Our client had created significant wealth over his working life. This was made up of property-related businesses and a number of investments held in a variety of tax wrappers. There was no cohesion in his planning and the portfolio was creating an administrative burden to the client and his family.
The client’s objectives were to:
- Reduce the administrative burden of the portfolio
- Diversify the investment holdings to provide greater flexibility and liquidity
- To have a cautious approach to investment risk
- Maximise the planning opportunities within his pension wrapper
- Due to the nature of the investments, devise a long-term strategy to achieve the above.
How 80Twenty helped
Our initial advice was to maximise the planning opportunities available through the client’s pension.
When we met, our client’s property business had made significant annual profits and therefore any planning which reduced his corporation tax bill was of great benefit.
The client had unused annual allowance, in relation to pension contributions, available from the previous 3 years. This unused annual allowance was able to be carried forward, allowing him to make a contribution of £180,000 to his pension (the standard annual allowance being £40,000).
- This allowed the client to take £180,000 from his business without it being liable to Income Tax or National Insurance.
- The pension contribution is classed as a deductible expense from Corporation Tax.
- The client is able to draw 25% of this fund tax-free as he is already over the age of 55.
- The remaining fund can be drawn as taxable income in retirement, potentially at lower income tax rates.
- If retained in the pension, the fund can be passed down the generations.
- The fund sits outside the client’s estate for Inheritance Tax purposes.
The Lifetime Allowance for pensions was reducing from £1.25m to £1m around the time we gave this advice. However, HMRC allowed individuals to apply for Fixed Protection which retained a lifetime allowance of £1.25m as long as no further contributions were made. We ensured that the client made the £180,000 contribution before the deadline to cease contributions and then assisted with the Fixed Protection application. With the client’s overall pension now being valued at circa £1m, this Fixed Protection provides valuable room for it to grow without incurring Lifetime Allowance tax charges in the future.
The client has no need to receive any income from the pension at this time, and so has not elected to draw any pension funds immediately. Given the substantial wealth outside of the scheme, this has the additional benefit of keeping these assets outside of his estate for Inheritance Tax purposes.
Given that the pension remains a long-term part of the planning, we also consolidated the holdings in the scheme onto an investment platform, held in a bespoke range of funds in line with the client’s attitude to risk.
This effective strategic tax planning reduced both Corporation Tax and Inheritance Tax, and will mean that this substantial, and liquid, asset can be utilised as and when the client’s scenario dictates. It has also become visible and the client is able to appreciate that the holdings are appropriate for his objectives and risk profile. This vehicle is now seen as an important part of his ongoing planning, whereas previously it was, to a large extent, ignored.