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TRUSTEE INVESTMENT PLANNING PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012 The reasons to incorporate trustee investment as part of your service delivery.

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Presentation on theme: "TRUSTEE INVESTMENT PLANNING PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012 The reasons to incorporate trustee investment as part of your service delivery."— Presentation transcript:

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2 TRUSTEE INVESTMENT PLANNING

3 PFS/SLIDES/TRUSTEE INVESTMENTS (2) The reasons to incorporate trustee investment as part of your service delivery under adviser charging Trustee investment fundamentals Putting it into practice: Case study

4 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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.

5 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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

6 PFS/SLIDES/TRUSTEE INVESTMENTS (2) SO WHAT WILL THEY PAY FOR? Basically, what they perceive as “difficult / complex” EXPERTISE / TIMESAVING SO WHAT WILL THEY PAY FOR?

7 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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……….

8 PFS/SLIDES/TRUSTEE INVESTMENTS (2) What’s going on? Tax Avoidance

9 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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)

10 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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

11 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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

12 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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

13 PFS/SLIDES/TRUSTEE INVESTMENTS (2) TRUSTEE INVESTMENTS – A GROWING MARKET TRUST STATISTICS 176,000 made S/A returns in 2009/10 Trust income £2,650m in 2009/10 £900m £1,750m iip discretionary Income tax £750m in 2009/10 £150m £600m iip discretionary Chargeable gains £2,045m in 2009/10

14 PFS/SLIDES/TRUSTEE INVESTMENTS (2) BARRY’S WILL TRUSTS Died on 17 May years prior to death gifted £20,000 to each of his four grandchildren Left -a widow -two children -four grandchildren - two great grandchildren

15 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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

16 PFS/SLIDES/TRUSTEE INVESTMENTS (2) UNDERSTANDING THE FUNDAMENTALS TRUSTEE ACT “IMPERATIVES”

17 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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

18 PFS/SLIDES/TRUSTEE INVESTMENTS (2) STATUTORY INVESTMENT CRITERIA Diversification Suitability AND Obtain and consider proper advice

19 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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 “PROPER ADVICE”

20 PFS/SLIDES/TRUSTEE INVESTMENTS (2) UNDERSTANDING THE FUNDAMENTALS TRUST TAXATION

21 PFS/SLIDES/TRUSTEE INVESTMENTS (2) TRUSTEE TAXATION Income Tax IIP (including Bare Trust) Income taxed on IIP beneficiary at marginal rate

22 PFS/SLIDES/TRUSTEE INVESTMENTS (2) TRUSTEE TAXATION Income Tax IIP (including Bare Trust) Income taxed on IIP beneficiary at marginal rate Discretionary Trust Income taxed on trustees at:- -Standard rate on first £1, % on dividend income 50% on other income

23 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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

24 PFS/SLIDES/TRUSTEE INVESTMENTS (2) DISCRETIONARY TRUST – INCOME TAX DETAIL 2 STAGE PROCESS

25 PFS/SLIDES/TRUSTEE INVESTMENTS (2) DISCRETIONARY TRUST:TRUSTEE TAX Discretionary Trust - Income tax Income received Trustee income tax 50%/42.5% (if over £1,000) Discretionary Trust

26 PFS/SLIDES/TRUSTEE INVESTMENTS (2) INCOME DISTRIBUTION Discretionary Trust - Income tax Income received Trustee income tax 50%/42.5% (if over £1,000) Discretionary Trust Income distribution: trustees must have paid 50% income tax Income taxed on beneficiary as trust income

27 PFS/SLIDES/TRUSTEE INVESTMENTS (2) DISCRETIONARY TRUST – INCOME TAX DETAIL STAGE 1: RECEIPT OF INCOME

28 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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

29 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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 %37.5% from

