2014 jan 30 - brendan twohig & eoin buckley - tax & financial planning
TRANSCRIPT
© M.K.Brazil
Personal Financial
Planning in 2014 …..Navigating Through Challenging Times
January 2014
© M.K.Brazil
Financial Planning v Tax Planning
Ireland 2014:
• Current Tax Rates
o Income Tax 52%+ (41% tax + 4% PRSI + 7% USC)
o CAT 33% (Gift and Inheritance Tax)
o CGT 33% (No Indexation)
o HIER, 10% USC, 5% S.23 USC, 80% Windfall Tax, etc
o LPT, Water Rates, Refuse Charges, Septic Tank, etc etc
Budget October 2013:
• DIRT Increased to 41%
o Really 45% because of PRSI?
o 41% and not Marginal Rate - Location, SRCOP etc irrelevant
o Announced in October 2013 but not effective until January 2014
5 Asset Classes:
1) Cash – Deposit Accounts – Bank v An Post o 2.4% Gross @ bank less 45% DIRT = 1.3% = An Post 3 Year Money
o Inflation Risk
2) Bonds – Yields must rise eventually = capital loss
3) Equities – Bull run for last 5 years
4) Property – Funds are receiving large inflows
5) Alternatives – Traditionally used for diversification
• Investment driven ideas
Multi Asset Funds - Diversification
Absolute Return Funds - Volatility
• Tax driven ideas
Individually owned portfolios
i) CGT @ 33% v 41%/45%
ii) Ownership in non-earning spouse to use SRCOP
iii) Death does not trigger a capital gain
iv) Making use of losses forward
• Pensions. Tax free investment growth less pension levy
CAT Annual Exemption / Thresholds:
• 2014 Exemption Thresholds
o Class A €225,000
o Class B €30,150
o Class C €15,075
Life-time Thresholds so aggregatable etc
• Annual Small Gift Exemption €3,000 (SGE)
o Per person per beneficiary
o Lost if not used up
o Totally under utilised in Succession Planning
SGE Example:
• Terry and June - retired and relatively financially secure
• They have one daughter, Mildred.
• Mildred is married to George and they have 3 kids
George & Mildred set up Joint Account with 3 kids
Terry & June set up joint account and monthly DD of €2,500pm
€30,000 tax exempt transferred each year
CAT Saving €9,900pa, €50k after 5 years, €100k after 10 years, etc
SGE Example:
• € 2,500 per month direct debit to life assurance company
o Utilising deed of assignment for (Grand)children
o Utilising trust form for adults
• Choice of asset class(es) linked to investment term
• € 108,000 contributed (€ 500 x 12 months x 18 years)
• € 140,853 value in 18 years (@ 2.95% = 6% growth – 1% AMC – 41% exit tax & -1% levy)
• 2 Goals achieved
1) Savings fund accumulated of € 140,853
2) Effectively increased CAT threshold from € 30,150 to € 170,733
S.60 – “Tax Insurance”:
• ‘S.60 Policies’ (Actually S.72 (Inheritances) & S.73 (Gifts))
• Insurance Policy expressly taken out to cover CAT o Regular premium paid by disponer which meets Revenue’s rules etc
• Element used to Pay Tax => EXEMPT from CAT
• Any Excess still paid but liable to CAT
S.60 cont…:
• Brendan & Miriam
o 65 and 63 years old respectively – both non-smokers etc
o Married & 3 kids (Fiachra, Brighid, Suilta)
• Succession Planning options have been explored
o Agricultural Relief
o T/F of Dwelling
o Utilising of Thresholds (€225,000 <> €30,150 <> €15,075)
o Annual Exemption, etc etc, etc
• They still have €4.5m in assets which will pass on their deaths
S.60 cont…:
• What Happens on Parents Death?
Fiachra Brighid Suilta TOTAL
Inheritance €1,500,000 €1,500,000 €1,500,000 €4,500,000
CAT @ 33% (€495,000) (€495,000) (€495,000) (€1,485,000)
(Thresholds used already )
Net Received by Kids €1,005,000 €1,005,000 €1,005,000 €3,015,000
Family €3m
€4½m
Tax €1½m
S.60 cont…:
• Brendan & Miriam now paying €28,500pa S.60 premium
o €2,377 x 12 every year for rest of their lives
• €4.5m nest egg falling BUT Inheritance Pot increased by €1.55m
o Remember €28,500pa really only 66% while bulk of €1.55m tax free
• Assume Brendan dies first and Miriam lives for 20 years
o Total S.60 Premium €570,566, i.e. €28,528 x 20 years
o €4.5m nest egg now €3.9m
Without S.60 - Kids get €3m
Because of S.60 – Kids get €4m
S.60 cont…:
• Miriam Dies after 20 years
Fiachra Brighid Suilta TOTAL
Inheritance €1,309,811 €1,309,811 €1,309,811 €3,929,434
{€4.5m - €570,566 (€28,528 x 20) }
Less CAT @ 33% (€432,238) (€432,238) (€432,238) (€1,296,713)
Add S.60 Tax-Free Proceeds €432,238 €432,238 €432,238 €1,296,713
€1.55m
Remaining S.60 Proceeds €84,429 €84,429 €84,429 €253,287
Less CAT on Excess S.60 (€27,862) (€27,862) (€27,862)
Net Received by Kids €1,366,379 €1,366,379 €1,366,379 €4,099,136
S.60 cont…:
• What if 10 years? Or 40 years? (Don’t forget premium less if younger etc)
Fiachra Brighid Suilta TOTAL
No S.60
Net Received by Kids €1,005,000 €1,005,000 €1,005,000 €3,015,000
S.60 - 10 Years
Net Received by Kids €1,440,448 €1,440,448 €1,440,448 €4,321,343 + €1.3m
S.60 - 20 Years
Net Received by Kids €1,366,379 €1,366,379 €1,366,379 €4,099,136 + €1.1m
S.60 - 40 Years
Net Received by Kids €1,218,241 €1,218,241 €1,218,241 €3,654,722 + 600k
Brendan & Miriam – Product Choice:
• Premium € 2,377 per month is based on
o Joint life 2nd death
o Both non smokers & average healthy lives
• Whole of life policies
o Guaranteed () V Flexible unit linked ()
• € 1.55m payout / € 28.5k annual premium = 54 year break even
• How do the life companies make money?
