Download Investing for trustees - The Personal Finance Society

TRUSTEE
INVESTMENT
PLANNING
• The reasons to incorporate trustee
investment as part of your service
delivery under adviser charging
• Trustee investment fundamentals
• Putting it into practice: Case study
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
These slides and the presentation in which they
are used are put forward for general
consideration only. They are based on fictitious
persons. No action must be taken or refrained
from based on their content. Accordingly, neither
Technical Connection Limited nor any of its
officers or employees can accept any
responsibility for any loss arising of whatever
nature to any person. Professional advice
based on the facts of each case is essential.
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
WHY WILL CLIENTS PAY FOR ADVICE?
(HOWEVER IT’S DELIVERED)
 Recognition of the limits of their own knowledge
 The adviser has expertise that the consumer doesn’t
possess or can’t get by “googling”
 The adviser makes them aware of the
need/risk/opportunity
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
WHATTHEY
WILL THEY
FOR?
SO WHATSOWILL
PAYPAY
FOR?
Basically, what they perceive as “difficult / complex”
Pensions planning
Estate planning /
management
Investing for
children
Mortgages
Investment
planning:
personal , trustee
, corporate
Tax planning
Other than
“straightforward”
protection
EXPERTISE / TIMESAVING
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
AND IF WE ARE TALKING ABOUT TAX ….
 You can’t have missed that it’s in the
news
 Tax and tax planning polarises
opinions
 Government committed to action
 So……….
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
Tax Avoidance
What’s going on?
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
A LOT!

General anti-abuse rule (consultation)

£50,000/25% income tax relief cap
(consultation)

“Enhanced DOTAS” :more advance information
and negative publicity

(Lifting the lid on tax avoidance)

Continued HMRC success in tribunal/court
cases

Public opinion (Times campaign)
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
FINANCIAL PLANNING
GAAR should not affect “the centre ground of
tax planning”
Opportunities to reinforce the power and
effectiveness of “acceptable” financial planning
for individuals , businesses and trustees
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
TRUSTEE INVESTMENT ADVICE:
A “PERFECT STORM”?
• High degree of difficulty
• Adviser charge justifiable
• Relatively high trustee tax rates
• Trusts are an essential part of estate
planning
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
TRUSTEE INVESTMENT ADVICE :
A “PERFECT STORM” ?
• Trustees must take investment advice
• Solicitors and accountants rarely have
the necessary financial planning skills
• Strong collaboration potential for advisers
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
TRUSTEE INVESTMENTS – A GROWING MARKET
TRUST STATISTICS
• 176,000 made S/A returns in 2009/10
• Trust income £2,650m in 2009/10
£900m
iip
£1,750m
discretionary
• Income tax £750m in 2009/10
£150m
iip
£600m
discretionary
• Chargeable gains £2,045m in 2009/10
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
BARRY’S WILL TRUSTS
• Died on 17 May 2005
• 2 years prior to death gifted £20,000 to
each of his four grandchildren
• Left
-
a widow
two children
four grandchildren
two great grandchildren
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
BARRY’S ESTATE
• Jointly held property passes directly to Britney
-
house
contents
• Discretionary Will Trust for investments up to
available nil rate band
• Life Interest Will Trust for balance of investments
-
life interest to Britney
