the barrister
Personal Finance & Wealth Management
Supplement 2008
Contents: page
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A Framework for Success By Jason Butler Your Retirement Choices Unravelled By Nigel Callaghan
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Take a SIPP: group pension opportunities for barristers By David Quinton page Some Basic Rules for Tax-Efficient Investing By Ian Scott
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Do With-profits Investments Still Have a Role to Play in a Balanced Portfolio? By Margaret Flaherty How do you protect your investments? By David Tiller
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Barristers, like all self-employed people, are sometimes guilty of leaving their tax returns until the last minute and making mistakes as a result. By Anne Gregory-Jones page The importance of Business Structure for Sets of Barristers Chambers By Jim Sweeney
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Can financial advice really be impartial if the sole means of paying for it is through commission? By Dennis Hall From Pupilage to judge the legal career can be complex and financially erratic. By Julia Whittle
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April Showers- Taxation of Trusts after Finance Act 2006 By Stephen Horton personal finance & wealth management supplement the barrister 2008
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A Framework for Success Having a clear idea of what you are trying to achieve and quantifying whether your financial resources are sufficient are key to devising a successful wealth plan. By Jason Butler
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hether you plan and manage your wealth yourself or you use the services of a professional depends very much on what type of person you are and whether you have the time and inclination to gather the necessary knowledge and, probably more importantly, the discipline to apply the key principles in the face of adversity. Nothing about managing wealth is really that difficult but experience suggests that it is often very difficult for one to be totally objective about one’s personal financial situation and to make good decisions without at least some form of outside assistance. A wealth management service makes most sense for those individuals who are natural delegators and have more important things to spend their time on or those who are uncomfortable making financial decisions on their own. There are various stages to developing a wealth management strategy and in simplified form these are encapsulated in figure one. The key to a successful wealth plan is setting personal financial goals/objectives, in the context of one’s money values. In addition, agreeing and articulating financial planning policies will assist with future decision making.
The ‘Desired’ goals are important but not at the expense of funding financial independence. Such ‘desired’ goals could be helping your parents in their old age or preserving assets for your children. The ‘Aspirational’ goals are essentially those goals that you wish to achieve if everything else has been catered for and perhaps investment returns have been consistently above those assumed. Such ‘Aspirational’ goals might be giving money to good causes or making specific gifts to family members in lifetime or after death. The point is that if the investment strategy has produced returns which are below the original assumption, it is the aspirational goals which take the back seat, not your core lifestyle expenditure.
Since the Financial Services Authority’s (FSA) requirement that all Self Invested Personal Pension (SIPP) Providers be authorised and regulated by them, around 150 companies have secured such status offering a bewildering array of choices.
Figure 2
SIPPs ordinarily have charges at a defined level, irrespective of the size of the fund, and as such larger accounts do not subsidise the smaller. But we need to dig deeper at this early stage. Dentons includes some services within these quoted headline rates, but other providers do not. For the latter a menu of additional fees, on either a fixed or hourly time costed rate will apply, which may include for example, tax reclamation on investment income, or even a certain number of investment transactions within an annual period.
Examples of clear goals Aspirational goals
- To give £500,000 to our own charitable foundation by the time we are 80
Desired goals
- To fund the grandchildren’s education at a cost of £10,000 per annum per child (3) assumed to start in 2009, 2011 and 2014 for 17 years
Figure one Required goals
Know where you are going and why – values, goals and planning policies Money values are overarching beliefs that one has about money which follow a progressive hierarchy. The values conversation, as it is known, starts with asking the question: ‘What’s important about money to you?’ Usually the first response will be general and basic like ‘Financial security’, which is a perfectly reasonable response. However, if one keeps following this line of questioning with ‘And what’s important about financial security to you’, it will allow the individual to discover more deep seated values. It is this process of self actualisation that really helps one to find real meaning and purpose for the future financial plan. Some people find this process a bit uncomfortable as it requires a level of reflection and contemplation about money that is rarely experienced. While setting clear financial goals is essential to developing a plan that works, not all goals are of equal importance. You might, therefore, find it helpful to categorise your goals as ‘Required’; ‘Desired’, and ‘Aspirational’ goals (see figure 2 for examples). The ‘Required’ goals are the most important and must be met, come what may and will usually involve meeting core living costs throughout lifetime, which we refer to as financial independence, i.e. that time when paid work is optional as you have enough resources available to fund lifestyle.
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personal finance & wealth management supplement the barrister 2008
- To be financially independent by age 60 supporting a lifestyle costing £200,000 per annum in today’s money
Financial planning policies are tools for making good decisions in the face of financial uncertainty. They transcend the current situation by expressing in general terms what one plans to do and how one is willing to do it in terms not limited to the current circumstances. Such policies are broad enough to encompass any novel event that might arise, but specific enough so that we are never in doubt as to what actions are required. An example of a financial planning policy might be - - - -
I will give 10% of my gross income to charity. I will only do work that I love. I will maintain sufficient life insurance to cover my children’s education costs. We will provide family with financial literacy support but will not give them money.
