10 things you may not know about Origen.

There’s no place like home

One of the most controversial issues arising from the Pre-Budget Report at the end of last year was the issue of how people resident, but not domiciled, in the UK would be taxed from 6^th April 2008. The announcement of these measures caused a significant stir in the market with concerns that many non-UK domiciliaries might leave the UK.

What does this mean?

The new rules only apply to income tax and CGT – they do not impact upon the IHT position. Estates of individuals who are non-UK domiciled and who are not ‘deemed domiciled’ are only liable to IHT on assets held in the UK.

…For accumulated UK pension funds

Whilst working in the UK, such individuals may have accumulated significant pension entitlements that are subject to tax advantages and the UK pension regime. As a part of their planning, it may be prudent to consider transferring the accumulated funds away from the UK to an overseas pension arrangement, where appropriate.

Qualifying Recognised Overseas Pension Schemes (QROPS) can accept transfers from UK Registered Pension Schemes and although such transfers must be tested against the Lifetime Allowance, they are generally only then subject to reporting benefit payments to HMRC for a period of five tax years following the time at which the member ceases to be resident in the UK, after which the link with the UK pension regime is broken.

Pension funds in the UK have to provide retirement income in one form or another with up to 75% of the fund value (the balance being permitted to be taken as a tax free cash sum). It is possible that, subject to the rules of the QROPS and the pension regime of the country in which it is situated, benefits can be taken in a manner more suited to the member’s personal circumstances.

But be very aware as HMRC has withdrawn approval status for all Singapore-based QROPS due to ‘regulation’ concerns.

Whilst the UK tax authorities allow transfers to QROPS, this is subject to the local tax regimes permitting such transfers into their corresponding pension regimes.

Transferring pension benefits is a complex area and it is recommended to seek independent financial advice first.

…For investments

For a person who pays the charge, they will only suffer UK tax on foreign gains and income remitted to the UK. The charge itself can be earmarked against overseas income and gains which would then be tax-free whenever they are remitted to the UK. HMRC believes that the charge will be allowable against foreign tax liabilities for the purposes of Double Taxation Agreements.

Many non-UK domiciled investors will not have sufficient overseas income or capital gains to justify the payment of the £30,000 charge yet they will not want to pay tax on an arising basis. For them one overseas investment that can be conveniently held is an offshore investment bond. This produces no natural income to be assessed on an arising basis. Nor are fund switches and realisations subject to CGT. Instead the investor can simply let the investment grow with no tax at that time. Indeed, if access is needed to the investment, use can be made of the 5% withdrawal rule to provide funds.

Of course chargeable event gains are not (and have never been) taxed on the remittance basis, so if the investor is UK resident these will be taxable irrespective of domicile and remittance. Also, if investments are being made into offshore investment bonds now using overseas assets on which income and capital gains have previously arisen, care needs to be exercised on constructive remittances if later withdrawals are made.

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Taxing capital gains

The reform of CGT was first announced in last October’s Pre-Budget Report. It immediately provoked considerable controversy and has since been subject to one major revision, the introduction of ‘entrepreneurs’ relief’. The move to an 18% flat rate from a rate that varied between 10% and 40% gave rise to winners and losers.

Winners & Losers

Winners

Higher rate taxpaying investors ·     Previously once your annual exemption was exceeded, the minimum effective tax rate you paid on ordinary investment gains was 24% after 10 years’ taper relief.   ·     While if you held investments for less than three years, the full 40% rate applied because there was no taper relief.   ·        From 2008/09 the only tax rate is 18%, which means more than a halving of your potential tax bill in some instances.

Second home & buy-to-let investors ·     Gains on sale of residential property are normally significant in size and would have often fallen into higher rate tax, even if you would otherwise be a basic rate taxpayer.   ·     As residential property did not normally qualify for business assets taper relief, tax on gains would often be at 24% - 40%.   ·     From 6 April 2008 this has fallen to 18%, a fact which is widely tipped to encourage some buy-to-let landlords worried about the housing market to take their profits and quit the sector.   ·        Increases in mortgage rates may also add to an exodus of ‘amateur’ landlords from the market.

Active investors ·    Those who regularly buy and sell shares or collective funds, active traders in other words, will benefit from the new regime.   ·    Taper relief has been of no relevance to them – because it did not begin for three years – and they previously paid 20% or, more probably, 40% on their gains above the annual exemption.