capital to children in equal shares on
Britney’s death
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
UNDERSTANDING THE FUNDAMENTALS
TRUSTEE ACT “IMPERATIVES”
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
TRUSTEES MUST TAKE INVESTMENT ADVICE
• Trustee Act 2000
• Wide implied investment powers
– if not specifically provided
• Statutory investment criteria
• Applies to all trusts whenever created
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
STATUTORY INVESTMENT CRITERIA
• Diversification
• Suitability
AND
• Obtain and consider proper advice
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
“PROPER ADVICE”
Advice of a person who the trustees reasonably
believe to be qualified to give it by his (or her)
Ability in
+
Practical experience of financial + other matters
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
UNDERSTANDING THE FUNDAMENTALS
TRUST TAXATION
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
TRUSTEE TAXATION
Income Tax
IIP (including Bare Trust)
Income taxed on IIP
beneficiary at marginal rate
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
TRUSTEE TAXATION
Income Tax
IIP (including Bare Trust) Discretionary Trust
Income taxed on IIP
beneficiary at marginal
rate
Income taxed on trustees at:- Standard rate on first £1,000
- 42.5% on dividend income
50% on other income
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
TRUSTEE TAXATION
Income tax – other relevant points
•
•
Income assessed on settlor if
“settlor- interested” trust ie:
settlor a beneficiary settlor’s spouse
a beneficiary
- not widow/widower
£100 rule (on vested or distributed income)
-
Beneficiary is minor unmarried child
of settlor
- Gross income (or income on all gifts)
exceeds £100
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
-
DISCRETIONARY TRUST – INCOME TAX DETAIL
2 STAGE PROCESS
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
DISCRETIONARY TRUST:TRUSTEE TAX
Discretionary Trust - Income tax
Income
received
Trustee income
tax 50%/42.5% (if
over £1,000)
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
Discretionary Trust
INCOME DISTRIBUTION
Discretionary Trust - Income tax
Income
received
Discretionary Trust
Trustee income
tax 50%/42.5% (if
over £1,000)
Income distribution:
trustees must have paid
50% income tax
Income taxed on beneficiary
as trust income
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
DISCRETIONARY TRUST – INCOME TAX DETAIL
STAGE 1:
RECEIPT OF INCOME
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
THE DISCRETIONARY TRUST “INCOME TAX TRAIL”
Interest
Trustees receive £80 net interest
•
£20 income tax already deducted
•
Trustees pay extra £30 to HMRC
•
Trustees are left with £50 net income
Note:
1.
Assumes other trust income absorbs
£1,000
2.
Applies even though settlor-interested
trust
3.
50%
45% from 6.4.2013
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
THE DISCRETIONARY TRUST “INCOME TAX TRAIL”
Dividends:
Trustees receive £80 net dividend
•
£8.89 income tax deemed to have been paid
•
Trustees pay extra £28.89 to HMRC
•
Trustees are left with £51.11 net income
Note:
1.
Assumes other trust income absorbs £1,000
2.
Applies even though settlor-interested trust
3.
42.5%
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
37.5% from 6.4.2013
DISCRETIONARY TRUST – INCOME TAX DETAIL
STAGE 2:
INCOME DISTRIBUTION
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
DISTRIBUTION OF SAVINGS INCOME (2012/13)
50%
40%
20%
0%
£
£
£
£
Receives
50
50
50
50
Grossed-up
100
100
100
100
Tax bill
50
40
20
0
(Pay) reclaim
-
10
30
50
Net
50
60
80
100
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
DISTRIBUTION OF DIVIDENDS (2012/13)
Income received by
trustees £80
Income tax of £28.89
