lumin news Issue 6 / Autumn 2022

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Page 4 lumin news 6 / autumn 2022 Learn how the pension lifetime allowance tax test works Many people leave their personal pensions untouched, but are unaware that there is an automatic tax test at the age of 75. Likewise, there is a secondary test at 75 if you have accessed your pension funds earlier. JAMES DELANEY Financial Consultant james.delaney@luminwealth.co.uk Phone 02039 887 788 The maximum value you can build up in your pension pot is currently £1,073,100. More people are expected to exceed this ‘lifetime allowance’, as the threshold has been frozen until April 2026. You should weigh up your choices carefully if you have large pension savings – particularly if you are continuing to make contributions – and watch out for the mandatory test event at age 75. Test at time benefits are taken, or at age 75 If you have left your pension plan(s) untouched, your unused pension funds will be tested against the lifetime allowance ceiling Watch out for an excess tax charge on your drawdown account Assumptions: Maximum cash lump sum (25%) of pension plan worth £1,000,000 taken in 2017/18 at age 67; remainder (£750,000) designated to drawdown; 4% investment growth p.a. (net of fees); figures rounded. Market value of pension at age 75 Pension value when designated to drawdown at 67 at the time you take benefits before age 75, or when you reach 75. The lifetime allowance should adjust in line with inflation again from the 2026/27 tax year. Secondary test at age 75 Some pension plan holders choose to take their tax-free cash lump sum (normally 25%, or up to £268,275 if the plan value is at or above the current lifetime allowance threshold of Scenario 1: No income taken Scenario 2: £30,000 income per year £1,020,000 £750,000 £750,000 £750,000 Difference £270,000 – 25% lifetime allowance excess tax charge How does the secondary test at age 75 work? Pension plan market value Lifetime allowance tax test Drawdown funds (75%) 2 nd lifetime allowance test at age 75 Tax-free cash (25%) £67,500 £0 £1,073,100) and assign the remainder to a drawdown account, which allows you to take flexible income as and when you need it. However, it is not common knowledge that these drawdown funds face a second test at age 75. Case study In the example above, a 67-year-old had a pension worth £1,000,000 in 2017/18. At that time, the lifetime allowance was also £1,000,000, so 100% of the allowance was used up. If no income is taken from the plan, and the drawdown funds benefit from investment growth, the market value of the plan will be higher at age 75 compared to when the funds were designated to drawdown. As the example illustrates, this would result in a significant tax charge at age 75 (25% of £270,000). This is a simplified example. We often encounter clients with more than one private pension, with different pots accessed at different times. Independent experts can help to provide a clear picture and strategy. Tax treatment Consider broader tax consequences when assessing your pension options. Pensions, including drawdown funds, feature outside of the estate for inheritance tax (IHT) purposes. Although the 25% cash lump sum can be taken without an immediate tax charge applying, it forms part of your estate for IHT purposes, and also becomes liable for income and capital gains taxes. Do you need pension planning to help you make well-informed financial decisions? The lifetime allowance is a complicated area of tax planning, but an expert can help you understand your options and assess whether you can take action to mitigate tax liabilities. Call 03300 564 446 to learn more. FACTSHEET/WEBINAR Overcoming lifetime allowance challenges Request a free factsheet or join our webinar (see page 12). Email info@luminwealth.co.uk, or call the team on 03300 564 446
lumin news 6 / autumn 2022 Page 5 Tax-efficient solutions for high earners and wealthy individuals Venture capital trusts and enterprise investment schemes can form a very useful part of a tax planning strategy for high-net-worth individuals. Here we outline some of the main tax advantages. 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 the team on 03300 564 446 If you’re a high-net-worth individual and regularly exhaust your annual pension and ISA allowances you may wish to explore additional tax-efficient investment solutions as part of a cohesive investment plan. Venture capital trusts (VCTs) and enterprise investment schemes (EISs) can be attractive solutions for those looking to achieve tax efficiencies. Venture capital trusts VCTs provide a number of tax benefits, including income tax relief of 30% of the amount invested, assuming the VCT shares are held for at least five years, and tax-free dividends and capital gains. Enterprise investment schemes EISs also allow you to claim income tax relief in the year the investment is made. There is also a capital gains tax deferral option, providing that the investment is made up to one year before making the capital gain, or three years afterwards. VCT vs. EIS – Simplified comparison Benefit VCT EIS For deferral relief, it’s the gain not the proceeds of sale that should be invested. In order for the deferred gain to be granted a number of criteria must be met. A deferred gain is charged at the applicable CGT rate when sold after the initial investment period. There is an option to defer the gain by reinvesting Tax-free capital gains Yes Yes, after 3 years Income tax relief 30% 30% Minimum holding period for income tax relief 5 years 3 years Tax-free dividends Yes No IHT relief No Yes, after holding for two years into a new EIS. If the EIS shares are held at the point of death then the deferred gain will be eliminated. Key considerations VCTs and EISs offer unique opportunities but are complex and high-risk investments, so you should ensure you fully understand them. An independent financial adviser can explain the various implications and risks. Lumin’s Client Solutions Committee has conducted extensive due diligence to select our VCT and EIS product solutions partners. To find out more, call 03300 564 446. Reducing inheritance tax liabilities with a gift and loan trust Gift and loan trusts allow you to implement a number of tax-efficient opportunities. You can retain control of the original invested capital and draw an ‘income’ from this investment. This is a suitable solution for someone who wants to start inheritance tax (IHT) planning, while retaining access to the original capital. If the gift and loan trust is set up in an offshore structure, such as an investment bond (see page two for more on offshore bonds) then investment growth is deferred, meaning any investment income or capital gains can roll up ‘gross’, and no tax returns are required each year. Negating IHT liabilities Since a loan is not an outright gift, the original loan amount remains within your estate. However, as the assets are held in trust, any investment growth falls outside of your estate, helping to limit potential IHT liabilities for your beneficiaries. For 20 years, you can withdraw up to 5% of the original capital each year with no immediate tax liability. Any unused 5% withdrawals accrue. So, for example, after a period of three years, if you haven’t accessed any capital, you can draw 15% with no immediate tax liability. If you draw an amount that exceeds your 5% withdrawal limit this will trigger a chargeable event, and there may be a tax liability charged to the settlor within that tax year. Tax efficiencies for beneficiaries When beneficiaries come to draw from the investment proceeds they will be taxed on the overall gain at their highest marginal rate. However, beneficiaries are able to ‘top slice’ the gain if it takes them into a higher rate band. Top slice relief allows you to divide the chargeable gain by the number of years it has been active, to keep you within basic rate (or higher rate) bands for income tax purposes.
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lumin news Issue 6 / Autumn 2022

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