. They also have a number of estate planning advantages that can help to reduce inheritance tax bills. JON HUSSEY Financial Planning Director jon.hussey@luminwealth.co.uk Phone 01727 893 333 Investments within an offshore bond are not subject to immediate capital gains or income tax charges. If you are a high-net-worth individual and regularly exhaust the standard pension annual allowance of £40,000 per year (this is reduced if your adjusted annual earnings are above £240,000) and your £20,000 annual ISA allowance then offshore bonds can be a useful, and tax-efficient, investment tool. What is an offshore bond? Offshore bonds, or international bonds, are tax-efficient investment vehicles. You can typically invest in a wide range of funds covering assets including equities, property, and fixed-interest securities. Investments are held in tax-efficient jurisdictions outside of the UK. Income and capital gains tax efficiencies Investments within an offshore bond are not subject to annual capital gains tax or income tax, so gains can ‘roll up’ without any immediate tax charges applying. You only pay income tax on the chargeable gain when you encash the bond. Timing is important. Higher and additional rate taxpayers can make significant tax savings if they expect to be a basic rate taxpayer when they encash the bond. The table below summarises the tax savings you could make when encashing a bond worth £740,000 as a basic rate taxpayer. Savers can also benefit from ‘top slice relief’. This allows you to divide the chargeable gain by the number of years it has been active, to keep you within basic/higher rate Tax charges when encashing an offshore investment bond Assumptions: Investment bond encashed after 10 years; figures rounded. Original investment £500,000 Growth per annum 4% Value in 10 years’ time £740,000 Gain £240,000 Tax at basic rate £48,000 Tax at higher rate £96,000 Tax at additional rate £108,000 Encashment timing attractive when: • Lower rate taxpayer • Residency in favourable non-UK location tax bands for income tax purposes. Offshore bonds may provide a more tax-favourable solution compared to general investment accounts, where income tax and capital gains tax applies to gains in the year they arise. Any dividends received within the offshore bond may be subject to withholding tax and cannot be reclaimed. Deferred tax You can withdraw up to 5% per annum of the original investment amount each year and see tax deferred on this sum. This 5% allowance also accumulates, eg. after two years, you can draw 10% of the original investment with tax deferred on this amount. Withdrawals above 5% may attract income tax. Mitigating IHT Many offshore investment bonds consist of segments that can be gifted/assigned to designated beneficiaries in a tax-efficient manner. You can assign segments of the bond to beneficiaries without incurring any immediate tax liability. If you survive for seven years it is considered outside of the estate, and is not subject to inheritance tax (IHT). Likewise trusts can be a useful IHT planning tool. Investment growth occurs outside of the estate, which can result in substantial tax savings over time. If a trust invests in an offshore bond then investment income or capital gains can be ‘rolled up’ on a tax-deferred basis. The beneficiary can also receive 5% of the original investment each year, without a tax charge applying. Other considerations Offshore bonds won’t be the right solution for every investor. You should have a long-term investment horizon, and charging structures can be complex, so it’s important to carefully examine provider fees and total costs. But they can form a valuable part of an overall investment strategy, alongside annual pension and ISA contributions. Clear planning and tax-efficient management of investments can lead to potentially large tax savings. Lumin provides a range of integrated investment management and financial planning solutions. Lumin conducts extensive due diligence on all selected products. To find out more, call 03300 564 446. Important: Past performance is not a guide to future performance. Tax treatment depends on your individual circumstances and rules may change. FACTSHEET/WEBINAR Tax-efficient solutions for wealthy individuals Request a free factsheet or join our webinar (see page 12). Email info@luminwealth.co.uk, or call Jon Hussey on 03300 564 446
lumin news 6 / autumn 2022 Page 3 Make sure you’re pulling on the correct tax levers in retirement MY TIP Most people have more leeway to influence the amount and timing of taxes in retirement, compared to when they are working. Clear financial planning can save (tens of) thousands of pounds in unnecessary tax bills. FIONA READ Senior Financial Consultant fiona.read@luminwealth.co.uk Phone 01727 893 333 How will your tax situation change once you retire? It’s important not to take your eye off the ball at this crucial juncture. Here we highlight the key tax levers you can pull to ensure you’re drawing on your assets in a tax-efficient manner. Income tax Other than pension contributions, employees have limited options to reduce income tax bills. For a minority, venture capital trusts or enterprise investment schemes may be an attractive option, as they benefit from income tax relief. However, these investments are highrisk. Upon retirement, the income tax burden usually falls and, with the right planning and decisions, you can significantly improve overall tax outcomes. Capital withdrawal order When it comes to funding your retirement, the order of drawing on assets has a substantial impact on tax bills, as the illustration The capital withdrawal order impacts total income tax bills over a planning horizon Example: Total income tax liabilities for a couple over a planning horizon; both aged 58; total investable assets of £1,700,000: £400,000 in each ISA, £600,000 and £200,000 in pension pots, £100,000 cash; figures rounded. Pension before ISA £484,000 £484,000 £484,000 shows. For many, it makes sense to withdraw capital from ISAs before dipping into pensions, as pension withdrawals beyond the 25% tax-free cash lump sum are subject to income tax. A cashflow plan can help you map out your journey and hone in on key decisions. Capital gains tax Many investors accumulate deferred capital gains tax (CGT) liabilities. Sometimes these stem from inherited shares and subsequent gains on market value from the time of death. Disciplined ‘harvesting’ makes the most of the annual taxfree capital gains allowance of £12,300. Lifetime allowance The amount you can normally build up in your pension is limited to £1,073,100. This ceiling is called the lifetime ISA before pension £206,000 £325,000 £443,000 Total until age 85 Total until age 90 Total until age 95 allowance. If you take pension benefits or reach age 75, your pension funds are tested against the threshold, and exceeding amounts are subject to a 25% or 55% tax charge. Early planning can ensure you take the best course of action at the right time. Inheritance planning Inheritance tax (IHT) of 40% above the tax-free threshold can significantly reduce the amount of your estate that is passed on to beneficiaries. Some assets, such as pensions, are outside your estate, so are not subject to IHT. Early planning can leave your loved ones substantially better off. Would you like to assess your tax planning potential? Call 03300 564 446 to book a free initial meeting with a Lumin expert. MARTIN COTTER Managing Director of Lumin Group Making sure your pension contributions come from the most tax-efficient source can help claw back thousands in unnecessary taxes. Most people are aware that contributions you make into your pension are deductible against income tax. However, although income tax can be reclaimed on personal pension contributions, no such exemption applies for National Insurance. However, when an employer makes a pension contribution it is considered a deductible business expense. This means the money goes straight from the company into the employee’s pension pot without any National Insurance deductions. These expenses can reduce the profits that are assessed for corporation tax, meaning that the company can receive tax relief. My tip: Significant National Insurance savings can be realised both for the employee and the company when pension contributions are paid by the employer. If you own the company then there is often scope to make even larger contributions, which can be timed to align with the company year-end for further tax efficiency.
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lumin news Issue 6 / Autumn 2022

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