CASE STUDY- EXAMPLES OF OUR TAX SAVING WORK
1/ The financial problem – Mr Smith invested £30,000 in an investment bond 10 years ago. He is a higher rate taxpayer and his bond today is valued at £70,000. He wishes to cash in the bond and secure the profits made, preferring to reinvest elsewhere because the company with whom the bond is held has closed to new business and has question marks over their future. The problem is that on the £40,000 gain our client would incur a £7,200 tax charge on realizing the bond proceeds. Our advice meant that we were able to help this client to realise the proceeds that in two distinct steps meant the entire tax liability was avoided in a legitimate manner within the rules of the Taxes Acts.
2/ The financial problem – Another client had held a share portfolio for over 10 years. Following stock market reverses he realised that it was no longer in his interest to hold a portfolio of shares that were not being actively managed. Furthermore we pointed out that he was suffering 40% tax on all his dividend income unnecessarily. Taking losses into account over the last three years, the overall portfolio now worth £65,000 still contained gains of £15,400 after taking out that allowed for indexation and taper relief. If he sold all his shares he would have a tax liability of over £3,000. Our advice meant that by leading the client through three separate steps he was able to:
- Encash all the holding without incurring any tax
charge.
- Move the value of the shares to an actively managed
fund of funds service.
- Then enjoy tax-free withdrawals from
his portfolio to replace dividends previously taxed at 40%
.
3/ The financial problem – This client had received an offer from a property developer to buy their practice building. The developer was to build a block of flats on the site. As a result the client’s share of the sale was £300,000. He was as a result about to meet a significant capital gains tax bill of £10,000. Our advice meant that we were able to help this client defer payment of this CGT bill and at the same time gain for him a £20,000 income tax rebate. Over time and with careful future ongoing planning it is possible that the deferred CGT bill might be avoided altogether. Needless to say this client was extremely pleased with our advice. We had turned around him paying tax of £10,000 into a situation where the HMRC (Inland Revenue) had to send him a handsome tax rebate.
GET A PENSION TAX SHELTER
USE AN IMMEDIATE VESTING PERSONAL PENSION
Here is an example of a tax shelter set up for a practitioner who was 67, but had non-pensionable earnings from part-time work. If you have non-pensionable earnings and are 55 or older this is a tax shelter we recommend, as it may well will work for you too.
“Here is a tax shelter that you should now put in place. It involves no investment risk. It will give you a guaranteed annual return that can only change if rates of income tax change. It will reduce your tax bill by £12,002.
All of this is achieved with no investment risk using legitimate tax reliefs only. We advise you to make a single premium contribution into a personal pension plan. You are eligible to invest £30,008, set up as an Immediate Vesting Pension Plan. This is by you investing the sum of £23,406 (£30,008 net of 22% basic rate tax relief given at outset). The remaining 18% marginal higher rate relief your accountant obtains for you as a credit against future income tax payments. You then immediately take benefits in the form of a tax-free cash sum plus a regular income for the rest of your life.
You will note from the illustration provided by Legal & General that an Immediate Vesting Personal Pension Plan with a total purchase price of £30.008 gross, would provide the following benefits.
- A tax-free cash sum of £8,205 to be paid immediately.
- Plus
a gross pension of £1,472 per annum will be payable
throughout your lifetime. This is payable monthly in arrears
and would not escalate.
- A 5-year Payment Guarantee on your own pension benefit would be in place. Therefore, if you were to die within the first 5 years, then this pension would continue to be paid to the beneficiaries.
As a higher rate taxpayer this represents an investment return of 9% on your net investment that is guaranteed for you (see the table below).
If you were not to make the above contribution, it would mean needlessly accepting paying income tax on £30,008 of your earnings. This means sending £12,002 to the Inland Revenue in tax. If instead you make the contribution as set out in the table you save £12,002 in tax and also obtain net income after 40% tax each year of £883. All this ultimately is for a net cost of £10,506. This in our view makes the above very attractive to you – as the Americans might say – a ‘no brainer’.
We recommend that a similar arrangement be set up each year you continue with your private practice. This will both boost income tax relief and add to the low risk portion of your investment portfolio.”
The moral here is that if you are still earning, are younger than 75, and are paying 40% income tax, you are worse off if you do not set up an immediate vesting pension plan. This really is a no-brainer subject only to new rules under what is known as pension recycling! Contact us for more on this – details as per the enquiry form or.
Investment Return Calculations
| Pension Details | |
| Gross Premium | £30,008 |
| Less 40% tax relief | £12,002 |
| Less 25% tax free cash taken | £7,502 |
| True net cost | £10,506 |
| Gross Pension | £1,604.88 |
| Pension net of 40% tax |
£962.88 |
| Return on true net cost (£962.88 divided by £10,506 times 100 equals) |
9% |