Once we have clarified values, goals and financial planning polices we can then get to work on the main financial analysis. Family balance sheet and lifetime cashflow Your family balance sheet provides an insight into your total net wealth and will include: - those assets you use, such as houses, cars, boats; - investable assets such as cash, investments, gilts and other liquid funds -Pension assets such as personal and occupational money purchase schemes - Ideas investments such as a business, alternative investments like EIS, gold or wine
With any product or service there are a number of factors that should be considered before signing on the dotted line. Industry publications focus attention on the measurable aspects only, such as headline charging rates, and whilst these should never be discounted there are potentially far more crucial factors that might initially be missed.
A feature of all SIPPs is the default bank account into which contributions / transfers must be paid and from which investments are purchased and benefits paid. Cash would not consistently be a major proportion of a long-term investment strategy, but there will be occasions such as the accumulation of funds before investment, as a strategic hold, or as a float to cover pension payments, when a substantial cash balance could be held. Thus the interest rate on the account might be crucial. Dentons pass on the full interest rate from the bank deposit taker, but, although few will admit it openly, some Providers have and continue to receive, a “cut” of the interest earned on their client’s deposits. Even a modest sum of perhaps £50,000 held on deposit with the Provider taking a 1% cut would yield £500 per annum to the Provider, effectively straight out of the client’s fund. Some Providers will insist that all deposits are held in the default account for this very reason. Others, Dentons included, will let you select your own deposit holder for the large amounts or long-term money. This immediately makes the headline fees look less of a major factor in cost analysis. Another favourite is the requirement by some providers, on property transactions, that the client should use Provider specified solicitors, property managers and insurers. Whilst the familiarity with the Providers requirements should allow a competitive rate, it is certainly not as clean as one would like and the possibility of
there being introductory fees, or some form of fee sharing, should not be discounted. Similarly, how transparent are the relationship between Stockbrokers and SIPP Providers regarding transaction costs on equity purchases and sales? Moving on, one of the most critical decisions to make must relate to the features required by the client. SIPPs essentially fall into three categories with those towards the bottom end offering often online access to share-dealing accounts, giving access to individual equities and a number of funds on a single platform. Moving up the scale, generally where the insurance company and medium sized SIPP Providers enter the market, they will add the ability to purchase commercial property, albeit with some restrictions, as well as a wider range of investment funds and ancillary deposit takers. Only at the very top end of the market will you find Dentons, allowing access to all commercial properties, including shared ownership (both on and offshore), together with more esoteric unquoted equities or unquoted funds. One should not assume, however, that all features are permitted by all SIPP Providers. It is also important to bear in mind that whilst not all of these features will be required at the outset when the SIPP is initially selected, they may well become factors at a later date and the establishment of a second SIPP necessitating the transfer of assets from the one that fails to fulfil requirements can be a costly exercise. Examples of features not always available from other providers are the ability to accept contributions and pay benefits in specie, to offer a multi-phased income drawdown facility and, most topically, offer Alternatively Secured Pension, the means by which the payment of income from the fund can be continued when past the age of 75. Many Providers have not fully dealt with the changes in legislation bought about by simplification, nor have they increased their staffing numbers to cope. Dentons have embraced both to ensure we continue to offer an excellent service.
Martin Tilley is a Pension Consultant & Business Development Manager at Dentons Pension Management Limited. He can be contacted at Martin.tilley@dentonspensions.co.uk or 01483 521521. Dentons Pension Management Limited is Authorised and Regulated by the Financial Services Authority.
www.dentonspensions.co.uk
From this analysis we can determine what resources are available to meet the various goals such that the capital will not be exhausted before age 99 i.e. you run out of life before you run out of money! The idea of drawing on capital as well as natural income is alien to many wealthy people but it is a more tax and investment efficient way of approaching the management of your wealth than relying on taxable income throughout life which is taxed at 40% and then a further tax of 40% payable on your eventual death on the remaining capital, particularly as capital gains tax is 18% from 6th April 2008. Also it is arguably better to use your wealth for the things that are important to you in your lifetime than leaving it up to your executors. We might also agree to completely disregard your property business for the purposes of meeting your goals, on the basis that this is the most prudent approach. We can then calculate the ability of your investable capital to meet your cashflow needs and other goals. The result is identification of the real rate of return i.e. the amount over inflation, that you need your capital to achieve to fund your goals. However, the required real rate of return will be different depending on which goals we are seeking to fund. For example we might be able to fund your ‘Required’ goals with a 2.5% p.a. real return, whereas including the ‘Desired’ goals might push this up to needing a 3.0% p.a. real return and including ‘Aspirational’ goals might push it up further to, say, 3.5% p.a. real return. Risk capacity and investment strategy Without knowing your risk capacity and desired expenditure it is difficult to suggest a suitable investment strategy. However, you need to start thinking in terms of the 40 years or so of your life expectancy rather than the 10 year period until you cease paid work. This change in time perspective will better enable you to plan and mitigate probably the biggest risk – inflation.
