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ESTATE PLANNING REPORT FOR XXXX XXXXXXXX 15th March, 2010 Prepared By Bob Massey BSc Dip PFS TEP Countrywide Legal Services NI Ltd 65 Eglantine Avenue Belfast Co. Antrim BT9 6EW Belfast Office: 02890 314145 Kenilworth Office: 01926 514390 Offshore Strategies The significant advantage of utilising some of our offshore strategies is that not only can you mitigate all Inheritance Taxation on your estate, but also in transferring your assets to this protected environment, you mitigate other taxes your assets attract. We have successfully transferred portfolios of Personal and Corporate assets, Buy to Let, Investment Properties, cash and other investments into this protected environment thereafter the assets have been free of all taxation. There is also a specific strategy that will allow contributions to a Trust to be an allowable business expense against profit for a company (whether trading or investment), partnership or sole trader hence mitigating Corporation or Income Tax. That is then free of: Income or Corporation Tax on rental and investment income or deposit based income generated. Capital Gains Tax upon sale of any personal asset. Corporation Tax on gains upon sale of a company asset Inheritance Taxation immediately upon transfer with no seven years to wait as with Gifting Strategies. The offshore strategies implemented by selected firms of tax planners on behalf of our clients use Statutory Relief‟s to move assets from the UK taxed environment to Offshore Trusts via tried and tested steps and strategies. The Offshore Remuneration Trust strategies presented to you have been implemented by the principal of the firm (a former solicitor and barrister) for nearly 20 years now without direct challenge from HMRC. The High Court of Justice has ruled that the use of Remuneration Trusts does not constitute tax avoidance: MacDonald (Inspector of Taxes) v Dextra Accessories Ltd and Others (2003). HM Revenue & Customs accepts and in any event is bound by this ruling. Should there be any questions from HMRC, the fees paid for implementing the planning covers any response required. Should HMRC press further and succeed then any court and barrister costs incurred by the client and HMRC would be covered by their professional indemnity insurance, but I must stress that to date this has not proven to have been necessary. Should you choose to engage our lawyers, they will provide you with a Professional Letter confirming the tax free status that your assets will enjoy. In the event that this was not achieved, then fees are returned. This is most unusual for such strategies, normally there would be a non refundable up front fee and a contingency fee payable on success - however here fees on deposit are at risk. With our recommended strategy, your fees cannot be lost and are guaranteed by professional indemnity up to £2 million. I must stress that in making a recommendation for any strategy, and firm to implement that strategy, we have taken intensive due diligence on both the strategy and the firm implementing these. Offshore Wealth Strategy Summary It is your objective to protect your current and any future wealth from taxation as much as possible. In order to achieve this it is necessary to change the environment in which it is currently held and in which it grows and passes on to your beneficiaries. Whilst one of your concerns is rightly with regard to the potential Inheritance Tax that would be due on your estate, this could be reduced using simple UK gift strategies. This would generally mean that you lose access to and control of the majority of your assets. The UK strategies would also leave the assets subject to UK taxation and claims against the receivers or beneficiaries of those assets in the event of divorce or bankruptcy. The objective is not simply to mitigate Inheritance Tax but also that you retain both control and access to all your property whilst held in a totally tax free environment, not simply for your own lifetime but thereafter for future generations as well. These objectives can be met by transferring your wealth utilising relevant statutory tax relief to tax protected trusts. The types of assets held will dictate which Offshore Trust route is to be used in order to ensure compliance with the different tax regimes governing the type of wealth or asset owned. The various trust routes will be explained in detail upon engagement with our preferred lawyers and tax consultants. The Remuneration Trust The Remuneration Trust Strategy is utilised for the company. Profits can be transferred into the Remuneration Trust, contributions are an allowable business expense so mitigating Corporation/ Income Tax on profits. Loans can be made to either the company if needed for cashflow, or yourselves. Again loans are tax free to the receiver and create a debt on the balance sheet or your estate. The same strategy can be utilised for partnership, sole trader or Ltd Co profits. This strategy would mean that you mitigate tax on profits. Utilising this strategy salaries could be reduced, thus enhancing profit and saving 40% higher rate tax and NI contributions for both employer and employee. Where dividends were being paid these would have been net of Corporation Tax and then 25% higher rate tax. Depending on which method of remuneration is preferred, the total taxation can be as much as 53%. Thus the enhanced profit can be an additional contribution into a Remuneration Trust. There is no longer a requirement to pay dividends, if the majority of profit is contributed to the Trust there is little or no retained profit from which to pay dividends each year. Here we mitigate employer National Insurance and higher rate taxation on