Tax Time with AWM: VCT’s

Tax Tips with AWM – Tip #1 VCT’s

Tax-Year-End is approaching and its time to take full advantage of all those tax benefits, that not many people seem to know about.

AWM will be running a series of blog posts on Pre-Tax-Year-End tax planning over the next week, so stay tuned. The aim of the blog series is to help make sure that you best utilise your options and today we focus on Venture Capital Trusts.

What is a Venture Capital Trust?

A Venture Capital Trust (VCT) is a company whose shares trade on the London stock market. A VCT aims to make money by investing in other companies which are typically very small and are looking for further investment to help develop their business.

Tax Benefits

Income Tax Relief: Up to 30%
Tax-Free Dividends: The dividends you receive from the VCTs you invested are tax-free.
Tax-Free Capital Growth: You won’t pay any Capital Gains Tax on profits from selling your VCT shares

The Different Types

VCTs commonly fall into three broad categories based on the profile of underlying companies a VCT invests in:

Generalist: Investments are usually made in unquoted companies across a wide range of sectors.
Specialist: Investments are made by a VCT fund manager specialising in a defined investment sector (e.g. healthcare, technology, environmental and media).
AIM: – The VCT makes investment mainly in companies whose shares are listed on the Alternative Investment Market.

AWM’s Recommendations

AWM has a dedicated investment team researching investment offers in the whole of market. We have a rigorous selection process in place, aiming to find the best VCT offers in the market for our clients. If you would like to hear more about our panel then please contact us by clicking below.

VCT Versus EIS

VCTs normally have a lower minimum investment amount which usually ranges from £3,000 to £6,000 compared to EIS fund which usually starts with £10,000 or more.
VCTs’ are usually more diversified than an EIS fund. A VCT would normally have 30 to 80 underlying companies while an EIS fund may normally have 4 to 15 underlying companies.
VCTs can pay out dividends and are tax-free, providing you with a regular early realisation of the investment while EIS companies normally do not pay out dividends. If they do the dividend is not tax-free.

Important Facts

Its important to note that VCTs are not a viable option for everyone. VCT’s are not FSCS protected and investing in a VCT is dependent on market capacity and we cannot guarantee the investment will take place to accommodate for the 2019/2020 Tax-Year-End.

Please click below to find out more about the potential risks of VCTs or chat with one of our advisers to find out what the most viable option is for your personal situation.

*utilising these allowances are provider timeline dependent.

Potential Risks

CONTACT US

Ascot Wealth Management Limited is authorised and regulated by the Financial Conduct Authority reference 551744. Our registered office: Scotch Corner, London Road, Sunningdale, Ascot, Berkshire, SL5 0ER. Registered in England No. 7428363. www.old.ascotwm.com Unless otherwise stated, the information in this document was valid on 3rd February 2017. Not all the services and investments described are regulated by the Financial Conduct Authority (FCA). Tax, trust and company administration services are not authorised and regulated by the Financial Conduct Authority. The services described may not be suitable for all and you should seek appropriate advice. This document is not intended as an offer or solicitation for the purpose or sale of any financial instrument by Ascot Wealth Management Limited. The information and opinions expressed herein are considered valid at publication, but are subject to change without notice and their accuracy and completeness cannot be guaranteed. No part of this document may be reproduced in any manner without prior permission. © 2017 Ascot Wealth Management Ltd. Please note: This website uses cookies. To continue to use this website, you are giving consent to cookies being used.

March 24, 2020January 26, 2022

AWM: Market Update

Tax Year- End Planning

We hope everyone is keeping well in these uncertain times.

With the speed of recent developments, we want to ensure communications are kept up this week. Many of you have been in touch with us during this period and hopefully, those calls have been useful.

Firstly I would just like to stress and credit just how well the whole Ascot Wealth Management team has handled the constantly evolving situation over the past few weeks. Especially with myself being the one self-isolating from last Sunday.

As we get deeper into this COVID-19 period it’s key we keep rationalising the situation. As per our note earlier in the week we have gone into remote working and are fully functional remotely. We sent out an updated contact list, please let us know if you have not received this.

