Tax Free Income Supporting Your Client’s Lifestyle
Continuing the theme of creative tax planning, how might your clients react if you could show them ways to have enough tax free income to support their lifestyle legally and ethically for the rest of their lives? I suspect a good few would be ready to bite your hand off for this information, provided you can reassure them it is 100% legal and ethical!
As with all genuine tax planning, this has to be done case by case. It will work well for some clients, and maybe not at all for others. A lot will depend, of course, on how much they actually need in order to support their desired lifestyle. But I think many clients will be surprised by just how much “income” they could receive tax free.
You will notice I have put “income” in quotation marks. There is a good reason for this which I will reveal shortly. But first let us consider how much “normal” income could now be received tax free. For this purpose I am assuming the clients are planning to retire next year.
In the case of a married couple, in 2016/17 up to £33,600 income could be tax free. This relies on each of them taking full advantage of both the Starting Rate (0%) and the Personal Savings Allowance. The figures are as follows:
Personal Allowance £10,800 each, Personal Savings Allowance £1,000 each, Starting Rate £5,000 each.
If the clients have just reached State Pension age in 2016/17, the Personal Allowance will be made up partially by the new State Pension. Assuming both have sufficient National Insurance credits we would be looking at £15,434 new State Pension (£148.40 per week each). This leaves £6,166 to come from other sources – perhaps private pension arrangements, or income from other investments.
Of course their savings income may fluctuate a little, and therefore they may have slightly more than the Personal Savings Allowance and Savings Rate combined. This would mean they would have a small income tax bill. Alternatively a change in savings interest rates may mean their savings income could be slightly less than planned, which would mean the total income would be a little under £33,600. Ballpark, though, assuming your clients have enough capital to produce £12,000 interest from savings, together with other investments or income as indicated in the previous paragraph, this figure of approximately £33,600 should be achievable.
For some clients this may be enough on its own to provide the lifestyle they require in retirement. If not, and if they have enough capital, there are certainly ways to increase this substantially without creating significant tax liabilities.
One way to increase “income” is to take full advantage of the Capital Gains Tax exemption. Have the client invest, for example, in a range of Unit Trusts aiming for capital growth rather than income. Now you can see why I put “income” in quotation marks! To the clients it doesn’t matter whether you call it income or capital growth, as it will still be money they can spend without reducing their invested capital, but as it will be classified for tax purposes as Capital Gains, this will allow them a further £11,100 each with no further tax to pay.
We now have a total of £55,800 tax free “income” a year for our married couple. And that is without even mentioning tax free income from the New ISA, and Pension Commencement Lump Sum taken on a gradual basis without touching the rest of the crystallised pension. Obviously the amounts available will be highly personal, depending on just how much the clients have built up over the years in their ISAs and pensions.
This should certainly be enough for many clients to enjoy a very comfortable lifestyle. All completely legal and totally ethical.