On this basis, if you allocated, say, £1M to the cash reserve, the remaining £4M allocated to the portfolio could provide an inflation protected ‘income’ of about £120,000 per annum. A higher ‘income’ might be possible if you were able to accept a higher risk or allocated more capital to the portfolio whether that be at outset or from surplus profits arising from the property business. Whatever allocation you choose, it is imperative that the portfolio is rebalanced back to the original asset allocation whenever the portfolio moves significantly out of line. This forces you to sell off assets that have risen and buy more of those that have fallen in value, which is the opposite of what most individual investors do. There is no real consensus on when one should do re-balancing but we suggest taking action whenever the individual asset classes exceed 10% of the original allocation. Tax structuring and inheritance tax Minimising the main taxes - income, capital gains or inheritance tax (IHT), is a tangible and desirable benefit which means you and your family get to keep more of the investment returns created. The key is to structure your wealth such that it minimizes tax in the short and long term based on the most likely assumptions about your needs, investment growth and changes to your circumstances i.e. moving abroad etc. Because tax rules change all the time, you might prefer to employ a diversified tax management strategy, so you don’t rely too much on one approach. Figure 3 shows the key tax shelters which might be included in your plan.
Cash has, historically, been a very poor store of value and inflation is likely to seriously erode the value over the longer term. You need to hold, therefore, sufficient cash to allow you to: a) meet immediate and short term capital spending; b) which allows you to ‘sleep well; and c) which provides a sufficient buffer to allow you to vary the rate at which you make withdrawals from the main portfolio. The balance can then be allocated to a diversified investment portfolio. Equities are risky but over 20 years or more they have historically offered the best hedge against inflation. The dividend income provided by equities has historically been much more stable than interest arising from cash and gilts, whereas the capital volatility from equities has been very high compared to cash. What you need is a spread of different types of equities, property, shares and some liquid commodities exposure. This will give you the highest expected return for the lowest level of risk and is called diversification. A risk profile assessment helps us to understand your ability to accept investment uncertainty relative to the general population and also relative to your own perception. The service we use is provided by market leaders Finametrica and you can do an assessment online at 1 A Framework for Success Final - Barrister Mag 19.05.08.docwww.myrisktolerance.com. If your risk profile matches the ‘average’ investor, then an allocation split 50% to growth assets (such as equities, property and commodities) and 50% to defensive assets (such as short dated bonds, index linked gilts and cash type investments) has a very high probability of producing a real return (i.e. after inflation), net of tax and charges, of in excess of 2.5% p.a.. Under this asset allocation, you could probably expect to take withdrawals from your overall portfolio of about 3% per annum and increase them over time to compensate for inflation, with a very high likelihood of the capital not being exhausted in your life time (which might be as much as 50 years).
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Disaster planning Insurance has a place in your wealth plan whenever you have insufficient resources to meet your needs in the event of illness or death or if it would be a better use of the family wealth to pay such premiums than use up resources in the event of such an event occurring. In wealthy families like yours the most common use of insurance is whole of life assurance written under a flexible trust for the benefit of heirs, to provide some or all of the capital which would be lost to inheritance tax. The cost of such cover is usually very low for the first 10 years, as long as you are in good health, and might provide you with some flexibility to decide what more substantial IHT planning you might undertake at a later date. Pulling it all together Having a clear idea of what you are trying to achieve and quantifying whether your financial resources are sufficient are key to devising a successful wealth plan. Investment and tax planning decisions can then be made in context and based on what has the highest likelihood of success and provides a disciplined framework for keeping on track. That way you can focus on really getting the most out of life and leave investment markets to take care of themselves. Jason Butler APFS IMC CFP is a Chartered Financial Planner and Investment Manager. He is the founder and senior partner of Bloomsbury Financial Planning based in The City, and has 20 years’ experience advising successful families on managing their wealth.
