1) Analysing the Client’s Financial Situation – Improving tax efficiency

Question 1

What factors would you take into account when reviewing the tax efficiency of Andrea’s existing portfolio? (9 points)

Answer 1

• Andrea is currently a higher-rate taxpayer, likely to be a basic-rate taxpayer in retirement.
• She has a PSA of £500/likely to be paying tax on savings income from deposit account and now corporate bond OEIC (at 40%).
• Use of her ISA allowances/no tax on income or growth.
• Appears not to have maximised tax relievable pension contributions/limited IHT efficient investments.
• No CGT liability on the transfer of gains to Andrea.
• Dividends from equity OEIC and individual shares are taxable if exceed DA of £1,000, as she is a higher rate taxpayer this is taxed at 33.75%.
• Income from corporate bond fund taxed as interest at 40%.
• May have CGT on sale of OEICS and individual shares/base cost used is Carl’s acquisition cost/liability over CGT AEA of £6,000 taxed at 20%.
• All assets except her pension will be added to estate for IHT purposes/her RNRB plus NRB is £500,000 hence she has a significant IHT liability.

Question 2

What factors would you take into account when reviewing potential options to ensure Andrea’s savings and investment portfolio is tax efficient as she approaches retirement? (10 points)

Answer 2

• ISA allowance of £20,000pa/tax free income and growth.
• Annual allowance on pension contributions is £60,000 per annum. Limited to earnings for tax relief (£56,000 in 2023/24 for Andrea).
• Pensions offer tax relief on contributions, tax free income and growth, PCLS but income taxable/IHT free.
• Andrea has a £500 PSA currently/could receive £1,000 PSA if she increases pension contributions.
• Income from corporate bond OEIC and interest from cash savings accounts use PSA/excess taxed at 40%.
• NS&I premium bonds are tax free.
• She has a DA of £1,000 (reducing to £500 in 2024/25).
• OEICs and shares produce dividends, as Andrea is a higher-rate taxpayer currently taxed at 33.75% over DA.
• Use of investment bonds/non income producing/offer 5% tax deferred income.
• She could make gifts for IHT/£3,000 pa annual exemption/small gifts £250/gifts from normal expenditure/could be used to help fund Junior ISAs for grandchildren if appropriate.

Question 3

Explain to Andrea how the OEICs and individual shares will be taxed if she decides to retain them and how they would be taxed if she decided to sell them. (8 points)

Answer 3

• She has a PSA of £500/her savings income from deposit account likely to use up all her PSA hence income from corporate bond OEIC will be taxed at 40%.
• Dividends from equity OEIC and individual shares are paid gross/taxable if exceed DA of £1,000.
• DA reducing to £500 from 2024/25.
• Dividends taxable if income taken or reinvested.
• As she is a higher-rate taxpayer excess is taxed at 33.75%.
• May have CGT on sale of OEICs and individual shares/can offset taxable gains with any losses she has carried forward from previous years.
• Base cost used is Carl’s acquisition cost/liability over CGT AEA of £6,000 taxed at 20%.
• Assets are liable to IHT.