salary, the latter on dividends and of course Corporation Tax. Thus achieving year on year savings of taxation on company profit and on your own remuneration. A Day Pension Plan (In deferment-no benefits taken) Funds in deferment At present upon your death the lump sum Death benefit, your Pension Fund of £X will enter your nominated beneficiaries‟ estate, and the funds will be classed as part of their estates for future Inheritance Tax Planning. If you have not nominated beneficiaries the trustees of the scheme will invariably transfer the fund to the spouse or mirror the wishes of any will. This will be at their discretion but they may be guided by the executor of the will. In order to avoid the funds entering the estate of your beneficiaries, it is possible to direct the death benefits to simple UK based Trusts. By effecting the trust, the funds do not enter the beneficiaries‟ estates and so mitigates IHT for a couple of generations - however these UK based funds would still be subject to ongoing UK taxation for income and capital gains in the trust. The compound effect of the taxation through the generations is a significant erosion of the benefits that you may leave your family. Crystalisation i.e. tax free cash taken Many clients choose to take the benefit of 25% of the fund as tax free cash. This is seen to be an advantage of Pension Planning, however for larger funds and estates all we are simply doing is taking an asset from the virtually tax free Pension Fund environment back into your estate. Thereafter it is subject to Income Tax, Capital Gains Tax and eventually Inheritance Tax. Whilst your Pension Fund is presently outside your estate for Inheritance Tax, this can change upon your death. The remaining Pension Fund can then be used to provide income that is taxable at up to 40% for those funds from which you have withdrawn Tax Free cash. You could however defer taking any at this time if it is not needed, to age 75. However upon your death there are two choices: the fund remains intact and your beneficiaries can draw an income, but subject to Income Tax again. Alternatively, your beneficiaries elect to take the cash net of 35% tax. Then upon their death(s), it is subject to 40% Inheritance Tax again. The effective Tax charged on the fund is then 61%, so £XXX of your fund lost in taxation! The IHT can be avoided as previously discussed by directing the lump sum death benefit to a Trust rather than to the beneficiaries. Post age 75 Alternatively Secured Pension (ASP). This is not the case should you live beyond 75 as most do these days, the cumulative tax rate is proposed to be 82%. That is 70% tax on the remaining fund upon death and the balance has to enter the estate and be assessed for IHT, - a further 40%, hence the cumulative rate of 82%. So less than £xxx of your £xxx fund would get to your family, in the latter circumstances, deferring your pension just means more pension fund to tax. But taking benefits just means more immediate taxation and assets to be taxed on your death, catch 22. ADPP-The Solution The A Day Pension Trust utilises some of the latest legislation, allowing individuals to work, contribute to and benefit from pensions internationally and The Pensions Act 2005, then combining these with advanced Remuneration Trust strategies. The Offshore Trust established is not restricted by UK pension rules, your fund ends up in a Company authorised to manage the proceeds of your Pension Fund under your direct control. A totally tax free environment. There is no requirement to buy a pension at 75 (ASP or Annuity), no investment restrictions, so we can now invest into residential property should we wish to do so and assets are free from taxation for your use and benefit, and for your chosen beneficiaries before or after your death. Control of the fund is passed seamlessly down to your beneficiaries and it continues to benefit from the tax free status. More importantly this allows loans to members of the previous pension, again tax free loans to you, and debts on your estate that mitigate Inheritance Taxation on the balance of assets in your remaining estate. You or other family members are able to borrow from the fund, but should only do so to spend the cash, this forms a debt on their estate mitigating IHT upon death. The loans received do not attract income tax and effectively gives 40% IHT relief on your estate upon death. More of your personal assets can then be transferred to the trust‟s tax free environment. Rather than purchase any appreciating assets in a UK tax payer‟s estate, the trust can buy these and the beneficiaries you choose utilise these without any tax implications on the individual and the trust. Appendix The Steps We establish a fiduciary company (FIDCO) this could be onshore or offshore. Say £5,000 is injected as capital, not subject to tax deduction. FIDCO then establishes a Remuneration Trust (RT) and contributes the £5,000. FIDCO shareholder is the Trustee of the RT. Pension members are Directors of FIDCO. A second offshore company is established owned and managed by trustees (OFFCO). The trustees of the RT delegate Investment powers to OFFCO. FIDCO is permitted by agreement only to hold, use and receive FIDCO funds. (FIDCO has beneficial ownership, but the exploitation of FIDCO funds can be drawn upon by the Trust. s.8(2) ICTA 1988. FIDCO will not be chargeable to corporation tax on profits arising in its fiduciary or representative capacity). FIDCO is appointed as the sponsoring employer of the current SSAS replacing the existing company. The member then surrenders their entire interest in the new scheme. This creates a surplus. An authorised payment is made to FIDCO. In the meantime you will have opened UK bank accounts in the name