paid to HMRC by the
trustees
Income remaining £51.11
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
[£88.89 grossed-up
equivalent]
[42.5% of £88.89 = £37.78
£37.78 less tax credit of
£8.89 so tax of £28.89 to
pay]
[£80 less £28.89]
Income received by
trustees £80
[£88.89 grossed-up
equivalent]
Income tax of £28.89
paid to HMRC by the
trustees
[42.5% of £88.89 =
37.78. £37.78 less
tax credit of £8.89
so tax of £28.89 to
pay]
Income remaining £51.11
Distribution to
beneficiary £40
[£80 available less £40.00
(ie. 50% of £80]
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
[£80 less £28.89]
Trustees` extra tax on
distribution £11.11
[Total liability £40.00 less
£28.89 already paid]
£
Net trust income
£
80.00
Tax on dividend receipt
28.89
Tax on income distribution
11.11
40.00
Net to beneficiary
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
40.00
INCOME DISTRIBUTION OUT OF DIVIDEND
INCOME
Beneficiary receives trust income
50%
40%
20%
0%
£
£
£
£
Receives
40
40
40
40
Grossed-up
80
80
80
80
Tax bill
40
32
16
0
(Pay) reclaim
-
8
24
40
Net
40
48
64
80
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
INCOME DISTRIBUTION OUT OF DIVIDEND
INCOME
Beneficiary receives trust income
50%
40%
20%
0%
£
£
£
£
Receives
40
40
40
40
Grossed-up
80
80
80
80
Tax bill
40
32
16
0
(Pay) reclaim
-
8
24
40
Net
40
48
64
80
ORIGINAL GROSSED-UP INCOME £88.89
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
PFS/SLIDES/TRUSTEE INVESTMENTS 10 2012
A SOLUTION TO THE PROBLEM? ADVANCEMENT OF CAPITAL
• Trustees invest for equity-based capital growth
• Use trustees’ annual CGT exemption to release
capital and appoint
• Care over disguised dividend distributions amounts and timing of accumulations/
advancements
• Must be power to advance in trust
• But…tax planning subject to investment
suitability
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
SUPPLEMENTING INCOME WITH CAPITAL: DETAIL
Assuming capital growth year-on-year of same
amount as net dividend
At best
Growth
80
Tax (exempt)
-
Net
80
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
At worst
80
(@ 28%)
22.40
57.60
ANOTHER SOLUTION TO THE PROBLEM?
• Trustees in UK/Offshore bond
• No trustee taxation of income or gains
• No underlying investment “constraints”
• Trustees withdraw/encash (care which)
• Trustees advance capital
• Must be power to advance capital
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
TRUST CAPITAL TAXED AS INCOME?
• Original Revenue view - purpose of
payment
• Brodies Will Trustees
• Stevenson -v- Wishart (1987)
• Don`t advance if in exercise of a specific
direction to augment income under trust
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
TRUSTEES
Capital Gains Tax
Bare Trusts
Beneficiary
assessed:
• £10,600 A/E
• then 18%/28%
as appropriate
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
TRUSTEES
Capital Gains Tax
Bare Trusts
All other Trusts
Beneficiary assessed:
Trustees assessed:
• £10,600 A/E
• £5,300 A/E *
• then 18%/28%
as appropriate
• then 28%
*
Pro rata reduction according to number of
trusts created by the same settlor – subject
to minimum of £1,060
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
TRUST TAXATION:INHERITANCE TAX
Inheritance Tax
Which type of trust?
- IPDI
- Bare Trust
- Trust for disabled
• PET if lifetime
• Capital taxed as part of
taxable estate of
beneficiary entitled to
income
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
TRUST TAXATION:INHERITANCE TAX
Inheritance Tax
Which type of trust?
- IPDI
- Bare Trust
- Trust for disabled
• PET if lifetime
• Capital taxed as part of
taxable estate of
beneficiary entitled to
income
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
All other trusts eg.