Trustees ·    The trust annual exemption is generally no more than half the individual exemption and may be as small as 10% of the individual exemption.   ·    Thereafter trustees were previously subject to tax at 40% on gains (adjusted for taper relief).   ·    The advent of a flat 18% rate will allow many trustees to realise ‘trapped’ capital gains which would have attracted unacceptably large tax bills under the previous regime.

Losers

Farmers  ·    The abolition of indexation allowance hit all those who have held assets for a long period of time.   ·    The maximum indexation allowance for assets held at March 1982 was 104.7% of the base cost.   ·    In most cases indexation allowance was ‘small beer’ because of subsequent gains. But where an asset has grown in value only slowly over a long term, such as farmland, the loss of indexation allowance can make a very significant difference to the amount of gain exposed to tax.

Business property owners ·    Previously, commercial property gains normally qualified for business assets taper relief if the property was occupied by an unlisted company or unincorporated business, even if the owner was not involved in the business.   ·    However, entrepreneurs’ relief will not apply in such circumstances and even if you are involved with the business, there will be restrictions, e.g. the property disposal must be associated with a business disposal.

Annual exemption users  ·    If you regularly use your annual exemption, you will find that the loss of taper relief restricts the amount of tax-free gains that you can realise each year.   ·    For example, if an investment you have held for six years was sold in 2007/08, up to £11,500 of gains were tax-free because these fell within the annual exemption once 20% taper was applied. £11,500 x 80% = £9,200   ·    In 2008/09 you can only realise £9,600 of gains tax-free, despite the increased annual exemption.   ·    The effect is even more marked where business assets taper relief applies.   ·    In 2007/08, £36,800 of gains subject to maximum business assets taper relief could be realised within the annual exemption. £36,800 x 25% = £9,200

Portfolio investors - insurance bonds or collectives

Most higher rate taxpaying investors will pay less CGT on realised gains under the new regime. Previously, depending on the level of taper relief available (and ignoring indexation allowance), CGT would have been paid at somewhere between 24% and 40%. From 6 April 2008, a flat rate of 18% will be paid on gains that exceed the annual exemption.

So, higher rate taxpayers who are investing for capital growth will be better off and it is this change that has caused some to express the opinion that investment bonds cannot be a good recommendation for somebody making a lump sum investment. This is on the basis that UK investment bonds suffer internal tax on capital gains at up to 20%, and the higher rate taxpaying investor will pay 20% income tax on gains arising on encashment.

This is largely true for capital gains but many portfolios produce income which is taken or reinvested. Investment bonds can represent a tax effective ‘home’ for reinvested income. We have returned to a situation where capital gains are once again more lightly taxed than income, particularly if you are a higher rate taxpayer.

Growth over income

Although the tax tail should never wag the investment dog, there is now a stronger tax case for favouring growth over income when setting your investment goals. There are many anti-avoidance rules which prevent income being transformed into capital gains, but it remains the case that some financial product structures provide income returns while others produce capital gains even though the underlying investments are the same. Selecting the right structure could therefore halve your tax bill. Having said this though, tax should certainly not be the sole or main determinant of investment portfolio construction.

Collectives or investment bonds

In the run up to the Budget there was some speculation that the Government might act to lighten the tax on investment bonds. However, nothing materialised. Whilst it is not possible to cover this area in detail here, there are some general indicators as to whether a collective or investment bond may be preferable and in what circumstances. However, it’s essential to keep in mind that in many cases the various pros and cons will need to be ‘weighed’ to arrive at the decision for a particular investor.

Type of investor	Collectives or investment bonds
Higher rate taxpayer investing for growth	Collectives will be best: 8% CGT
Investor with annual CGT exemption available investing for capital growth	Collectives will be best: no tax
Higher rate taxpaying investor investing into a high yield equity fund	Bond better: lower tax on income
Higher rate taxpayer investing for retirement when likely to be a lower rate taxpayer	UK bond may be better
Investment for IHT planning	Bond better: discretionary trust, discounted gift trust & loan trust available potentially without trust tax complications
Client wishing to use bed and ISA, bed and spouse, bed and SIPP strategies to utilise annual CGT exemption	Growth collective best (see below)
Client in age allowance ‘trap’	Use bonds with 5% part surrenders to provide ‘income’

In some cases it may be appropriate to split the investment between tax wrappers.

Planning points

Use your annual exemption

Would you waste a tax exemption worth up to £1,728 a year? That is what an investor’s full annual CGT exemption is worth, in terms of tax saving. In the new post-taper relief world, it is more important than ever to use the annual exemption each year (and for the investor’s spouse/partner to do the same).