personal finance & wealth management supplement the barrister 2008
Your Retirement Choices Unravelled “Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.” (David Copperfield by Charles Dickens) By Nigel Callaghan, Pensions Analyst, Hargreaves Lansdown
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f you are planning to retire in the next few years, you may be thinking about how to best take an income from your hard-earned pension savings. These choices are becoming ever more complex – driven partly by legislative changes, partly by the investment environment, and partly by demographics. This article aims to shed some light on these choices. Annuities Until the mid 1990s, the only real choice for anyone with a maturing pension plan that wasn’t a final salary scheme, was to buy an annuity Annuities came in differing shapes and sizes – single or joint life, with or without inflation proofing - but they weren’t what you would call exciting. I do think the ordinary annuity is a much better product than many give it credit for. It does one thing very well; it guarantees you an income for the rest of life, no matter how long that is. Nothing else does this. The virtue of such a guarantee is that it leaves you with more flexibility to manage the rest of your money creatively, secure in the knowledge that your annuity will keep paying out. The once sleepy annuity world is undergoing a radical change as it moves away from its historic “one-size fits all” pooled approach to a more individual pricing policy. There will be winners and losers from this fundamental change. Golden Rule Annuity rates vary enormously between insurers. Retiring investors should always shop around to ensure that they get the highest annuity rate they can amongst all insurance companies– this can be easily done by using webbased annuity comparison sites or by contacting an Independent Financial Advisor, who specialises in annuities. The annuity your existing pension company offers you may represent dreadful value for money. On average, an investor can improve their pension income for life by over 15% by shopping around. As the typical 65 year old will live for another 20 years plus, this additional income can easily amount to thousands of pounds. This is a once-off decision, so get it wrong and it could prove to be an expensive oversight. The following highlights the best-buy deals, based on a fund of £100,000. These deals change frequently. Male
Female
Age 60;
Level pension
£7,069
£6,740
Age 60;
RPI-linked pension
£4,053
£3,710
Age 65;
Level pension
£7,818
£7,337
Age 65;
RPI-linked pension
£4,809
£4,359
Source; Hargreaves Lansdown
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Are annuities good value? In the short term, rates are near a 5 year high. Many investors consider this to be a good time to buy an annuity. Bond yields and spreads have significantly widened in the wake of the credit crisis, which has driven up annuity rates. There also seems to be a fierce price war amongst the top annuity insurers. The consumer should be the winner from this. Future annuity rates? There is a mixed outlook and the future direction of annuity rates is not clear; • We are all living much longer and insurers have lowered rates to reflect this. Life expectancy at age 65 has risen at a rate of three months a year over 25 years, adding several years on to the average annuity payment period. This is set to continue, with a corresponding knock-on effect of lowering of annuity rates. • The cost of living, fuelled by rising commodity prices, is causing substantial inflationary pressures that could push annuity rates up still further. We might look back on 2008 as an annuity highpoint. Enhanced Annuities Some insurers will pay a higher income if you have certain medical conditions. Statistics show that people with some health conditions have a shorter than average life expectancy. These specialist insurers use this to your advantage: they will pay you a higher income because they calculate that, on average, your income should be paid out for a shorter period of time. About 40% of people could obtain enhanced rates, yet only a tiny proportion apply for them. Don’t miss out. Declare any lifestyle or medical conditions as they may qualify you for an even bigger income. If you smoke 20 cigarettes a day, shout about it. Everyday conditions including being overweight, high blood pressure or diabetes could qualify you to an enhanced annuity and its higher income for life. There are currently 1500 conditions that qualify and that number is growing. Here are examples of the annuity available for relatively minor conditions (based on a 65 year male, £50,000, single life, no escalation or guarantee). Annuity p.a.
% Increase over ordinary annuity
Ordinary Annuity
£3,719
Smoker
£4,447
20%
Enhanced annuity high blood pressure, cholesterol and obesity
£4,245
15%
Source; Hargreaves Lansdown
Income Drawdown This is an alternative to buying an annuity. You draw an income directly from your pension fund, whilst the fund remains invested. You retain ownership of your investments. You continue to manage your pension fund and make all the investment decisions. Providing the fund is not depleted by income withdrawals or poor investment performance, it may be possible to increase your income. However, there are no guarantees. If your pension savings are decreased by withdrawals or poor performance, your income will be reduced. You bear the investment risk – unlike an annuity. You need to be happy to accept this risk. If you’re not, it may be sensible to buy an annuity instead. The maximum income you can take from a drawdown plan is 120% of whatever an annuity will pay, whilst the minimum is zero. Investors can withdraw their tax free lump sum at age 50 (55 from 2010), and leave the balance of their pension fund invested and growing until they need it, perhaps ten or fifteen years later. Given recent stockmarket turbulence, some investors have been doing this as way of generating income for the next few years, but leaving the majority of their pension savings intact and invested.
Inheritance Considerations Death benefits for drawdown plans are a definite attraction, compared to the relatively inflexible terms of an annuity. An annuity’s main problem is that once you have made your choices, you are stuck with them forever. With drawdown, nothing needs to be decided in advance. On your death, your surviving spouse has the choice to carry on with the drawdown plan as if it were their own; take the entire fund and buy an annuity for themselves; or take the fund value as cash, less a 35% tax charge.
around 11 years longer than the inhabitants of Glasgow, districts of which have roughly the same life expectancy as the Gaza strip. If you are healthy and wealthy, then you are going to be increasingly disinclined to purchase a conventional annuity in your sixties; put crudely, you may be better off waiting until your mid seventies, when your health starts to deteriorate, and you may secure a better rate via an enhanced annuity. Until then, you may choose to stay invested in a drawdown plan, managing your investments. There will be continued product innovation in the coming years. In 2012 alone, 800,000 people will hit retirement as the baby-boomer generation reaches the end of their working lives.