discretionary trust
•
CLT
•
Periodic charge
•
Exit charge
RELEVANT PROPERTY CODE
•
CLT on entry
-
•
Periodic charge at 10 year anniversary
-
•
possible 20% on excess over NRB
7 year cumulation
Trustees have NRB
Maximum charge 6%
Trust fragmentation (Rysaffe)
Exit charge when property leaves trust – IHT
based on
-
charge on entry (first 10 years)
charge at last 10 year anniversary
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
RATIONALE
Trust is treated as a person and charges
broadly the same as if individual had owned
the property….and disposed of it every 10
years
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
EXAMPLE - JOE
Periodic charge
•
Joe creates discretionary trust for
£250,000 on 1/9/12
•
No CLTs in last 7 years
•
On 1/9/22, value of trust £750,000
•
NRB £500,000
•
IHT: £250,000 @ 6% = £15,000
•
Equates to 2% on £750,000
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
EXAMPLE - JOE
Exit charge
• Property (£600,000) distributed in year 8
= No charge
• Property (£1,000,000) distributed on
1/9/28 24/40 x £1m x 2%
= £12,000
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
RELEVANT PROPERTY CODE - COMPLICATIONS
•
Added property
•
Related settlements
•
Income accumulations
•
Inter-trust transfers
•
Property leaving the trust
•
7 year cumulation periods – pre-trust
•
Creation – recategorised PETs
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
PFS/SLIDES/TRUSTEE INVESTMENTS 10 2012
UNDERSTANDING THE FUNDAMENTALS
MAKING THE MOST OF THE NIL RATE
BAND
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
NIL RATE BAND BASICS
•
Nil rate band £325,000 in 2012/13
•
Nil rate band frozen until 5 April 2015
•
Husband and wife will have
COMBINED nil rate band of £650,000
•
Can use up to £325,000 on first death or
transfer percentage not used to survivor for
use on second death
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
BARRY & BRITNEY
•
NRB when Barry died was £275,000
•
Used £74,000 in 7 years before death
•
Used a further £201,111 on death by gift
to discretionary trust
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
BARRY & BRITNEY
•
They have combined NRB of £600,000
(£275,000 + £325,000)
•
TNRB did not exist in 2005 but
•
Had all estate passed to Britney then total
NRB = £650,000
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
NEW NIL RATE BAND PLANNING
•
Can only transfer one nil rate band
however many spouses you have had in
past
•
Applies on second deaths from 9/10/07
•
Can transfer nil rate bands of spouses
who died before 9/10/07 – this affects IHT
calculation of widow/widower
•
PRs make election within 2 years of
second death
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
(TWICE) MARRIED MAN WHOSE FIRST WIFE
HAS DIED
H
W1
H
W2
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
- Did not use NRB
(TWICE) MARRIED MAN WHOSE FIRST WIFE
HAS DIED
PLANNING AS FOLLOWS:
1.
H dies first
H
W2
2.
must use NRB on first death
gets two NRBs (H and hers)
W 2 dies first
W2
H
must use NRB on first death
gets two NRBs (H and unused from W1)
NB: You can only increase NRB by a maximum of 100%
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
TWO NIL RATE BANDS EACH?!
•
Second marriage of both current husband
and wife
•
Previous spouses both dead
H
W
£650,000
£650,000
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
PFS/SLIDES/TRUSTEE INVESTMENTS 10 2012
A TNRB ALTERNATIVE /FORERUNNER
THE DISCRETIONARY WILL TRUST
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
DISCRETIONARY WILL TRUST
H
NRB Trust
Spouse a
potential
beneficiary
W
• Loans
• S103 FA 86
• SP Bonds
• Deeds of variation
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
EXISTING WILL INCLUDES TRUST
H
Will
Trust
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
EXISTING WILL INCLUDES TRUST
H Spouse exemption W
Will
Trust
2 years
•
If discretionary trust, trustees can appoint
benefits absolutely to spouse
•
If appointment within 2 years, treated as
made by deceased
•
NRB of husband NOT used
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
TNRB
Does the transferable nil rate
band make IHT planning on
death of the first of a couple
to die unnecessary?