30 PFS/SLIDES/TRUSTEE INVESTMENTS (2) DISCRETIONARY TRUST – INCOME TAX DETAIL STAGE 2: INCOME DISTRIBUTION

31 PFS/SLIDES/TRUSTEE INVESTMENTS (2) % 40% 20% 0% £ £ Receives Grossed-up Tax bill (Pay) reclaim Net DISTRIBUTION OF SAVINGS INCOME (2012/13)

32 PFS/SLIDES/TRUSTEE INVESTMENTS (2) Income received by trustees £80 Income tax of £28.89 paid to HMRC by the trustees Income remaining £51.11 [£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] DISTRIBUTION OF DIVIDENDS (2012/13)

33 PFS/SLIDES/TRUSTEE INVESTMENTS (2) Distribution to beneficiary £40 Trustees` extra tax on distribution £11.11 [£80 available less £40.00 (ie. 50% of £80] [Total liability £40.00 less £28.89 already paid] Income received by trustees £80 Income tax of £28.89 paid to HMRC by the trustees Income remaining £51.11 [£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]

34 PFS/SLIDES/TRUSTEE INVESTMENTS (2) £ Net trust income80.00 Tax on dividend receipt28.89 Tax on income distribution Net to beneficiary40.00

35 PFS/SLIDES/TRUSTEE INVESTMENTS (2) Beneficiary receives trust income 50%40%20%0% £ £ ££ Receives Grossed-up Tax bill (Pay) reclaim Net INCOME DISTRIBUTION OUT OF DIVIDEND INCOME

36 PFS/SLIDES/TRUSTEE INVESTMENTS (2) Beneficiary receives trust income 50%40%20%0% £ £ ££ Receives Grossed-up Tax bill (Pay) reclaim Net ORIGINAL GROSSED-UP INCOME £88.89 INCOME DISTRIBUTION OUT OF DIVIDEND INCOME

37 PFS/SLIDES/TRUSTEE INVESTMENTS

38 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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

39 PFS/SLIDES/TRUSTEE INVESTMENTS (2) SUPPLEMENTING INCOME WITH CAPITAL: DETAIL Assuming capital growth year-on-year of same amount as net dividend At bestAt worst Growth Tax (exempt) - 28%) Net

40 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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

41 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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

42 PFS/SLIDES/TRUSTEE INVESTMENTS (2) TRUSTEES Capital Gains Tax Bare Trusts Beneficiary assessed: £10,600 A/E then 18%/28% as appropriate

43 PFS/SLIDES/TRUSTEE INVESTMENTS (2) TRUSTEES Capital Gains Tax Bare TrustsAll other Trusts Beneficiary assessed: £10,600 A/E then 18%/28% as appropriate Trustees assessed: £5,300 A/E * then 28% * Pro rata reduction according to number of trusts created by the same settlor – subject to minimum of £1,060

44 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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

45 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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 All other trusts eg. discretionary trust CLT Periodic charge Exit charge

46 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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

47 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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

48 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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: 6% = £15,000 Equates to 2% on £750,000

49 PFS/SLIDES/TRUSTEE INVESTMENTS (2) EXAMPLE - JOE Exit charge Property (£600,000) distributed in year 8 = No charge Property (£1,000,000) distributed on 1/9/2824/40 x £1m x 2% = £12,000

50 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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

51 PFS/SLIDES/TRUSTEE INVESTMENTS

52 PFS/SLIDES/TRUSTEE INVESTMENTS (2) UNDERSTANDING THE FUNDAMENTALS MAKING THE MOST OF THE NIL RATE BAND

53 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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

54 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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 BARRY & BRITNEY

55 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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 BARRY & BRITNEY

56 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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 NEW NIL RATE BAND PLANNING

57 PFS/SLIDES/TRUSTEE INVESTMENTS (2) H (TWICE) MARRIED MAN WHOSE FIRST WIFE HAS DIED W 2 W 1 H - Did not use NRB

58 PFS/SLIDES/TRUSTEE INVESTMENTS (2) (TWICE) MARRIED MAN WHOSE FIRST WIFE HAS DIED 1. H dies first must use NRB on first death gets two NRBs (H and hers) 2. W dies first 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% H 2 W H W PLANNING AS FOLLOWS: 2 2