Next Steps…. If you are comfortable with making your own financial and investment decisions, there are a number of companies that will offer fantastic value for money for both annuities and income drawdown plans. Some will offer top notch investment research and state of the art web-based service. Any webengine search will throw up a number of possible candidates. However, if you unsure or need advice, make sure you see an appropriately qualified IFA.
Hargreaves Lansdown Helpline 0117 980 9940 http://www.h-l.co.uk/
for you to take control of your Pension and Savings Instructions to Counsel... Choose Wealthtime for your self invested personal pension (SIPP) and other retirement savings requirements. We are independent specialists with an in depth understanding of the needs of the legal profession. A number of our clients are lawyers as is our senior director. We provide the legal and tax framework to put you in control of your pensions and savings.
Variable Annuities These were 2007’s big thing. They are broadly a hybrid of drawdown and an annuity. They offer investment market exposure, with the potential benefit of growth that can bring, some death benefits, and the certainty of guarantees on the level of income paid out. It looks like an attractive package, and in principle they are a good idea. Unfortunately the products to date have struggled to overcome cost issues that can have charges pushing up towards 4% a year. If an investor was drawing 5% income from their pension fund, they would need an investment return of up to 9% p.a., just to stand still.
In brief...
We offer • • • • • •
However, this is a fast moving arena and costs will fall dramatically as variable annuities become more commoditised. For most investors, the same balance of investment risk combined with guarantees on income can be achieved by mixing and matching a drawdown plan with an annuity.
Future Investor Retirement Strategies As mentioned, there is a growing trend towards a segmentation of the annuity market. Insurers are launching variations on this theme, including separate smoker and non-smoker rates; underwritten rates – where they look for evidence of compromised health and life expectancy. We have even seen postcode rates, on the basis that people in Kensington do, on average, live
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personal finance & wealth management supplement the barrister 2008
We don’t
The articles in this supplement are intended for general information only and should not be construed as advice under the Financial
• • • •
A highly flexible and tax efficient pension and savings vehicle Flat fees which are not linked to fund size and don’t increase each year Full stockbroking and fund supermarket facilities chosen by you or your adviser On line portfolio viewing and dealing A personal service A wealth of knowledge and experience
Have any hidden charges Take any ‘kickbacks’ from bank interest or fund manager rebates Restrict what you invest in (within HM Revenue & Customs rules) Give investment advice - you or your advisers make the decisions
In our submission... For more information please visit our website at www.wealthtime.co.uk or call David Baker LLB 01725 512925 / 07977 121172 or Jan Regnart FCII FPMI 01725 512925 / 07926 098702
Services and Markets Act The price and value of investments and their income fluctuates: you may get back less than the amount you invested. Remember that how an investment performed in the past is not a guide to how it will perform in the future. If you are in any doubt about investing in these types of investments, you should consult your financial adviser. Tax legislation and practice may change in the future. Any changes may affect your tax position. The Wealthtime Private Client Service is administered by Wealthtime Limited, which is authorised and regulated by the Financial Services Authority. The Operator of the SIPP is Wealthtime Limited. The SIPP Trustee is Wealthtime Trustees Limited which is not regulated by the Financial Services Authority. The ISA is provided by Barclays Stockbrokers Limited which is authorised and regulated by the Financial Services Authority.
Take a SIPP: group pension opportunities for barristers Barristers can now join together to form a Professional Practices Self Invested Pension plan and potentially use pension savings to help manage their business. David Quinton of Smith & Williamson, answers key questions on setting up and running such a scheme Q – Can you give a brief overview as to how a Professional Practices SIPP works?
Q – How does each member know what benefits he has under a Professional Practices SIPP?
A – Each individual barrister who participates in a Professional Practices SIPP can make contributions up to an annual allowance, currently set at £235,000 for the tax year 2008/09. Investments are also subject to a standard lifetime allowance of £1.65 million for the 2008/09 tax year. These upper limits apply to any pension investments, however, benefits may arise from a Professional Practices SIPP as contributions are combined. Therefore, if there are ten barristers in Chambers setting up a Professional Practices SIPP together, they can make combined contributions of up to £2.35 million pa creating a maximum overall fund of £16.5 million based on figures for the current tax year. All contributions are placed into one pooled fund for the purposes of investment.
A – All contributions, including those transferred from previous pension arrangements, are placed in the pooled fund, but each member has his own identifiable share of that fund. Every 12 months, members receive a valuation of the fund, details of its performance and a statement of their particular share. There is no cross-subsidy of investment gains or losses between participating members.
Q – Can barristers transfer existing pension arrangements into the Professional Practices SIPP? A – Yes they can. Barristers should however check for any penalties they might incur or guarantees they might lose before making any transfer.