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
IHT PLANNING POST TNRB
Married couples with estates of up to
combined NRB
Mr and Mrs Osborne
House
£450,000
Investments
£100,000
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
MR AND MRS OSBORNE
•
No lifetime planning necessary
•
No NRB first death planning generally
necessary
UNLESS………………
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
REASONS TO USE NRB ON FIRST DEATH
• Second marriage and different children to benefit
from half share on second death
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
REASONS TO USE NRB ON FIRST DEATH
• Second marriage and different children to benefit
from half share on second death
• Desire to move assets away from surviving
spouse (local authority care charge)
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
REASONS TO USE NRB ON FIRST DEATH
• Second marriage and different children to benefit
from half share on second death
• Desire to move assets away from surviving
spouse (local authority care charge)
• You think assets given on first death will increase
in value at a greater rate than the increase in nil
rate band
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
REASONS TO USE NRB ON FIRST DEATH
• Second marriage and different children to benefit
from half share on second death
• Desire to move assets away from surviving
spouse (local authority care charge)
• You think assets given on first death will increase
in value at a greater rate than the increase in nil
rate band
• Divorce /insolvency protection for children
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
REASONS TO USE NRB ON FIRST DEATH
• Second marriage and different children to benefit
from half share on second death
• Desire to move assets away from surviving
spouse (local authority care charge)
• You think assets given on first death will increase
in value at a greater rate than the increase in nil
rate band
• Divorce /insolvency protection for children
• You qualify for double NRB despite still being
married
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
PFS/SLIDES/TRUSTEE INVESTMENTS 10 2012
USING MAIN RESIDENCE IN FIRST DEATH
PLANNING
• It can be complicated because need to
secure survivor’s tenancy but avoid an IIP
• Use IOUs or Charge Scheme
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
SPOUSAL PLANNING ON FIRST DEATH; A
SUMMARY
• Consider transferable nil rate band first: effective
and simple
• Consider alternatives if circumstances dictate
• Remember , first death planning with residential
property “fraught”
• The most common objection to using TNRB is
lack of control over “asset destination”….there is
an answer………
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
PLANNING FOR SPOUSE ON FIRST DEATH
H
W
•
Spouse exemption
•
Full transferable
NRB available
•
No control
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
FIRST DEATH SPOUSE PLANNING :THE EASY WAY
H
W
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
•
Lifetime gifts to
children
•
PET – survive 7 years
gift drops out
•
GWR/POAT issues
•
No control to H over
“asset destination”
OVERCOMING THE “NO CONTROL” OBJECTION
THE QUESTION
• Can you keep control – even after
death?
• Yet use the transferable nil rate band?
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
USING WILL TRUST BUT RETAINING
TRANSFERABLE NRB
H
- IIP Trust for wife
- power to appoint to children
• Wife has IPDI
• Spouse exemption
• No use of NRB
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
USING WILL TRUST BUT RETAINING
TRANSFERABLE NRB
H
- IIP Trust for wife
- power to appoint to children
Trustees appoint to
children absolutely
• PET by wife
• 7 year survival gift
drops out
• Full transferable NRB
still available
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
TRUSTEE INVESTMENT ADVICE:
A “PERFECT STORM”?
•
High degree of difficulty
•
Adviser charge justifiable
•
Relatively high trustee tax rates
•
Trusts are an essential part of estate
planning
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
TRUSTEE INVESTMENT ADVICE:
A “PERFECT STORM”?
•
Trustees must take investment advice
•
Solicitors and accountants rarely have
the necessary financial planning skills
•
Strong collaboration potential for
advisers
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
LSA2007 : WHAT ARE THE RISKS FOR LAWYERS?
• Impact from greater competition with strong
national brands eg. Co-op
• Fall in market share for established legal
firms
• Smaller, non-progressive firms may go out
of business
• Dual authorisation and complex
compliance requirements may make ABSs
prohibitive….so…..
• Joint ventures may offer similar benefits
within a simpler operating model
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
OPPORTUNITIES FOR FINANCIAL ADVISERS
• Potential to offer legal services or become
part of a firm that offers ‘one stop shop’
services
• Collaborations become easier
• Scope for increased referrals from a
broader client range
• Introduction of Legal Ombudsman
heightens need for trustee investment
advice
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
INTRODUCTIONS AND REFERRALS FOR
FINANCIAL ADVICE POST-RDR
The new “post RDR” adviser categorisation
(Independent / Restricted) has led
professional bodies to review stance on
referral guidelines
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
INTRODUCTIONS AND REFERRALS
FROM ACCOUNTANTS
• Institute of Chartered Accountants for
England and Wales (ICAEW) will allow
accountants to refer to restricted advisers
• Must first make a ‘case-by-case’
assessment of suitability (not necessary for
referral to an ‘independent’ adviser)
• Consistent with existing code of ethics
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
INTRODUCTIONS AND REFERRALS
FROM SOLICITORS
• Solicitors Regulatory Authority (SRA)
consultation on independent advice issued
in July
• Sets out three possible options for reform
of existing outcome-based guidelines
contained in Chapter 6 Solicitors Code of
Conduct
• SRA preferred option is the third – allows
clients to make informed choice having first
discussed with solicitor
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
ADVISER CHARGING AND TRUSTS
A FEW THOUGHTS ON THE POTENTIAL
TAXATION IMPLICATIONS IN RELATION TO
ADVISER CHARGING ON PRODUCTS IN
TRUST
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
ADVISER CHARGES AND TAX IN RELATION TO
FINANCIAL PRODUCTS IN TRUST
The basic model
TRUST
Paid from trust?