59 PFS/SLIDES/TRUSTEE INVESTMENTS (2) TWO NIL RATE BANDS EACH?! H W Second marriage of both current husband and wife Previous spouses both dead £650,000

60 PFS/SLIDES/TRUSTEE INVESTMENTS

61 PFS/SLIDES/TRUSTEE INVESTMENTS (2) A TNRB ALTERNATIVE /FORERUNNER THE DISCRETIONARY WILL TRUST

62 PFS/SLIDES/TRUSTEE INVESTMENTS (2) HW NRB Trust Spouse a potential beneficiary DISCRETIONARY WILL TRUST Loans S103 FA 86 SP Bonds Deeds of variation

63 PFS/SLIDES/TRUSTEE INVESTMENTS (2) H EXISTING WILL INCLUDES TRUST Will Trust

64 PFS/SLIDES/TRUSTEE INVESTMENTS (2) H EXISTING WILL INCLUDES TRUST Will Trust W Spouse exemption 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

65 PFS/SLIDES/TRUSTEE INVESTMENTS (2) Does the transferable nil rate band make IHT planning on death of the first of a couple to die unnecessary? TNRB

66 PFS/SLIDES/TRUSTEE INVESTMENTS (2) IHT PLANNING POST TNRB Married couples with estates of up to combined NRB Mr and Mrs Osborne House£450,000 Investments£100,000

67 PFS/SLIDES/TRUSTEE INVESTMENTS (2) MR AND MRS OSBORNE No lifetime planning necessary No NRB first death planning generally necessary UNLESS………………

68 PFS/SLIDES/TRUSTEE INVESTMENTS (2) REASONS TO USE NRB ON FIRST DEATH Second marriage and different children to benefit from half share on second death

69 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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)

70 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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

71 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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

72 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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

73 PFS/SLIDES/TRUSTEE INVESTMENTS

74 PFS/SLIDES/TRUSTEE INVESTMENTS (2) It can be complicated because need to secure survivor’s tenancy but avoid an IIP Use IOUs or Charge Scheme USING MAIN RESIDENCE IN FIRST DEATH PLANNING

75 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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………

76 PFS/SLIDES/TRUSTEE INVESTMENTS (2) HW Spouse exemption Full transferable NRB available No control PLANNING FOR SPOUSE ON FIRST DEATH

77 PFS/SLIDES/TRUSTEE INVESTMENTS (2) HW Lifetime gifts to children PET – survive 7 years gift drops out GWR/POAT issues No control to H over “asset destination” FIRST DEATH SPOUSE PLANNING :THE EASY WAY

78 PFS/SLIDES/TRUSTEE INVESTMENTS (2) Can you keep control – even after death? Yet use the transferable nil rate band? OVERCOMING THE “NO CONTROL” OBJECTION THE QUESTION

79 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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

80 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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

81 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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

82 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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

83 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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

84 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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

85 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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

86 PFS/SLIDES/TRUSTEE INVESTMENTS (2) INTRODUCTIONS AND REFERRALS FROM ACCOUNTANTS Institute of Chartered Accountants for England and Wales (ICAEW) will allow accountants to refer to restricted advisersICAEW Must first make a ‘case-by-case’ assessment of suitability (not necessary for referral to an ‘independent’ adviser) Consistent with existing code of ethics

87 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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 INTRODUCTIONS AND REFERRALS FROM SOLICITORS

88 PFS/SLIDES/TRUSTEE INVESTMENTS (2) ADVISER CHARGING AND TRUSTS A FEW THOUGHTS ON THE POTENTIAL TAXATION IMPLICATIONS IN RELATION TO ADVISER CHARGING ON PRODUCTS IN TRUST