The loss of taper relief means that from 2008/09 the annual exemption will not take as much of a person’s longer term investment gains out of tax. By not systematically using the annual exemption, an investor is more likely to reach a point where some of their gains are subject to tax. Unfortunately, you cannot simply crystallise a gain by selling and then repurchasing an investment - so called ‘bed-and-breakfasting’.

Other ways of achieving similar results

Bed-and-ISA: An investor can sell an investment, e.g. shares in an open-ended investment company, and buy it back immediately within an ISA. For 2008/09 the maximum ISA investment is £7,200, a rather meagre £200 increase from 2007/08 but the rules governing cash and stocks and shares ISAs will be much simpler than the previous maxi and mini ISA rules.

Bed-and-SIPP: This is a similar process to bed-and-ISA, but the cash realised is used to make a contribution to a self-invested personal pension (SIPP). The reinvestment is then made within the SIPP. This approach has the added benefit of income tax relief on the contribution and may also offer a higher reinvestment ceiling than an ISA, depending on the investor’s earned income and other pension contributions.

Bed-and-spouse: An investor can sell an investment and his/her spouse can buy the same investment without falling foul of the rules against bed-and-breakfasting. However, the investment cannot be sold to the spouse – the two transactions must be separate.

EIS: If you paid CGT at a rate of more than 18% on gains made in the last three years, you could consider using an EIS investment now to claw back the tax you have paid and bring the gains into the 18% tax world.

An investment in an EIS allows you to claim reinvestment relief for any capital gain (before taper relief) that you have made in the previous three years. This allows you to reclaim any tax you have paid on the gain or defer tax that is due. When you sell the EIS shares, the gain you have reinvested is crystallised and becomes chargeable, but at current tax rates. So you might be able to turn an immediate 40% tax liability into an 18% deferred liability.

The Budget offered some extra help here by increasing the amount of EIS investment that qualifies for income tax relief to £500,000 in 2008/09 subject to confirmation by the European Commission. There is no limit to investment where the claim is only for CGT reinvestment relief.

EIS investments are not suitable for everyone and it is important for investors to seek independent advice.

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Don't overlook pension planning

It is now more than two years since pensions tax simplification came into existence. The Lifetime Allowance for 2008/09 is £1.65m.

The lifetime allowance for 2008/09

An important point to note is that we are now less than a year away from 5 April 2009, which is the final day on which elections for enhanced protection and / or primary protection may be made. If you have substantial pension entitlements and have not yet reviewed the use of these special transitional protections, now is the time to do so. Without transitional protection you could face an additional tax charge of up to 55% on some of your retirement benefits. For 2008/09, the annual input allowance is £235,000.

The annual input allowance for 2008/09

This is often interpreted to mean that the maximum that can be placed in your pension plans during the tax year is £235,000. However, such a statement is an oversimplification of the rules. The general principles are:

• There is no limit on how much your employer can contribute. However, pension contributions have to be justified as allowable business expenses if they are to be tax relievable for the employer and their tax relief may be spread when their total pension contributions exceed £500,000.
  
• If you make gross personal contributions which total more than 100% of your relevant UK earnings (or £3,600, if greater), the excess will not be eligible for income tax relief.
  
• If the total contribution input to all your pension arrangements during a tax year exceeds the annual allowance, the excess is subject to a 40% annual allowance charge. This can only be avoided by drawing all benefits from the relevant pension arrangements in the same year or, more drastically, death.

The calculation of contribution input is not straightforward. What matters are the contributions made during each pension arrangement’s ‘pension input period’ ending in the tax year. For example, if you have two pension schemes, one with a pension input period ending on 30 June and another with a pension input period ending on 31 December, were you to make contributions to both in August 2008:

• For the first plan the contribution will count towards the £245,000 annual allowance for 2009/10 (i.e. for the input period ending 30 June 2009)
  
• For the second plan this will count towards the £235,000 annual allowance for 2008/09 (i.e. for the input period ending 31 December 2008).

This complexity means that by manipulating pension input periods it is possible for contributions of up to £480,000 to be made in 2008/09 without falling foul of the annual allowance charge.

Because of the complex nature of the rules, individuals should seek independent advice in relation to this planning.

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'Expression of wishes' & IHT

Whilst on the pensions topic it has come to our attention that HMRC has recently brought a charge to IHT in respect of death benefits payable under a personal pension scheme where these were distributed by the scheme administrator following the completion, by the member, of an ‘expression of wish’ form.

