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Tax Planning Ideas

Click on each category to see more detail.
  • All Tax Wrappers
    Clients invested in common tax wrappers such as Pension/SIPP, ISA, Junior ISA, Offshore Bonds and Trusts.
     
    The Fund may be purchased in all of the above wrappers in order to:

    • Diversify a client’s existing portfolio and enhance the risk/reward characteristics
      • Private let UK residential property has demonstrated low correlation with equities, fixed interest and cash, and is not perfectly correlated with commercial property
    • Reduce exposure to the current risks associated with fixed interest assets
    • Attract buy-to-let investors who distrust stock-markets, or just want the asset class in a more tax efficient wrapper.
    • Access the tax efficiency of the PAIF (Property Authorised Investment Fund) regime.
    More wrapper specific examples are detailed below.
  • Individual Savings Account (ISA)
    Annual allowances for stocks and shares ISA contributions are reasonably generous when considering the unrestricted access and sheltering of assets from Income and Capital Gains taxes. 
     
    • 2015/16 tax year: £15,240 per person
    As the Fund is more closely linked to changing house prices than equities, fixed interest, cash, or commercial property it may be used within an ISA wrapper in order to:
     
    • Save for a deposit for house purchase (first time buyers or home movers)
    • To diversify existing ISA portfolios
    • Access the buy-to-let market, without the hassle of ownership -  without creating income tax or capital gains tax liabilities
    • Access the tax efficiency of the PAIF (Property Authorised Investment Fund) regime.
  • Junior ISA (JISA)
    Although having lower annual investment allowances, JISAs provide a tax efficient way for parents, grandparents or other donors to save money for a child’s future – particularly for a deposit for a first property:
     
    • The Fund will provide a closer link to changing house prices than equity, fixed interest or cash funds
    • Savings can grow without creating any liability to income tax or capital gains tax
    • The allowance increased to £4,080 for 2015/16
    • For regular investors, £340 per month may be subscribed to a JISA over the course of the 2015/16 tax year, assuming equal monthly contributions
    • Donors to Junior ISAs may contribute as part of their Inheritance Tax planning:
      • Annual gifts exemption of £3,000
      • Gifts out of normal expenditure (GOONE)
      • Potentially Exempt Transfers
  • Personal Pension and SIPP
    Annual allowances for tax-relievable pension contributions are £40,000 in 2015/16 (unchanged from 2014/15, it was £50,000 for the two previous tax years).


    Carry forward allowance also provides for larger contributions to be made where these limits have not been reached in the previous three tax years: Using carry forward, the maximum gross contribution in 2015/16 could be £180,000 which could generate income tax relief worth £36,000, £72,000 or £81,000 depending on an individual’s marginal rate.


    Considering the tax relief available on contributions, and the fact that the pension pot grows without generating any liability to income tax or capital gains tax, the Fund may appeal to the following types of investors:
     

    • Existing buy-to-let investors who may be considering purchase of a new property
    • Those who have realised profit from a buy-to-let asset and wish to offset the resulting capital gain with the tax relief available on a pension contribution
    • Existing buy-to-let investors who have neglected pensions in the belief that they will have to invest in equity funds within a pension wrapper
    • Any investor who will benefit from adding further diversification to their pre or post retirement pension portfolio
    • Those with ‘protected rights’ portfolios accrued prior to April 2012 which now have wider investment options as ‘ordinary rights’.
    • Investors with exposure to certain property based high risk unregulated collectives or similar who now wish to move to a lower risk regulated property fund.
  • Offshore Bonds
    Offshore bonds provide a number of tax planning opportunities, especially for clients who may spend a period as non-UK residents, ex-pats, and those who may be able to control their income from employment or via income drawdown.


    The following types of client may find owning the fund in an offshore bond attractive:
     

    • Ex-pat clients who wish to maintain a link to the UK housing market, but who do not want the hassle of owning a property back in the UK.
    • Trustees who require exposure to the UK property market but in a way that allows them more flexibility as less onerous reporting than if they owned a physical property or a direct investment in OEICs or UTs
    • Buy-to-let investors who want to shelter UK property returns from immediate income tax and capital gains tax liability, especially now that markets are rising again.
    • Non-UK residents / ex-pats for whom ownership of a UK property would affect their domicile/deemed domicile status for IHT planning
     
    It is worth considering some of the regulations and key tax benefits of Offshore Bonds, particularly in comparison to direct UK property/buy-to-let portfolio ownership:
     
    • Physical property is not a permitted asset for Offshore Bonds owned by UK residents, but OEICs and UK authorised Unit Trusts (such as the TM Hearthstone fund) are permitted.
    • Holding physical property (such as a buy-to-let house or flat) in an Offshore Bond owned by a UK resident would breach HMRC rules and create an income tax liability for the investor on a deemed 15% cumulative annual gain.
    • Income and gains within an Offshore Bond roll up free from immediate income tax liability.
    • Investors may withdraw up to 5% of their original investment each year for up to 20 years without immediate income tax liability. This is effectively a return of their invested capital.
    • Top-slicing relief may be used when withdrawals are made that exceed the accumulated 5%pa allowance. The number of years used in the top-slicing calculations count back to the date of inception of the bond (unlike onshore bonds which count back to the last chargeable event).
    • Time apportionment relief may be used to reduce a chargeable event gain in recognition of the time that an investor has been a non-UK resident during the period of investment.
    • Offshore Bonds are non-income producing assets which may be attractive to trustees in the interests of managing their annual tax liabilities and simplifying trust accounting.
    • Investors who are able to control their income (for example company directors, or those using income drawdown from pensions) may be able to time their exit from the bond in order to realise large gains with little income tax liability due to top slicing relief. For example, in 2014/15, assuming no other income in the tax year, an individual with an offshore bond set up 10 years ago could realise a gain of £100,000 and pay just £17,712 tax (17.7%).
    • Trustees may assign a bond to the beneficiaries without creating a tax liability for the trust. The recipient may then realise the capital from the bond with the gain being taxed according to their own personal circumstances rather than the (usually higher) rates suffered by trusts.
  • Trusts and IHT Planning
    The Fund can be used within any trust and can therefore prove to be a useful asset in IHT planning.


    Some examples of how the Fund could be used are:
     

    • Managing a physical property within a trust may work out to be an expensive and onerous task. Where trusts are considering or already holding a property in trust, it may be more cost effective, less onerous, and provide greater diversification to own the TM Hearthstone fund instead.
    • The Fund can be held in an Offshore Bond whereas a physical property cannot. As a bond is a non-income generating asset, this is likely to be a more convenient way of accessing investment returns from the UK residential property market.
    • Grandparents or other donors may like to make use of their annual IHT exemptions and/or make gifts out of normal expenditure into trust for children. The object of these gifts is often to help them on their way in life – especially to help them onto the property ladder. Trusts will allow larger annual contributions and potentially more control than via a Junior ISA.
    • Non UK Domiciled investors may find an Excluded Property Trust is an efficient way of gaining access to the UK residential property market via the TM Hearthstone fund. If your client is UK non-domiciled at the time of creating the trust, the asset will be exempt from UK inheritance tax under current legislation.

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