The current levels of volatility are unprecedented, and we are at a stage of ‘fear’ in the attitudes of investors. Yesterday saw large moves in the dollar; partly due to business increasing their cash reserves to meet future liabilities, but just as in any point of market crisis the dollar is the preferred choice of many. We saw this in 2008. While it puts further strain on asset classes such as the £ it will be the cash that comes back into markets when a correction materialises. The extent of the liquidity squeeze yesterday was deeper than I thought and whether this is short-lived or longer term will prove a pivotal point of this pullback.

Focusing on the UK, yesterday we saw the suspension of several UK property funds, which; on one hand, create flash negative headlines, however, on the other, it does protect long term investors in these funds with their physical assets. It does, however, mean we now don’t have the same ability to sell down these particular funds and return investors capital. We will keep you posted on the replacement allocation for any new contributions into the portfolios. I know the investment team have prepared a separate note on this so I will allow that to further explain the implications.

Oil adds further challenges to the market, with continued actions of increasing supply (from the Saudi’s) in a time of lack of demand, this has meant we have seen prices drop to mid-1980’s levels of $25 on Brent Crude and Sub $20 briefly today on US Crude. This will have long-lasting impacts on oil business and the worrying start of downgrades of oil firms to ‘junk’ status today has given all credit markets a violent shock.

See a picture (below) of the oil forward curve which has a short-term pricing to current levels but not a flattening by any means. In Cape Berkshire, we added a small position on Monday and despite further drops yesterday we will, as with all asset classes, keep an eye on this for the opportunity to add if we see fit. We have a call with an excellent natural resources fund manager today, so will inform you further after that, if necessary. Ideally, we would have waited 2 more days to invest, but we simply are not trying to call a bottom to something with truly record-breaking levels of volatility.

So, that’s three pieces of negative press, but I feel two of these will be challenged in the coming weeks by investors who see a buy opportunity. Every day there are more promises of fiscal stimulus from Governments and Central Banks, despite the Fed cut on Sunday being seen by many as ‘throwing all their monetary tools at the issue’, I personally think it showed the lengths they are willing to go in order to support the economy. This has been followed by a more unified ECB package that will again be huge in size at some €50 billion in support. This will be a liquidity tool that will buy all Government, including Greek, debt as well as buying corporate bonds. This is something not even the US has decided to do yet. Governments know, that to avoid a long deep recession, these are the steps they must take.

Global reports on the COVID-19 show China suggesting that new domestic cases are flatlining, with two consecutive days of no domestic cases, which is positive for China, but it foreshadows some of the lengths we are potentially going to have to go through in the UK to mitigate the spread. South Korea also seems to have their spread now under control and the US seem to be leading the race for some form of a vaccine. Although, perhaps Mr Trump went too far with the mention of a Malaria related vaccine being effective ahead of the health departments approval!

Our advice to clients during this time is to keep in contact with your advisers and the investment management team, we will continue to send out regular updates. The decision of whether to increase or decrease risk by moving up or down a portfolio has really been driven at an individual level. If you wish to take an increased cash position for a short period we see this as a better option to large liquidation.

Now is the time to look at reducing unnecessary expenditure in order to avoid depleting assets at an already depressed level. Perhaps more easily done with more and more borders closing restricting travel and holidays planned, but other projects, like extensions, can be deferred in order to mitigate drawing down on an asset and realising a loss.

As touched on in my last note, we would stress again the efficiencies in our investment process in the Cape Berkshire Discretionary proposition – If you require more information on our discretionary proposition, please contact your adviser.

We do currently have some cash in the Cape Berkshire portfolios and we will look to get this invested on days I feel are most stretched. We do this knowing it could well drop lower the next day but with the volatile 10 days we have had with the stock market, circuit breakers on 5 of those in a row, shows an exact entry point is impossible to predict. We are increasing our planned fund manager meetings for the next 3 weeks, all by video/telephone, and these will pivot where we focus on any changes.