89 PFS/SLIDES/TRUSTEE INVESTMENTS (2) ADVISER CHARGES AND TAX IN RELATION TO FINANCIAL PRODUCTS IN TRUST The basic model Paid from trust? Poss GWR but likely “carve out” Charge for initial advice Paid from own funds: No tax (VAT?) Paid by Settlor? Further gift (Poss N.EXP) Charge for ongoing advice TRUST FINANCIAL PRODUCT CASH ACCOUNT Possible tax (2)(3) Settlor No tax

90 PFS/SLIDES/TRUSTEE INVESTMENTS

91 PFS/SLIDES/TRUSTEE INVESTMENTS (2) TRUSTEE INVESTMENT:CASE STUDY PUTTING IT INTO PRACTICE: APPLIED EXPERTISE

92 PFS/SLIDES/TRUSTEE INVESTMENTS (2) BARRY’S WILL TRUSTS Died on 17 May years prior to death gifted £20,000 to each of his four grandchildren Left -a widow -two children -four grandchildren - two great grandchildren

93 PFS/SLIDES/TRUSTEE INVESTMENTS (2) THE FAMILY Britney (76) Mike - Gale (52) (49) Isla (24) Aiden (26) 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 Sheila - Gary (50) (51)

94 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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

95 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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

96 PFS/SLIDES/TRUSTEE INVESTMENTS (2) HOW THE ESTATE DEVOLVED Barry Britney House Contents Survivorship

97 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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) Britney House Contents Survivorship £85,000 NS certs £116,000 BS cash

98 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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 annex) Life Interest Will Trust (IPDI) - Britney life interest - Children reversionary beneficiaries to capital - Treated as transfer to Britney for IHT Britney House Contents Survivorship £85,000 NS certs£50,000 BS cash £116,000 BS cash£500,000 Portfolio

99 PFS/SLIDES/TRUSTEE INVESTMENTS (2) HOW THE ESTATE DEVOLVED (CURRENT VALUES) Barry Discretionary Trust Available nil rate band £201,000 (ie. £275,000 less £74,000 previous lifetime gifts; £80,000- £6,000 annex) Life Interest Will Trust (IPDI) - Britney life interest - Children reversionary beneficiaries to capital - Treated as transfer to Britney for IHT Britney House Contents Survivorship £85,000 NS certs(£120,000)£50,000 BS cash(£63,000) £116,000 BS cash(£140,000)£500,000 Portfolio(£542,000)

100 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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)

101 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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

102 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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?

103 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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

104 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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

105 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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”

106 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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 - document as capital - should be taxed as capital

107 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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

108 PFS/SLIDES/TRUSTEE INVESTMENTS (2) BREAKING UP TRUSTS IIP IncomeCapital Capital value to Britney Value of reversionary interest to Sheila and Mike

109 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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?

110 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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

111 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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

112 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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

113 PFS/SLIDES/TRUSTEE INVESTMENTS (2) USING THE TRUSTS FOR SCHOOL FEES DISCRETIONARY TRUST Income (use beneficiary’s personal allowance) Care: dividend income Capital (no tax charge on beneficiary) Use trustees’ annual CGT exemption or use 5%s from Bond Powers? to pay Josh/Primrose

114 PFS/SLIDES/TRUSTEE INVESTMENTS

115 PFS/SLIDES/TRUSTEE INVESTMENTS (2) “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

116 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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

117 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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

118 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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

119 PFS/SLIDES/TRUSTEE INVESTMENTS (2) IHT ON BRITNEY’S DEATH Personal EstateIIP Trust capital £1.5 million£605,000 Total estate£2,105,000 IHT *£713,200 Payable by estate£508,218 (LPRs): Trustees:£204,981 * One NRB – Barry used his

120 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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.

121 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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

122 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 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.

123 PFS/SLIDES/TRUSTEE INVESTMENTS (2) Techlink professional 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 DELIVERED THROUGH

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125 PFS/SLIDES/TRUSTEE INVESTMENTS (2) CONTACT Tony Wickenden

126 PFS/SLIDES/TRUSTEE INVESTMENTS (2)

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