Poss GWR but
likely “carve out”
Charge for
initial
advice
FINANCIAL
PRODUCT
CASH
ACCOUNT
Settlor
Paid from
own funds:
No tax
(VAT?)
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
Possible tax (2)(3)
Paid by
Settlor?
Further gift
(Poss N.EXP)
Charge for
ongoing advice
No
tax
PFS/SLIDES/TRUSTEE INVESTMENTS 10 2012
TRUSTEE INVESTMENT:CASE STUDY
PUTTING IT INTO PRACTICE:
APPLIED EXPERTISE
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
BARRY’S WILL TRUSTS
•
Died on 17 May 2005
•
2 years prior to death gifted £20,000
to each of his four grandchildren
•
Left
a widow
two children
four grandchildren
- two great grandchildren
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
THE FAMILY
Britney (76)
Mike - Gale
(52)
(49)
Isla
(24)
Aiden (26)
Sheila - Gary
(50)
(51)
Reece married (29)
George married (29)
Josh (5)
Primrose (6)
• Gale has 2 adult children from a previous marriage
• Gary and Sheila’s marriage is not stable
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
BARRY’S ESTATE
• Jointly held property passes directly to Britney
-
house
contents
• Discretionary Will Trust for investments up to
available nil rate band
• Life Interest Will Trust for balance of
investments
-
life interest to Britney
capital to children in equal shares on
Britney’s death
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
BARRY’S ASSETS ON DEATH
• House £600,000 in total (50% interest)
• Contents £100,000 in total
(50% interest)
• Investment portfolio £500,000
• National Savings Certificates £85,000
• Building Society cash deposit account
£166,000
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
HOW THE ESTATE DEVOLVED
Barry
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
Britney
Survivorship
•
House
•
Contents
HOW THE ESTATE DEVOLVED
Barry
Discretionary Trust
Available nil rate band
£201,000 (ie. £275,000
less £74,000 previous
lifetime gifts-£80,000£6,000 ann ex)
£85,000 NS certs
£116,000 BS cash
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
Britney
Survivorship
•
House
•
Contents
HOW THE ESTATE DEVOLVED
Barry
Britney
Survivorship
• House
• Contents
Discretionary Trust
Life Interest Will Trust (IPDI)
Available nil rate band
£201,000 (ie. £275,000
less £74,000 previous
lifetime gifts ;£80,000£6,000 annex)
-
Britney life interest
-
Children reversionary
beneficiaries to capital
£85,000 NS certs
£116,000 BS cash
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
-
Treated as transfer to
Britney for IHT
£50,000 BS cash
£500,000 Portfolio
HOW THE ESTATE DEVOLVED (CURRENT VALUES)
Britney
Barry
Survivorship
• House
• Contents
Discretionary Trust
Life Interest Will Trust (IPDI)
Available nil rate band
£201,000 (ie. £275,000
less £74,000 previous
lifetime gifts; £80,000£6,000 annex)
-
Britney life interest
-
Children reversionary
beneficiaries to capital
£85,000 NS certs
£116,000 BS cash
(£120,000)
(£140,000)
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
-
Treated as transfer to
Britney for IHT
£50,000 BS cash
(£63,000)
£500,000 Portfolio (£542,000)
BRITNEY’S CURRENT ESTATE
House:
£1.2m
Contents:
£200,000
Own investments£100,000
Life interest in
Will Trust :
£63,000 (cash)
£542,000 (investment portfolio)
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
THE FAMILY’S OBJECTIVES
Subject to considering the “Ground rules”
i.e. the essential legal and tax issues:
•
Improving Britney’s income without
putting capital at risk
•
Using the trusts to help school fees of Josh
and Primrose at age 11
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
THE FAMILY’S OBJECTIVES
• Protection against a divorce claim from Gary
(Sheila’s husband)
• Minimising IHT on Britney’s death
• Subject to the main objectives: minimising
tax through “tax smart” investment/planning
• And subject to achieving the main objectives, is
it possible to break up and distribute the assets
of the life interest trust?