Q – Can Chambers use pension arrangements to buy their office premises? A – Yes. Barristers within Chambers can use the Professional Practices SIPP to buy commercial property including their own office accommodation. Prior to April 2006, each barrister could set up his own SIPP, which would purchase or own a portion of the premises. However, it is now possible to use one overall SIPP, like the Smith & Williamson Professional Practices SIPP, rather than a series of individual pension arrangements. This means that the purchase is considerably simpler to arrange, fund and administer, providing overall cost savings.
Q – What type of Chambers is the Professional Practices SIPP most relevant to? A – There are no restrictions, in fact, Professional Practices SIPPs are equally suitable for barristers, solicitors, accountants, surveyors, dental practices and so on. The main criteria is that there is a group of like-minded individuals joining together in one overall pensions scheme for a specific purpose. Investment decisions must be agreed unanimously by participating members.
Q – What can a Professional Practices SIPP invest in? A – They can invest in a wide range of investments including equities, bonds, Oeics, unit trusts, bank deposits, financial instruments, hedge funds and commercial property as mentioned above. Many practices, in common with individual SIPPs, will use some or all of the funds accumulated in the pooled fund to take up discretionary fund management services. As with all types of SIPP arrangements, HMRC will not, however, allow investments in residential property nor loans to members or anyone connected to them. Indeed, there are severe tax penalties if such investments are made.
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Q – Can a Professional Practices SIPP borrow funds? A – Yes, gearing is allowed for investment and liquidity purposes. A Professional Practices SIPP can borrow up to 50% of the net asset value of the pooled fund for such purposes.
Q – What happens when a new barrister joins or leaves Chambers? A – When setting up the SIPP, members should agree the criteria for new barristers coming into the pension arrangement and also what happens when a barrister leaves. It’s important to set out a controlled exit plan which is satisfactory to all parties and avoids damaging ongoing investment strategy.
Q – What happens when a member retires and what impact will this have on the remaining members? A – The exit strategy should be carefully considered when the SIPP is set up and this typically involves a detailed study of the likely cash flow of the SIPP over the next 20-25 years. In this way, there will be little or no impact on the remaining members and the ongoing investment strategy, allowing a retiring member to maximise the wide range of options available. While it’s impossible to legislate for every situation, if a strategy is agreed at the outset, this means that procedures are in place which should help to avoid cash flow issues when a member retires.
Q – What would happen if Chambers were dissolved? A –Although the Professional Practices SIPP could be wound up, this is not essential. Indeed, some or all of the members could continue with the arrangement including making further contributions. The only criteria is that all members must act unanimously. If it is decided to wind up the SIPP, each member’s share of the funds are to be transferred to alternative pension arrangements of their choice.
Q – Are there any disadvantages of the Professional Practices SIPP? A – This depends on an individual’s circumstances, however, people should consider the following: • once contributions have been paid to the SIPP, the member cannot get them back other than in the form of retirement benefits • retirement benefits cannot be taken before age 50 (age 55 after April 2010). • members may not be able to withdraw their share of the fund immediately if they decide to leave the SIPP, for example if they decide to leave the SIPP at short notice and transfer to another pension arrangement • possible liquidity problems in some circumstances. To consider a rather extreme example, if three members of a SIPP were to die together in a car crash, an unanticipated cash flow problem could arise, although there are solutions to assist in such circumstances. Q – What would you say are the main advantages of a Professional Practices SIPP? A – These include: • the ability for members of Chambers to join together to purchase commercial property from which to carry out their business, thereby securing tax relief on contributions, receiving arm’s length rent deductible as a business expense and tax free capital growth on the building and its income • control and management of assets within the current self-investment rules permitted by HMRC • economies of scale, particularly with commercial property purchases. • competitively priced discretionary fund management services for all or part of the pooled fund. • the facility to ensure full use of tax planning advantages available under current legislation • the chance to minimise tax liabilities arising on residual funds on death using legitimate solutions not available under an individual SIPP or other personal pension arrangement.
Press queries Kate Harrison or Alison Hayman on 020 7131 4228 / 4138 Disclaimer By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing. Note to editors Smith & Williamson is an independent professional and financial services group employing over 1,500 people. The group is a leading provider of investment management, financial advisory and accountancy services to private clients, professional practices and mid-to-large corporates. The group operates from offices in London, Belfast, Bristol, Dublin, Glasgow, Guildford, Maidstone, Salisbury, Southampton and Worcester. Smith & Williamson Limited Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International, a worldwide network of independent accounting firms. Smith & Williamson Financial Services Limited Authorised and regulated by the Financial Services Authority.
Q – Are Professional Practices SIPPs easy to set up? A – They are a relatively new development arising from changes in legislation in April 2006. Such arrangements are not widely available as yet, but there are specialist advisers who can assist in drawing up of such arrangements. The mechanics of establishment are quite straightforward. It is expected that the popularity of Professional Practices SIPPs may grow rapidly over the coming years, because of their highly attractive features.