On the subject of the forced working practices, I believe this will be looked back upon as a turning point in the full adoption of technology within many industries. I also think it will show that business can operate more efficiently by adopting these practices and as such a lean model will evolve. At AWM we were well on the way to implementing this but for this to be more widely adopted will aid the next stage of the economic cycle. As with the 2008 crash, we had the Amazons and Apples go on to dominate US market share and if we can remain, long term investors, I truly believe we will again look back at this as a major pullback but one I am confident we will get through economically, returning to and superseding previous portfolio levels.

As ever, please get in contact if you wish to discuss anything further.

We wish all our clients and families the best during this time.

November 7, 2019January 26, 2022

Ascot WM Takes Another Win!

2019 has proven to be a good year for Ascot Wealth Management and last night was no exception.

After being shortlisted in the prestigious ‘Growth Investor Awards’ alongside industry heavyweights such as Barclays and UBS – Ascot Wealth Management walked away with the coveted ‘Wealth Manager of the Year’ award.

It was announced last night at a black-tie ceremony at the Royal Lancaster Hotel in London. Judges took into account how these companies optimise research and education, how they apply expertise to add value to their clients, and how they promote such investments as part of their portfolio.

A huge thanks to our talented AWM team; without whom none of this would have been possible. And of course, not forgetting the loyalty, trust and support of our clients.

Many thanks for all the congratulatory emails from those who have already heard this great news.

September 16, 2019January 26, 2022

The importance of getting your affairs in order!

The importance of getting your affairs in order

It’s key to plan ahead for life’s unexpected events as anything can happen at any time. It is therefore crucial to have your affairs in order should the worse happen. One of our recent cases just reaffirmed the importance of planning ahead.

After undergoing an operation, Sally* contacted our estate planning team to inquire about a Lasting Powers of Attorney (LPA)[i] to enable her family to make financial and medical decisions should the need for this arise.

On the back of the meeting, Sally decided she would like to consider the LPA and a follow up meeting was scheduled for a few weeks later. What couldn’t have been predicted was that during this time, Sally’s condition deteriorated and she was re-admitted to hospital. Her doctor has explained that she cannot now sign an LPA due to her mental capacity and, as such, her family are unable to make decisions regarding her medical care or finances.

The only option that remains now is to apply to the Court of Protection to become Deputies which unfortunately can take months and is considerable more expensive than an LPA.

It’s not always easy to talk about sensitive topics like this but it is important to have plans in place should the worse happen.

Please get in contact with our in-house estate planning adviser if you need any advice or assistance. Remember that the initial assessment is free.

*name changed

[i] A lasting power of attorney (LPA) helps you appoint people you trust to act on your behalf if you should lose mental capacity.

August 28, 2019January 26, 2022

AWM launches its own Discretionary Fund Management service!

AWM launched its own Discretionary Fund Management

“If you have been following our journey these past few months, you would know that 2019 has been a big year for AWM. Not only were we nominated for numerous awards but we launched the Ascot Wealth Platform last week – a significant milestone for AWM!

It is with great pride that we can now announce the official launch of Cape Berkshire Asset Management (CBAM), a discretionary fund management service giving us more efficient and cost-effective solutions. We have had the permissions for this since March ’19 but wanted to launch it in conjunction with our platform.” – Mark Insley, Founder and Managing Director

Our Background

AWM has been growing at a steady pace for the past 8 years and in this time we have developed a tried and tested method of investing. Our portfolios continue to provide strong returns and with the increase in the number of clients that we decided to implement a dedicated discretionary fund management service. We want to continue delivering the quality of service we are so proud of and therefore feel that this is the right time and decision for AWM as this will increase the operational effort in running the portfolios for 750+ clients with close to £150mm under management.

Cape Berkshire Asset Management was formed in late 2018 and is something we have been building behind the scenes. We now feel that we are ready to advise clients on whether it is the best option for them.

Benefits of using the discretionary service include:

A lower expense ratio to the current AWM Advisory expense ratio.
The ability to use exchange-traded funds.
Cost-efficient, sector-specific exposure.
The ability to use investment trusts.
Improved efficiency for portfolio transactions.
Removed administration for clients.
The introduction of a portfolio management team as well as an Investment Committee.

