Question

I retired three years ago, with half my income coming from my company pension fund and the other half from interest from investments. I am paying tax at a rate of 41%. Is there anything that I can do to reduce this amount?

Answer

The capital gains tax rate for trusts is high. It has an inclusion rate of 80% and the marginal tax rate of 45% giving you an effective capital gains tax rate of 36%.

Now if you were an individual, your inclusion rate will only be 40% so your capital gains tax would effectively be 18% if you were at the maximum marginal tax rate.

If you have any longer-term investments in a trust, I would certainly recommend that you consider using sinking fund structure for them. A sinking fund is a lot like an endowment except there is no life assured. This means that trust can own a sinking fund.

The big advantage of using a sinking fund is that the assets will be taxed at the life assurance company rate of 30%.  Any capital gains within the sinking fund will have an inclusion rate of 40%, thus giving an effective capital gains tax rate of 12%.  This means that your capital gains tax by holding your assets in the sinking fund will be 1/3 of what it would have been had they been held directly by the family trust.

So, to summarise

The downside of having any investments in a sinking fund structure is that there will be liquidity issues for the first five years of the investment as there is a restricted period for withdrawals. Once the five years have elapsed you may make withdrawals from this investment whenever you like.  I would therefore only recommend it for the longer-term parts of your portfolio.  As trusts typically have a long investment timeframe, this should not be a showstopper.

Local trusts are prohibited from making direct offshore investments.  However, if your local trust wants to increase its offshore exposure, it can use the sinking fund vehicle very effectively to do this. The way this would be done is to invest in offshore assets using the asset swap capacity of a local asset manager.  This is a fantastic way to reduce the risk of the trust having all its assets in one country.

Trusts offer a great way for families to preserve and grow their wealth for future generations.  A bit of clever financial planning can certainly help reduce any leakage when it comes to paying tax.