o Time value of money is working in their favour
o Many policies lapse
Retirement Planning:
• Retirement Relief 55 – 65 years of age
o S.598 - €750,000 life-time cap
o S.599 – No Cap but 6 year claw back
• Restrictions for 66+ became effective from 1st January 2014
o S.598 - €500,000 life-time cap
o S.599 – Capped @ €3m
• Various other reliefs, BR, Ex-Gratia, Pensions etc
Example:
• Homer & Marge are 60+ and ready to retire
• Son Bart ready to take over the family business
• Homer and Marge want to retain investments to fund retirement and
to look after other kids
Father M other
Homer Marge
Family Ltd
Investments TradeP r ope r t y & Ca sh
Example cont...:
Homer & Marge set up a new company
Take advantage of S.615 / S.587 / S.80 etc
Isolate trade into the new company
Homer Marge
shares
F amily Ltd New Co.
Trade
Investments Trade
Example cont...:
• Homer & Marge now have 2 companies:
– New Co. is pure trading company
– Family Co. is an investment company
• Ready to implement further changes
Ho m e r M a rg e
F amily Ltd N ew C o .
I nv e st me nt s Tr a de
Example cont...:
Homer & Marge gift some shares to Bart
Company buy’s back Homer & Marges’ shares for €1.5m (pre 2014)
– No CGT because of Retirement Relief
Homer Marge
Family Ltd
Investments
Ho m e r M a rg e B a rt
Shares
N ew C o .
C ash
Trade
Example cont...:
Homer & Marge extract €1½m
Bart Takes over Family Business
Home & Marge Retain control of investments
All with very little tax cost
Homer Marge
€ 1 ½ m + Family Ltd
Invest ment s
Retirement Planning:
•Homer and Marge could additionally, at the point of retirement,
transfer € 4m out of the limited company bank account & put €2m
into each of their pension funds.
•Pre retirement Planning
o Personal Pension
o PRSA
o Occupational Pension Scheme
•Differences re death before normal retirement age (NRA) –
PP/PRSA
•Differences re funding ability, tax efficiency & trust structure – OPS
Retirement Planning:
•Planning for Tax Free Cash only
•€350,000 Fund for Homer
•€ 87,500 25% TFLS
•€ 262,500 75% Balance to ARF
•€ 13,125 5% ARF Imputed Distribution
•€22,703 S/W Pension incl. adult Dependant
•€ 35,828 Total Income
•€200,000 Fund for Marge (Salary € 133k)
•€ 200,000 TFLS - Based on 1.5 times final salary (beware must go annuity with excess)
•€ 350,000 Fund for Homer
•€ 200,000 Fund for Marge
•€ 550,000 Total – All Received Tax Free
Retirement Planning:
•2 Funds is better than 1
•€1.6m fund for Homer V 2 Funds (€800k for Homer & €800k for Marge)
•Tax Free Lump Sum (TFLS) € 200k V € 400k
•Obvious but often overlooked
•Employ Spouse
•& Incept occupational pension scheme
•Salary Swapping
•used to maximise TFLS – beware of anti-avoidance rules
Retirement Planning:
• 6 Key Tax Benefits
• Employee Contributions - 41% tax relief
• Employer Contributions - 52% tax relief
•Tax Free Investment Growth (less pension levy)
•TFLS - € 200k (with additional €300k @ 20%)
•PP/PRSA – on death before retirement, full fund value is paid
out tax free (CAT spousal exemption)
•ARF – 5% mandatory drawdown + discretionary to suit tax band.
Capital Preservation on death
Summary & Conclusion:
•TAX
o ABTAT – Always be Thinking About Tax
•Financial Planning
o The Time to Plan is Now
© M.K.Brazil
This presentation is intended to be informative but issues are
condensed in the interest of clarity and brevity which may lead to over-
simplification and inaccuracies. The time restrictions should also be
considered as these may have lead to errors and omissions.
This format does not facilitate a more comprehensive examination of
the issues covered. In addition, many of the comments are based on the
author’s personal interpretation of the relevant events, statements and
documents, and may differ from the interpretation of others and may be
inaccurate outside the context of this event.
Please note that this presentation was intended to be a general guide
only and further advice should be obtained before taking, or refraining
from taking, any action. Neither the speaker nor MK Brazil accept any
responsibility for any party acting or refraining from acting on the basis
of the information disclosed either orally or in writing during this
presentation.
© M.K.Brazil
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Tel:051 840800 / Fax: 051 - 874504
E-mail: [email protected]
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