What does this mean for you, our client?

It doesn’t have to mean anything if you don’t want it to. Rest assured, the advisory service will remain but will just be run in a more systematic manner to reflect Cape Berkshire decisions at the end of the quarter. However, for clients that want us to be able to act quickly and take advantage of market opportunities as and when they arise at our discretion, Cape Berkshire could be a good option.

To fully understand how this can benefit you please contact your adviser who will be best placed to help you with your decision to add Cape Berkshire DFM to your AWM serving.

August 13, 2019January 27, 2022

Big year for AWM!

Ascot Wealth Management had the honour of starting off the year by being named the South East’s Professional Adviser Firm of the Year for 2019. This was followed by a number of nominations for the highly acclaimed Retirement Planner Awards 2019 in the following categories: Best Individual Pensions Advice Firm of the Year*, Best Pension Freedom Service, as well as an individual candidate nomination for our financial adviser, Catriona McCarron, in the Young Retirement Planner Award in the UK** category. We also received our first-time nomination for the Investment Marketing and Innovation Awards’ Digital Marketing Initiative of the Year Award, in recognition of our short financial videos.

And this was all in the span of only eight months!

It is with great pleasure that we are now able to announce that Ascot Wealth Management has been shortlisted in the fifth annual Growth Investor Awards for the coveted Wealth Manager of the Year Award, sponsored by Kin Capital. The award focuses on companies that have had an impact beyond investment whether that be through the creation of jobs, boosting economic growth or supporting of innovation. To be recognised in this category confirms the refreshing Ascot Wealth Management mantra of always looking outside the box for the latest investment solutions

The judges will evaluate how we incorporate alternative investments as part of a client’s portfolio, how we optimise research and education and how we apply our expertise to add value to our clients.

The exclusive black-tie dinner will be held at the Royal Lancaster Hotel in London on the 6th November in front of an audience of 450 guests.

Commenting on becoming a finalist in this prestigious category, AWM’s Managing Director, Mark Insley said: “The AWM team is thrilled to be recognised as a finalist for this award. Our mantra is always to think outside the box with fresh ideas and with with the extreme volatility in world markets we pride ourselves on looking at the positive opportunities for clients to achieve their investment goals”

*London, the South East and East Anglia

** excluding London

July 8, 2019January 28, 2022

Statement on Liquidity of Risk-adjusted portfolios

The recent suspension of the Woodford Equity Income Fund (WEIF) amidst a torrent of investor withdrawals (most notably Kent County Council £263m (Financial Times, 2019)) brought to light that the fund was not as liquid as the “open-ended” term in the title of the universe in which it exists would infer.

As folklore will one day tell, it turned out that the fund had been investing in less frequently traded unquoted private stocks which ultimately have less liquidity than their listed peers but offer potentially higher returns to reward the additional investment risk. To invest in a private company an investor often has to overcome a multitude of difficulties such as increased due diligence, selecting an appropriate valuation method for pricing company stocks, less ease of access to company financial statements and it is also not uncommon for there to be liquidity clauses for investors in private companies looking to offload their investment be it to another investor or a secondary market at listing. The final point is compounded in loss-making companies where an investor looking to offload the stock may find themselves in competition with the company itself which might be looking to raise capital by issuing new shares (Jourdan, 2019). However, the WEIF had c. £3.5billion assets under management (AUM) (Financial Times, 2019) bringing in more than adequate fund manager fees to absorb any additional costs associated with unquoted investments. The problems only started after a period of rocky performance persisted long enough to trigger a mass investor exodus from the fund.