The charge was levied under the ‘general power’ provisions under Section 5(2) of the Inheritance Tax Act 1984 and arose because of the wording of the particular ‘expression of wish’ form concerned, which we understand was Norwich Union’s.

Recent case

The ‘expression of wish’ is not binding on the scheme administrator who still has discretion over who should receive them. In the case in question, the ‘expression of wish’ form provided that the death benefit was payable to one or more of:

• The policyholder’s spouse at the date of his death or;
  
• The policyholder’s children at the date of his death or;
  
• The policyholder’s estate or;
  
• Any person, including trustees whose names the policyholder notified to the scheme administrator in writing prior to the date of his death.

The individual, who died, left no surviving spouse or children. He had indicated on the ‘expression of wish’ form that he wanted the lump sum death benefit to be passed to his two sisters in unequal shares. HMRC said that there was a liability to IHT under section 5(2) because of the wording of the particular ‘expression of wish’ form.

The ‘expression of wish’ form stated that if no written wish were received by the scheme administrator prior to the date of the member’s death and no other pension was due to be paid under the scheme, the benefit would be paid as a lump sum to the member’s estate. The form then went on to say ‘Use this section of the application to suggest… the person(s) you wish to receive all or any of the benefits.’  It is also specified in an accompanying note that ‘Payments of benefits to your estate may be liable to inheritance tax.’

The opinion of HMRC

HMRC considered that because of the wording of the document and more particularly because of the fact that he had no beneficiaries other than his sisters; the policyholder had in effect retained control over the destination of the life cover. If he had revoked that ‘expression of wish’ then the scheme administrator would have had no option but to pay it to the estate and the fact that he did not revoke it meant that he effectively retained control.

This has naturally caused some concerns amongst product providers and it is very likely that will also extend to Trustees of non-insured arrangements. Norwich Union will be reviewing the wording of their ‘expression of wish’ form and everyone else will undoubtedly do so too.

A possible solution

One possible solution (at least in relation to personal pensions) is to have the death benefits written in Trust, which means that the scheme administrator would then pay the benefits to the independent Trustees who would then control where the funds were paid. The planholder would have no control as long as he / she and his / her estate were not beneficiaries under the Trust.

In the meantime caution needs to be exercised in recommending the use of an ‘‘expression of wish’’ form.

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Origen news

Winner of ‘Best Retirement Planner’ 2008

The eighteenth annual Financial Services Awards run by Money Marketing is firmly established as the primary event in the financial services calendar and is attended by  a large number of IFAs from across the UK. We are delighted that Origen was chosen as the winner in the category for ‘Best Retirement Planner’.

An expert panel of senior industry names judged the entries on the firm’s business model, ability to deal with regulatory market changes and commitment to the delivery of top class advice. The judges commented that: "Origen had the most complete pensions advisory service, that all clients received the same level of service and had a clear and sincere commitment to training and competence".

Origen has also been shortlisted in the Corporate Adviser Awards, UK Pensions Awards and Personal Finance Awards

10 things you may not know about Origen

1. Founded in 2005, from a merger of five of the UK’s leading Independent Financial Advisers.
   
2. Part of the AEGON Group – one of the world’s largest life insurance and pension companies. AEGON’s market value is greater than household names such as Adidas, Boston Scientific and Cadbury Schweppes.
   
3. We are one of the largest Employee Benefits and Independent Financial Advisers in the UK, with over 400 full time employees based in offices nationwide.
   
4. One of the largest client bases of any UK advisory firm with over 330,000 private clients, 6,000 small to mid-corporate clients, 21 clients in the FTSE 100 and some in the FTSE 350.
   
5. We have a breadth of expertise that is difficult to match. Our key service areas are outlined below:
                   
   

   
                                     
   

6. We are one of the UK’s leading providers of employee financial education in the workplace.
   

7. We have been recognised across the financial services profession, as by our successes in a number of highly respected financial services awards – most recently for ‘Best Retirement Planner’ at the Money Marketing Awards 2008.
   
   

   
   
   

8. Our Retirement Service is one of the leading ‘advice-led’ annuity and drawdown advisers in the country.
   
9. Our annual Employee Benefits Survey is renowned for being the largest piece of research of its type in the UK and is viewed as a key industry reference tool, with the Department of Works & Pensions receiving a copy. We use this as part of our advice process, assisting clients in reviewing and benchmarking their benefits against organisations with a similar profile.
   
10. As part of our commitment to excellence, we are members of the Financial Services Skills Council and support our advisers’, and non-advisory staff’s, personal and professional development through extensive training.

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