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
MEETING OBJECTIVES
1.
IMPORTANT AND LEGAL TAX ISSUES
Legal issues:
•
Powers of investment? Wide
•
Invest for the benefit of all beneficiaries
-
•
discretionary trust
life interest trust
SIC
-
diversification
suitability
advice
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
MEETING OBJECTIVES
1.
IMPORTANT AND LEGAL TAX ISSUES
Tax fundamentals:
Discretionary trust
-
50%/42.5% income tax
CGT annual exemption (reduced)
then 28% CGT
IIP Trust:
-
Income taxed on Britney
CGT annual exemption (reduced)
then 28% CGT
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
MEETING OBJECTIVES
In determining the strategy keep in mind:
•
There are two trusts
• Desire not to put capital at risk
•
Tax saving can deliver “Alpha”
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
MEETING OBJECTIVES – IMPROVING BRITNEY’S
INCOME
Life Interest Trust
•
Britney entitled to income
•
Pays income tax at marginal rate(s)
•
Trustees could consider advancing capital
•
trustees’ power to advance
otherwise consent of remaindermen required
Income tax on capital?
- irregular amount
irregular time
capital
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
- document as
- should be taxed as capital
BREAKING UP TRUSTS
•
Samson v Peay
•
Discretionary Trust – not possible
•
IIP Trust
-
are parties all sui juris?
if so value interests and break trust
BUT reversionary interest only if beneficiaries
alive so their interest not ascertained
so
-
could advance capital (power?) or
could take out indemnity insurance or
could take risk
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
BREAKING UP TRUSTS
IIP
Income
Capital
Capital value
to Britney
Value of reversionary
interest to Sheila and
Mike
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
MEETING OBJECTIVES – IMPROVING BRITNEY’S
INCOME
Discretionary Trust
Trustees control who gets income/capital
•
Britney a beneficiary
•
Advance capital
-
no income tax
CGT? Use annual exemption or hold-over
relief
•
Exit charge unlikely
•
Trustees could make loans?
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
MEETING OBJECTIVES – IMPROVING BRITNEY’S
INCOME
Trustees making loans to Britney
-
Trustees realise cash (CGT?)
-
loan to Britney – do trustees have
power?
-
Britney spends loan
-
Loan repayable on her death: taxable
estate reduced
-
Care: s103 Phizackerley
-
Avoids any exit charge risk
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
USING THE TRUSTS FOR SCHOOL FEES
• Use discretionary trust not IIP trust
• Are Josh/Primrose beneficiaries?
• Power to pay income/advance capital?
• Appoint income to use their personal
allowances – no reclaim of NRTC
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
USING THE TRUSTS FOR SCHOOL FEES
And with capital:
• Appoint capital – not taxable in
beneficiary’s hands
-
Use trustees’ CGT annual exemption
(£2,650)
Use 5% withdrawal from bond (see
“Investments” next)
• Exit charge on capital advancement ?