When a fund is inundated with more withdrawal requests than available funds the manager is forced into what is termed a “fire sale” which is effectively selling off stocks as quickly as possible without concern for timing or pricing (liquidity at any cost). In thinly traded stocks a large selloff by exiting investors can have the effect of exerting downwards pressure on the stock price leaving the remaining investors worse off. As such the fund manager can effectively “block” investors from withdrawing whilst they build up liquidity by orderly selling which is essentially where the Woodford Fund is now (Jolly & Jones, 2019). The fund is required to review the decision to suspend trading every 28 days and WEIF’s authorised corporate director has recently informed the Financial Conduct Authority that the fund is not yet ready to be re-opened effectively starting another 28 day cycle ( (Financial Times, 2019).

We recently underwent a liquidity assessment exercise for the funds we hold to assess the current turnaround time for sell down out of a fund’s underlying assets in a fire sale scenario:

The method we used to measure liquidity was to separate net asset value (NAV) into four time buckets based on proportion of assets the fund manager would reasonably expect to be able to sell in that time period given normal market conditions (as per method used by the FCA Chief Executive in his letter to the Chief of the Treasury Committee (Bailey, 2019)). We sent this breakdown to each of our mutual fund providers and collated the results to assess the impact on our portfolios.

Table 1: Liquidity Bucket Weighting AWM Funds

Table 2: Liquidity Bucket Weightings Average across AWM Funds vs WEIF

*Property Feeder Funds could not reliably supply data due to the naturally illiquid nature of direct investments in real estate, for the purposes of this exercise we designated these as 25% Bucket 3 and 75% Bucket 4. Vanguard with whom we hold a index tracker funds was inundated by requests for this data from several investors and financial advisors alike and are at the time of this writing working on a uniform response to go out to all their investors in the near future. We therefore excluded Vanguard funds in the AWM Fund Liquidity Profile above. Inclusion of these index trackers funds would most likely increase the weighting of Buckets 1 and 2 as holdings normally have to satisfy strict set of criteria which may include market cap, trading volume, credit rating etc before they become eligible for edition to the index which increases liquidity.

** Source: (Bailey, 2019)

Figure 1: Liquidity Bucket Weightings Average across AWM Funds vs WEIF

On average, the current AWM Fund universe has an average 79.33% weighting in Bucket 1 (1-7days) which is 58.33% higher than the WEIF did at its higher Bucket 1 assessment date 30th June 2018. In Figure 1 above, there is an observable 13% reduction of Bucket 1 weighting for the WEIF across the timescale described by the FCA which has been distributed across less liquid Buckets 2 to 4. As at 30 April 2019 observation the WEIF fund Bucket 1 weighting is only 2% higher than current AWM average Bucket 4 weighting of 6%.

Whilst the WEIF decision to hold unquoted securities in its portfolio was within the regulator’s mandate, our research has not indicated any evidence to suggest similar trends developing in any of the mutual funds we currently hold. More so, we anticipate that development of such a trend is especially less likely given an environment of concurrently peaked investor and regulatory liquidity vigilance. The key takeaways from this is that even fund managers who have performed well in the past may (and are likely to) run into unfavourable periods of performance in the future which may result in loss of investor confidence. We maintain our stance that a diversified portfolio is the most appropriate solution as this will often act to limit downside exposure specific to any one mutual fund in times such as these.

We continue to closely monitor these and other developments that influence the performance of the portfolios on an ongoing basis.

Prepared by: Shingirai Makuwaza, Investment Analyst, July 5, 2019

Bibliography

Bailey, A. (2019, June 18). Letter from FCA Chief Executive to Chair re Woodford 180619. Letter from FCA Chief Executive to Chair re Woodford 180619 . London, London, United Kingdom: Financial Conduct Authority.

Financial Times. (2019, July 2). Financial Times. Retrieved July 4, 2019, from Financial Times: https://www.ft.com/content/7cba76c4-9c1f-11e9-b8ce-8b459ed04726

Jolly, J., & Jones, R. (2019, July 1). The Guardian. Retrieved July 4, 2019, from The Guardian: https://www.theguardian.com/business/2019/jul/01/block-on-withdrawals-from-neil-woodford-fund-extended

Jourdan, P. (2019, June 20). Amati Global Investors. Retrieved July 4, 2019, from Amati Global Investors: http://amatiglobal.com/press.php?date=20190620

July 3, 2019January 28, 2022

Pension Tax relief

Pension tax relief

The government offers tax relief on pension contributions to encourage people to save for their retirement. This tax relief is given at the tax payers marginal rate of income tax; so for basic rate tax payers there is 20% tax relief available, for higher rate tax payers there is 40% tax relief available and for additional rate tax payers there is relief of 45% available. For contributions to a personal pension this relief comes in the form of the basic rate tax relief being added to the contribution and any higher or additional tax relief being claimed back via a self-assessment tax return.