David Quinton is Senior Corporate Benefits Consultant at Smith & Williamson, the investment management, financial advisory and accounting group. He will be running seminars on setting up the Professional Practices Sipp in late 2008. david.quinton@smith.williamson.co.uk 020 7131 4359 www.smith.williamson.co.uk
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Some Basic Rules for Tax-Efficient Investing
many, this will indeed be true. That reason however, cannot be true for all
in recent years.
wealthy investors simply don’t use their ISA allowance.
tax avoidance legislation, yet for most people these allowances are again
tax payers. From personal experience, I am aware that many comfortably
By Ian Scott, regional director, Iimia Wealth Management
T
he US Appeals Court Justice, the Honourable Billings Learned Hand (1872 – 1961) is reputed to have said:
“There are two systems of taxation in our country; one for the informed and one for the uninformed”.
Whilst it is probably fair to say that the Honourable Gentleman’s comment
could just as easily apply to our own country, it is also fair to say that over the
last ten years or so, the opportunities available for significant tax planning have certainly diminished.
Back in the Thirties, life was so much simpler. In the case of IRC v Duke of
Westminster (1936) AC 1, Lord Tomlin said “Every man may well be entitled, if he can, to order his affairs so that the tax attaching under the appropriate Acts is less than it would otherwise be”.
In those bygone days it would seem that the mantra ‘tax avoidance good, tax evasion bad’ held true! So what has changed?
The Finance Act 2004, plus later additions on 1st August 2006 to widen the net to include most taxes, have rendered many tax planning schemes ineffective. This is largely due to most esoteric planning options and their many derivatives having to be pre-disclosed to HMRC.
This standard specifies requirements and provides a framework that applies
to the ethical behaviour, competences and experience of a professional personal financial planner.
The standard defines six steps of the personal financial planning process: •
• • • • •
Establishing and defining the client and personal financial planner relationship
Gathering client data and determining goals and expectations Analysing and evaluating the client’s financial status Developing and presenting the financial plan
Implementing the financial planning recommendations
Monitoring the financial plan and the financial planning relationship
It can be seen therefore that it’s only after Step 3 is complete, i.e. we understand where the finish line is and we understand our clients’ current
situation, that serious consideration to tax planning schemes should be
discussed. Indeed, much of our initial time spent with clients is devoted to achieving an understanding of what they have already acquired.
Rule 2 – Start with the small allowances first
All however is not lost, as there are still many options which are open for
The key taxes we generally focus on reducing for private clients are income
schemes, the old adage of the tax tail not wagging the investment dog still
however, it is the smaller, simpler allowances which are ignored. For example,
private clients to pursue. In lamenting the passing of the many esoteric holds true.
So what tax planning goodies are still available to those private clients who feel they are paying too much tax but aren’t yet thinking of leaving the UK’s shores or aren’t in the league of those able to purchase English football clubs?
A few basic rules may help focus the mind!
Rule 1 – Start with the end in mind Although tax breaks are generally popular and well-received, we need to understand how the tax breaks will help us reach our goals. Our first rule therefore doesn’t start with tax planning.
Any financial planner worth his or her salt will use a tried and tested format
to understand what is important to you, long before the latest tax ‘wheeze’ is pushed under your nose.
The British Standards Institute has drawn up a reference, BS ISO 22222:2005, with the objective of achieving and promoting consumer confidence by
providing an internationally-agreed benchmark for a high global standard of personal finance service.
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personal finance & wealth management supplement the barrister 2008
tax, capital gains tax and for older generations, inheritance tax. Often a couple can generate income of £12,070 per annum (2008/9) and pay no income tax provided their incomes are arranged equally.
There are many examples of high-rate tax paying clients keeping cash
reserves in their own name and suffering a 40% loss of interest rather than simply holding the cash in the (trusted!) partner’s name. By simply holding £50,000 cash in a non tax paying partner’s name, a saving of £1,200 per annum can be achieved. Not a life-changing sum, but sufficient to start
a regular monthly savings scheme, investing in fine wine, organised by a decent London Vintner. There is a certain irony in funding a cellar from tax
savings, resulting in a portfolio of the most liquid of investments, especially when any capital gain on the wine is tax free!
On a more sober note, people are generally aware that ISAs offer a tax shelter for cash, equities, bonds or all three. So why don’t 100% of people
that just over 30 million people in the UK were classed as income tax payers
in 2004/5. Additionally, just over 17 million individuals held ISAs for that tax year i.e. 35% of the eligible adult population.
JP Morgan goes on to say that if retired non-taxpayers also hold ISAs (many
of whom do), then the percentage not using the allowance is even higher! Many will no doubt claim they can’t afford to put the cash aside, and for
underutilised. Why?
The reasons given seem to fall into two camps:
In my opinion, much of the blame can be laid squarely at the feet of
1)
charges for inflexible, restrictive contracts with poor or at best mediocre
2)
It’s not worth it or
They are too expensive
the pensions industry. For too long, pension schemes levied far too high performance.
