TRUSTEE INVESTMENT PLANNING The reasons to incorporate trustee

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, 650 m in 2009/10 £ 900 m £ 1, 750 m iip discretionary • Income tax £ 750 m in 2009/10 £ 150 m iip £ 600 m discretionary • Chargeable gains £ 2, 045 m 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 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 Grossed-up 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 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 Grossed-up 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 Grossed-up 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 - possible 20% on excess over NRB 7 year cumulation • Periodic charge at 10 year anniversary - 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) distributed on 1/9/28 24/40 x £ 1 m 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 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 W 1 H W 2 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 W 2 2. must use NRB on first death gets two NRBs (H and hers) W 2 dies first W 2 H must use NRB on first death gets two NRBs (H and unused from W 1) 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 wife • Previous spouses both dead H W £ 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 • S 103 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

LSA 2007 : 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 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 Survivorship Britney • 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 Survivorship Britney • 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. 2 m 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 time capital - irregular amount 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 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 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: s 103 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

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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

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CONTACT www. technicalconnection. co. uk www. techlink. co. uk Tony Wickenden tkw@tecconn. demon. co. uk Tony. wickenden@technicalconnection. co. uk 0207 405 1600 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012

PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012