For example:

For a higher rate tax payer, with the relevant allowances available, a £1,000 gross pension contribution would only cost them £600.

In practice, the higher rate tax payer could contribute £800 to a personal pension; this would topped up to £1,000 through basic rate tax relief. Then, as a higher rate tax payer, this individual could claim a further £200 on their tax return, thus meaning for this individual their £1,000 pension contribution would have only cost them £600.

Contributed: £800

Amount added to Pension inc government top up: £1,000

Tax Claimed Back via self-assessment: £200

Total Cost: £600

Pension contribution limits

There is technically no limit on pension contributions that an individual can make; however there are limits to the amount of contribution on which tax relief is available – thus making contributions over the below limits inefficient.

The main two limits on tax relievable contributions are an individual’s relevant earnings and the pension annual allowance.

The general rule is that UK tax payers can get tax relief on pension contributions each year on the lower of 100% of their earnings (only on earnings classed as relevant) or £40,000 which is the pension annual allowance. One exception to this rule is that individuals up to 75 that have no income can get tax relief on pension contributions up to the value of £3,600.

An individual’s contributions may be restricted further than the above general rules for two reasons. Firstly, they may be subject to annual allowance tapering. Annual allowance tapering impacts high earners, whereby an individual’s annual allowance will be reduced on a tapered basis if they earn over a certain amount. Secondly, they may be subject to the Money Purchase Annual Allowance (MPAA). The MPAA reduces an individual’s annual allowance to £4,000 and come’s into effect if the individual has flexibly accessed their pension. Both annual allowance tapering and the Money Purchase Annual Allowance have a complex set of rules so if you have any questions please contact your adviser.

Carry forward

One way individuals may be able to make tax relievable pension contributions above the pension annual allowance is through carry forward.

Carry forward allows an individual to make use of any annual allowance that may not have been used from the past 3 tax years. In order to make use of carry forward an individual must first have used their full current year annual allowance, at which point they can then look back at previous years for any unused allowance, starting with 3 years ago. If there is unused allowance available the individual can then use it in the current year in order to make a tax relievable pension contribution above the current year annual allowance.

Relevant earnings limits still apply to carry forward contributions meaning that an individual can still only receive tax relief on contributions up to the amount they earn, even if there is carry forward allowance available beyond this level.

BOOK A SEAT IN SURREY

BOOK A SEAT IN LONDON

CONTACT US

June 24, 2019January 28, 2022

Tax Talks with Ian – Enterprise Investment Schemes & Venture Capital Trusts

Enterprise Investment Schemes & Venture Capital Trusts

BOOK A SEAT IN LONDON

BOOK A SEAT IN SURREY

EIS

Enterprise Investment Schemes (EIS) are tax-efficient schemes created by the UK government during 1994 and which have since raised over £20 billion in investment. They were designed to encourage individuals to invest in smaller high-risk companies in return for a range of attractive tax reliefs that they could not obtain via directly investing into the companies.

There are a few qualifying rules to meet the EIS requirements. Firstly, investors cannot control more than a 30% stake in any company invested through EIS and can only invest up to £2 million per year, provided anything over £1 million is invested in ‘knowledge-intensive companies’. In addition, eligible companies must have:

Fewer than 250 full-time employees
Gross assets not exceeding £15 million
‘knowledge-intensive’ companies will be able to receive up to £10 million in EIS funding in a year
Held the shares for at least three years from the date of issue of the shares or three years after commencement of trade

There are a number of benefits which are as follows:

Income Tax

Income tax relief of 30% is available to individuals for the entire invested amount in EIS. This tax liability reduction is up to £300,000 per tax year. Therefore, if you make an investment of £10,000 you can save £3,000 in income tax.