IHT charge unlikely
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
USING THE TRUSTS FOR SCHOOL FEES
DISCRETIONARY
TRUST
Powers?
to pay Josh/Primrose
Income (use
beneficiary’s personal
allowance)
Care: dividend income
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
Use trustees’
annual CGT
exemption or use
5%s from Bond
Capital (no tax
charge on
beneficiary)
PFS/SLIDES/TRUSTEE INVESTMENTS 10 2012
“COMPETING OBJECTIVES”: THERES ONLY SO
MUCH TO GO AROUND
• The more that objectives other than improving
Britney’s income are worked on , the less will be
available to increase Britney’s income
• Tax minimisation can help to increase available
funds through “Tax Alpha”
• A “tax smart” investment strategy can help
• A key role for the financial planner
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
MEETING OBJECTIVES – IMPROVING TAX
EFFICIENCY OF TRUSTS
IIP Trust
• Income taxed on Britney
• Not a higher rate taxpayer
• Income enhancement is a prime objective
• Low yield/growth = pressure
• Invest for capital growth and appoint capital
(on tax grounds)
-
use trustees’ annual CGT exemption
-
care capital taxed as income
-
care investment suitability and investment risk
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
MEETING OBJECTIVES – IMPROVING TAX
EFFICIENCY OF TRUSTS
Discretionary Trust
• Income taxed at 50/42.5%
• Appoint life interest to Britney?
-
do trustees have power?
satisfies Britney’s income needs
• Invest for capital growth
-
reduces income
use CGT annual exemption
right investment decision?
• Invest in tax-efficient investments such SP Bond
-
non-income producing
tax free switching
5% tax-deferred withdrawals
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
MEETING OBJECTIVES – PROTECTION AGAINST
DIVORCE
•
No claim yet on IIP trust but could be in
future
•
Could settle reversionary interest on
discretionary trust – but care - deprivation
•
Sheila a beneficiary of discretionary trust
•
No direct claim by Gary but Court may
attribute value if previous regular
appointments by trustees
•
Tell trustees not to appoint – perhaps
appoint to children instead of to Sheila
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
IHT ON BRITNEY’S DEATH
Personal Estate
IIP Trust capital
£1.5 million
£605,000
Total estate
£2,105,000
IHT *
£713,200
Payable by estate
(LPRs):
£508,218
Trustees:
£204,981
* One NRB – Barry used his
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
REDUCING IHT
•
Britney could release life interest
-
PET
7 year survival: out of estate
but she would lose income
•
IHT planning difficult on estate – mainly
house/contents;
•
Possibly: Downsize? Equity release? plan with cash
•
Joint occupation? Full market rent ? Unlikely
•
Discretionary trust – assets already outside estate
•
Life cover : Care cost? Beneficiary funded? Keep
policy outside IIP trust.
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
IN SUMMARY
• Need to prioritise the relative importance of competing
objectives with limited resources
• Tax planning can increase available funds
• “Tax smart” investments can help to deliver greater capacity
to meet objectives
• Tax effectiveness must always be secondary to investment
suitability and “risk appropriateness”.
• For trustee investment – always consider the legal “ground
rules” first
•
Try to balance income provision with capital reservation
•
Trustee investment represents an excellent market for
- professional collaboration
- strongly justifiable (and profitable) adviser charging
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
Comprehensive technical support and business
generation for financial planners
•
•
•
•
•
•
•
Techlink Professional
Accredited CPD
Advanced examination support
ASK; Case related technical support
Business Generation Initiatives
Techlink Communicator
Dynamic client facing website content for
advised and non –advised markets.
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
Techlink professional
DELIVERED THROUGH
TECHLINK PROFESSIONAL
All you need to:
 Keep up to date professionally and technically
 Research the answers you need to your
technical questions
 Secure business generation ideas
 Carry out, automatically track , record and test
your technical CPD
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
TECHLINK COMMUNICATOR
Our complete communication service that enables you to keep in touch with, inform and
inspire your clients and the professional advisers you do business with.
1.
2.
3.
Quarterly Newsletters for your clients
and professional (Accountants and
Solicitors) contacts
"FYI” our bi-weekly , managed ,self
select client email service.
FYI Professional, bi-weekly managed e-mail
to be sent to your professional connections.
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
CONTACT
www.technicalconnection.co.uk
www.techlink.co.uk
Tony Wickenden
[email protected]
[email protected]
0207 405 1600
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012
PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012