of FIDCO. Pension members as signatories only. (s.172A FA 2004 declares that such a surrender is not an unauthorised payment). The pensioner trustee for FIDCO reports the payment of the surplus. FIDCO is exempt from tax as a fiduciary company. FIDCO holds those funds for the RT. These funds can be held for beneficiaries. Access is obtained as loans or assets can be purchased. FIDCO pays no tax on income UK gains. A Pension Member passing away has no bearing on the arrangement, no IHT or otherwise. Tax Benefits Summary Upon transferring assets into the Offshore Trusts, there is no taxation triggered. Once within the Offshore Trusts, assets can be sold and do not attract Capital Gains. These assets are then free of all taxes on growth or income going forward. No Income Tax – therefore any rent your receive whilst increasing your assets, will have saved 40% from Inheritance Tax. No Capital Gains Tax by moving to an offshore strategy, therefore saving you upto 18% CGT on any future disposals that may be made. No Corporation Tax. No Inheritance Tax. The savings and future savings made for yourself and future generations should easily outweigh the cost of incorporating this Offshore Strategy. Protected Assets Effectively each of the above strategies results in assets being held in Offshore Trusts. Once within the trusts protective structure they are not only free of taxation, they are better sheltered from any claim against your own or your family‟s estates, from creditors, divorce etc. The assets pass freely down future generations without taxation. Choice of Trustees Once within the Offshore Trust, the assets must be held in the name of the offshore trustees. As the “protector” of the trusts you will have the power to hire and fire trustees, but essentially they act at their discretion for the benefit of the beneficiaries, not at your discretion. A “Memo of Wishes” is provided to the Trustees and ongoing requests for them to consider. This maintains the integrity of the trust structure. In practice they will agree to almost any request made for loans and regarding the type of asset you wish the trust to purchase for growth, income or simply for you and your family to utilise. Offshore trustees are very tightly regulated and monitored, each also has £1 of liability insurance for each £1 of asset they hold. There are ongoing costs from the trustees, very dependent on what you need them to do. Onshore Wealth Administration Offering FEEL UNCOMFORTABLE ABOUT AN OFFSHORE STRANGER MANAGING YOUR WEALTH? It is natural to feel concerns. We want the wealth protection benefits that appropriately structured „offshore‟ arrangements provide. But: Can the offshore trustee always be trusted to do what is needed? If the offshore trustee has to be changed, might there be a legal battle? If there is fraud, how long before the insurance company pays up? What if there‟s a large scale fraud and the investigation takes years? Unless the wealth is managed offshore, won‟t reinvestment returns be taxed? These are perfectly proper and important questions. Uniquely, our lawyers are able to provide the answer for Offshore Plan Clients. ONSHORE WEALTH ADMINISTRATION Using highly sophisticated trust based financing strategies, successfully implemented over a decade, the Offshore Client can enjoy direct control and administration of Plan Assets Onshore ~ within the UK: A Client owned Onshore Personal Management Company owns the Plan Assets Reinvestments still accumulate tax free All Plan benefits are retained Fiduciary Confidentiality is maintained TICK THE ‘ONSHORE’ BOX These benefits are provided through the implementation of this highly technical Product Supplement by the expert professionals of our renowned Wealth Strategy Firm. Comprehensive written professional advice, together with specialist consultation and client support – both during and after the transactions – are included in the fixed fee. Fees Offshore planning fees are significantly higher than that of traditional UK estate planning, but reflect both the level of expertise employed and the benefits to you. Fees to effect this strategy are based on the value of the assets sheltered and would be in the region of 3-5% plus VAT for the UK legal strategies and then 10% paid to the offshore firm who own the intellectual rights to the strategy. The principal partner of the UK firm and beneficial owner of the rights are effectively one and the same. OWAO arrangement fees are £5,000. Trustees Fees, initial establishment of Offshore companies and an annual charge thereafter. This will be quoted before engagement but is very dependent on strategy agreed. As a guide £10,000 first year, £5,000 per annum thereafter. Less if Channel Islands is not used. Fees can be paid outright, loans can be geared against trust assets to meet fees and/ or assets geared to achieve greater investment return and effectively pay fees over a period. We can consider these at a later date, but primarily you need to be comfortable with the strategy itself, the taxation saved and that the advantages far outweigh the costs. ADPP - UK Pensioneer Trustees Fees will be £3,000 + VAT for a scheme value of £1m or less and 1 or 2 members. £5,000 + VAT for a scheme value of £1m plus and 3 members or more. Summary Each of the above strategies and how they are implemented depend very much on the assets held on the balance sheet, profits generated, how shareholders take income from these personally at present and your intentions regarding future sale of the business. In any event, almost invariably, we are able to transfer all assets and consequently all future income and gain from these into a totally tax free shelter outside of your estate.
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