Capital Gains Tax

No Capital Gain Tax is payable/due on disposal of shares provided they are held for three years.

By investing in EIS qualifying shares, investors can defer Capital Gain Tax on gains realised on different assets. To be able to receive this relief, investors must subscribe for EIS shares during the period of one year before or three years after selling or disposing of the asset. Deferral relief is unlimited and can also be claimed by investor whose interest in the company exceeds 30%.

Inheritance Tax (IHT)

Shares in EIS qualifying companies will generally qualify for Business Relief for IHT purposes. Relief can be at rates up to 100% after two years of holding the investment, therefore any liability for IHT is reduced or eliminated in respect of such shares.

Venture Capital Trusts (VCT)

VCTs began in 1995 to encourage investments into early stage companies based in the UK. Due to the risks associated with early stage investments, HMRC offered investors generous tax breaks for investors taking such risks. VCTs therefore have great similarities to EIS qualifying products, but the key difference is EIS allows direct investments into qualifying companies whereas a VCT is an investment into a trading company that then goes onto provide the start up funding.

To qualify, the VCT must satisfy a number of rules to gain investors tax relief:

The VCT must be unlisted at the time of investment with no plans to IPO unless it is onto AIM
The company must have less than 250 employees
The company must have been established less than seven years ago
Funding raised by the company cannot be more than £15million from VCT funds

Tax Relief

As mentioned, in order to encourage investors to take VCT risk HMRC offer tax reliefs, including:

Income Tax

Similar to EIS investing, you receive 30% income tax relief on the amount you invest, but shares must be held for five years as opposed to three with EIS. It is also important to the note the maximum amount eligible for tax relief is £200,000.

For example, if you invest £10,000 into a VCT, £3,000 will be taken off your income tax bill at point of completing your tax return.

Dividends received via VCT’s are also tax free

Case Study 1: EIS recommendation

A long term client of ours, who is a high net worth client and running his own Ltd Company, was looking at reducing the amount of tax he pays whilst also experiencing an investment. Before recommending this type of product we had to ensure he understands the risks especially the illiquidity nature and we had to account for how experienced he was with these types of unregulated financial products. These products although offering tax incentives, are not covered by FSCS (Financial Services Compensation Scheme) nor can the client complain to the Ombudsman. After taking the above into account, we recommended a £10,000 investment into one of our EIS schemes. As this was his first experience investing with an EIS, we only recommended a relatively small amount to start off with and to ensure he still maintains a suitable emergency fund and enough cash that is not locked in an investment. During his next tax return, he was able to obtain tax relief at 30% of his investment which was £3,000 of his £10,000 investment.

Case Study 2: VCT recommendation

A high net worth client of ours aged 61, was in the process of winding down for retirement and was targeting an income of £5000 per month. After performing our necessary due diligence in ensuring he understands the risks that as those mentioned above, we recommended a VCT as one of the investments to achieve this. He had already fully utilised his ISA allowance, was already invested in structured products and peer to peer lending so we recommended a VCT as the next investment. He was also looking at a tax relief investment which the VCT would provide along with capital gains free growth and tax free dividends, the latter of which could be used to provide an income. The VCT also allowed for another avenue of diversification in his portfolio.

BOOK A SEAT IN LONDON

BOOK A SEAT IN SURREY

June 13, 2019January 28, 2022

Tax talks with Claire – Inheritance Tax Planning

Inheritance Tax Planning

Inheritance Tax (IHT) is a sensitive subject and one that you should be considering and thinking about even throughout the early stages of your lifetime. Your early years are deemed your accumulation phase as this is where you will see the majority of your wealth building.

IHT can be due on an individual’s estate when they die if their estate is valued at more than their available nil rate band (£325,000 in 2019/20). Your NRB is reduced by any non-exempt transactions made in the seven years prior to death. A range of IHT exemption are available to reduce your IHT liability; I am going to discuss benefits and drawbacks of trust planning.

