40% tax-avoidance, child benefit, SIPP Pension conundrum

[tony13579]

I did this example for my sister who has 4 children and her husband earns 60-70k paye and about 15k self employed. They have £85k mortgage on repayment terms. the paye job might end and all income would be self employed in partnership with my sister.

 

He has 14 years until he is 55 and can draw his pension. Part of his income is self employed. They are trying to transfer some (all) of his income to her and avoid 40% tax maintaining enough income to pay a 85k mortgage, feed 4 kids 2 of which are costing a fortune due to county level sport commitments. My suggestion is to do a SIPP buying corporate bonds mainly as a sort of self invested endowment policy without the management charges. ( via H&L) at 55 this could provide25% of the pension pot to pay off the mortgage. Would this qualify as a "credible repayment scheme" for an interest only mortgage?

If interest rates rise I would expect corporate bond rates to rise too.

 

As well as paying the mortgage this builds a significant additional pension pot of £255k for £14k in their situation by saving tax & reinstating their child benefit (x4) it also is tax efficient if he dies.

 

I would appreciate any fine tuning,

 

 

------------------------------------

 

 

Proposal:

 

 

Change your mortgage from repayment to interest only

Invest in a pension, use the 25% tax free lump to pay the capital off at 55 years old

I am assuming lots of things. 85k mortgage. 3% interest rate. 6% compound intersst earned on your pension pot. Child benefits will reduce as they leave education.

There are plenty of good bonds paying 5.5%-8.5% ........6% is achievable

 

The numbers are compelling

 

Pay in to a pension £1000 costs 600 from your pay packet

£85k costs£51k

 

Interest incurred at 3% 2550 per year x14=£35700

 

£3900 monthly compound @6% = £85,000 ( X 0.6)

 

There fore it costs £2340 on interest to cover the capital of your mortgage.

1/3 of your mortgage interest could be offset against tax

 

As you can only get 25% of your pension as a lump sum you would need to put 4 times that sum in 9360

 

That is £780 per month. Offset by savings on your mortgage and getting child benefit back, tax relief on 1/3 of your mortgage interest

 

Mortgage saving £408 per month (85k,3%,14years, repayment-interest only)

Child benefit gained £262

tax saving about £28

£698

 

Actual cost to you £780-£698=£82 a month (£13,776 over14 years)

Return= pension pot worth £255,000 after mortgage paid

[Jonnyboy]

I prescribe 5 pints and a decent gig.

[Gemmel]

Tony - Can you help with 52% Tax on a non approved share option scheme

[Alain Perrin]

The risk you run is if the tax free cash option is reduced or eliminated as has been mooted. This may count against it as a credible repayment scheme.

Sent from my RM-821_eu_euro1_276 using Board Express

[aintforever]

Most boring thread ever written.

[Barry Sanchez]

Impressed, I wont pretend to understand it all too much but awesome savings.

[tony13579]

This could be boring for some. However others may have lost all their child benefit. This could get it back. Also sorting out your pension is worth it. It's the difference between cruising to the Caribbean in your old age and being stuck with Sun £10 holidays in Shanklin.

 

I have limited knowledge of share options. I made £52k on a 18k investment. I would need to see the scheme paperwork.

Are the shares, your money at market risk?

Is the money out of your pre tax wages?

Or is it a share save scheme where you buy the shares at the end of the saving scheme?

I have seen employee shares loose 80% of their value. if your job, pension and money are tied up in one company that is a huge risk.

I am not a financial advisor, just done my own research on the bits that affect me and my family.

[Jonnyboy]

Fair chance Shanklin and the Caribbean will be underwater by my retirement.

 

They'll probably have banned retirement by then too.

[Gemmel]

This could be boring for some. However others may have lost all their child benefit. This could get it back. Also sorting out your pension is worth it. It's the difference between cruising to the Caribbean in your old age and being stuck with Sun £10 holidays in Shanklin.

 

I have limited knowledge of share options. I made £52k on a 18k investment. I would need to see the scheme paperwork.

Are the shares, your money at market risk?

Is the money out of your pre tax wages?

Or is it a share save scheme where you buy the shares at the end of the saving scheme?

I have seen employee shares loose 80% of their value. if your job, pension and money are tied up in one company that is a huge risk.

I am not a financial advisor, just done my own research on the bits that affect me and my family.

 

Your advice looks a million times better than any fa I've worked with......And its not boring.

 

It is a stock option scheme. The options are available at the price they were issued at and then you have to pay 52% (Never heard anything so ******* stupid in all my life) tax on the net return.

[tony13579]

I'm not sure what tax rate that is?

Share option up to 30k pay CGT

But not income tax or Ni

 

https://www.gov.uk/tax-employee-share-schemes/company-share-option-plan

 

You should get £10,600 each capital gains tax allowance?

 

I wonder if there is a window of time where you can transfer them

A . between you and you wife

B. into an ISA

[tony13579]

I think I understand now.

As it is a non HMRC approved scheme you are hit for tax and national insurance and CGT.

 

One option;

 

Possibly you could pay any CGT put the money into your pension via a sipp and claim the tax back on your tax return

 

You could not get any of the money until you are 55. You would get 25% tax free lump. The rest would be taxed as any other pension income.

[tony13579]

It appears the government will change the rules next budget (too late) but there is mention of a 60 day window

It describes the current legislation as a "bramble patch"

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/198440/ots_unapproved_employee_share_schemes_final.pdf

[Gemmel]

Cheers Tony - Very interesting and much appreciated.

[tony13579]

Are the stocks immature or are tradable on the open market? if they are not tradable you might have to pay tax on them just to receive them.

 

I would be cautious about holding them for a long time. Businesses have a natural cycle of start-up, struggling expansion, steady growth,flat line, decline, takeover or bust.

For electronics and software companies these are far more compressed. You need to research your own company, see where they fit into this cycle. How long other similar companies last.

[Gemmel]

Are the stocks immature or are tradable on the open market? if they are not tradable you might have to pay tax on them just to receive them.

 

I would be cautious about holding them for a long time. Businesses have a natural cycle of start-up, struggling expansion, steady growth,flat line, decline, takeover or bust.

For electronics and software companies these are far more compressed. You need to research your own company, see where they fit into this cycle. How long other similar companies last.

 

The stock is tradeable and we are a "Darling of Wallstreet" - Went out at $12 and now at $45 :) :)

[Torres]

Another illustration of how ridiculously complex our current tax rules are. None of this should be necessary.

[tony13579]

It is to avoid people slipping their employees shares rather than wages and tax.

If they are giving you USA stocks, do you have to pay tax on them immediately? Probably not...

can you be paid them/hold them in the USA feed them back In a tax efficient way. Is US tax lower than the UK?

 

The SIPP plan only works if it is income tax you are paying

http://www.hl.co.uk/pensions/sipp/what-is-a-sipp