A trust is a way of managing assets (money, investments, land or buildings) for people. There are different types of trusts and each taxed differently.

Trusts involve:

the ‘settlor’ – the person who puts assets into a trust and stipulates the terms of the trust
the ‘trustee’ – the person who manages the trust and ensure compliance with the settlors wishes
the ‘beneficiary’ – the person(s) who benefits from the trust

Trusts are set up for a number of reasons, including:

to control and protect family assets
when someone’s too young to handle their affairs
when someone can’t handle their affairs because they’re incapacitated
to pass on assets while you’re still alive
to pass on assets when you die (a ‘will trust’)

Gifting to a Trust

Gifting to the trust has a tapering allowance against IHT, demonstrated through the following decreasing basis:

For an investment of £325,000 (maximum gift each 7 years without incurring a lifetime charge); your IHT liability would be £130,000 at 40%, if you gift it to a trust you would see the following reductions:

Trust Options

Family Gift Trust (FGT)

Probably the most traditional method of reducing IHT liability, but still hugely popular and very effective having stood the test of time is a lump sum gift into a family gift trust. We feel this could be hugely beneficial to many individuals, as we could place some savings into this trust to start the 7-year clock and take it outside of your estate for IHT purposes. You can only gift up to the nil rate band in any 7 year cycle without incurring an immediate 20% IHT liability (lifetime rate).

Positives: Simple and traditional form of IHT mitigation.

Negatives: Seven Year clock must be survived, and the control of money is lost.

Gifting Outside of Normal Expenditure

While the lump sum Family Gift Trust option mentioned above is certainly the most traditional and vanilla method of reducing an IHT liability, we will now move on to discussing more tailored uses of Trusts and allowances.

The first of these methods is “Gifting outside of Normal Expenditure”. With this method you would regularly and continuously use excess income to gift, there is no seven year clock. Assets gifted outside of your expenditure are considered immediately outside of your estate.

This option only allows for regular gifts to be made when they are from income and the value transferred leaves you with sufficient income to maintain your usual standard of living. It is particularly appropriate for high earning individuals who can afford to gift a larger amount on a regular basis.

Positives: No need for lump sum to be gifted away. This is a progressive method of IHT mitigation, and the money gifted is immediately outside of estate.

Negatives: Control of money is lost.

Annual Allowance Gifting

Another key strategy is to utilise the individual annual exemption. The first £3,000 of an individual gift in a tax year is immediately exempt from IHT. The exemption can apply to transfers into trust as well as outright gifts. The exemption can cover a single gift or several gifts up to this amount. It can also cover the first part of a larger gift. Once the current tax year’s annual exemption has been used, it is possible to bring forward any unused annual exemption from the previous tax year.

Positives: Effective and efficient way of utilising an annual allowance.

Negatives: Limited to £3,000 per year.

Flexible Loan Trust

This method is not as commonly used as the previous Trust strategies, however it continues to be a viable option, especially whereby a Lump Sum is looking to be gifted away, and an ongoing income is sought.

This method encompasses the following key steps:

Lump sum of money is loaned to a Trust
The Trusts invests this money inside an Investment Bond
As the money has been given as a loan, it effectively freezes the IHT liability on this amount.
All growth on the money invested belongs to the trust, and not to the lender.
The loan can then be paid off over time, ideally when income is required. Thus the money received back from the Trust would be used and not retained in the estate.

Overall, this can be an effective option in order to “freeze” ones IHT liability on a sum of money.

The Flexible Loan Trust is an effective estate-planning solution for clients who wish to achieve IHT savings over time and wish to have continued access to their original capital. Even though a discretionary trust is established, there are no immediate IHT consequences to consider.

Positives: Allows growth to accrue on investable assets outside of the estate instead of building additional wealth.

Negatives: The capital used to loan to the trust falls back into the estate at the date of death.

If any of these options discussed are of interest to you or you are just starting to consider the impact IHT could have on you and your loved ones then please get in contact with us for a free initial consultation.