Both arguments however will hold little water when a deeper discussion is
However, the boot is now firmly on the investor’s foot thanks to a series
existing portfolios, it is well worth attempting to use your £7,200 (2008/9)
pensions in 1988, which spawned the Self Invested Personal Pension (SIPP)
entered into. Even with a substantial sum to invest, or for those with large annual allowance, £14,400 for a couple.
Given time, substantial sums can be squirreled away in this tax-favoured
shelter. The resulting ISA fund can then give a degree of flexibility and choice that simply isn’t available with a tax-restricted portfolio.
For example, a long-held portfolio of shares is often very overweight in one
or two individual stocks, simply because potential capital gains tax charges
of legislative changes. The important changes are the advent of personal
shortly after, followed by the introduction of stakeholder pensions, which drove down costs, and finally the new simplified regime.
This means the days of insurance companies insisting that investors purchase
both the administrative wrapper plus a limited and often poor fund range as one package has finally been blown apart. The SIPP has finally started to come to the fore as the flexible king of pension planning vehicles.
would arise if a portfolio is rebalanced.
With the new regime, a tax-free fund of up to £1.65m (2008/9) can be accrued.
A gift to children of capital to ease an inheritance tax burden is far more
at £235,000 for 2008/09), and at retirement you can currently take 25% of
efficient from an ISA wrapper than a portfolio of shares that can’t be gifted without triggering a charge to capital gains tax.
Annual contributions are now a maximum of 100% of earned income (capped
your fund as tax free cash. The remaining fund provides income, which for most retirees is exactly what they need, albeit the income is taxable.
Long term use of ISA allowances gives additional freedom to meet your
For those wanting more excitement, VCTs, EIS and EZTs might be deemed
paying 40% income tax, providing additional lump sum top ups to pensions, or
income tax relief, CGT deferral at now 18% and 40% if carried back to
objectives, whether that is to generate more income in retirement without providing a gift to children to utilise your £3,000 annual IHT free allowance.
As for ISAs being too expensive, this seems to be a throwback to the old
PEP accounts. In the late 80s and early 90s, it was common for stockbrokers
to be far sexier investments, and who can deny the EIS tax breaks of 20%
previous years plus IHT exemptions at 40% aren’t attractive? However if tax tails aren’t going to wag investment dogs, we should ensure that our rules have first been considered!
to charge additional fees for running these accounts over and above their
normal account charges. It was often stated, particularly by the money section of the press, that the additional charge negates the tax break. Whilst
Summary
PEP tax shelter (now merged into ISAs) are grateful they ignored this piece
Tax-deferral or tax-saving is very appealing to most clients, and although
for the tax-sheltered ISA account.
such as investment into British Film Partnerships etc, there are still plenty
that may have been partially true in the early years, clients still holding their of “advice”! Worth noting then that today, it is rare to see additional charges
Whilst considering the smaller allowances, there may also be room for one of
the safest of all investments, the humble but tax-free index-linked National
Savings certificate. The gross return of circa 8% pa required for a high rate tax payer to match the current rate from the 45th issue certificate will have many fund managers running for the hills.
use them?
Figures from J.P. Morgan’s “Changing Fortunes” paper, dated May 2008, state
Use of your pension allowances seems to fit well with the new sensitive
Rule 3 – Don’t forget the larger allowances, then finally consider the esoterics
For those people paying significant income tax at 40%, one of the biggest tax breaks available is via a pension scheme.
many planners will lament the passing of some of the esoteric tax breaks of options available which most clients will enjoy. Our advice, somewhat predictably, is to seek advice!
Whether you seek your own counsel, or seek advice from a fee based Financial Planner, we hope you find our Basic Rules a useful starting point!
Ian Scott (ian.scott@iimia.co.uk) is a regional director with iimia Wealth
Management (iWM) and specialises in advising members of the legal profession. iWM provides holistic financial planning advice and investment
management to high net worth private clients, Trustees and Attorneys from
their offices in Bournemouth, Exeter, Falmouth, London and Northampton. Please visit our website at www.iimia.co.uk for further details.
5th April 2006 heralded the dawn of the new “simplified” pensions regime. In
fairness, this has been one of the better changes to the pensions landscape
personal finance & wealth management supplement the barrister 2008
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Why should you choose a private bank?
“Private banks aren’t what they used to be.” This is a comment sometimes heard amongst the wealthy and raises a number of questions. What did Private Banks use to be like? Would those wealthy people actually want what they offered in the old days assuming, of course, that it was still legal? And is there someone, somewhere that gets close to the spirit of the issues being alluded to? A very British model What did they used to be like in the golden days of yore? Private Banks 30 to 40 years ago could probably be said to fall into two categories, broadly the Swiss and the British. The Swiss model was mainly about secrecy in world that still tolerated that sort of thing. The line between tax evasion and tax avoidance was more blurred and less enforced and the concept of international rules to crack down on money laundering only a gleam in the eye of national regulators. So highly was that secrecy valued that deposits sometimes paid no interest, the shelter from the taxman having a greater value than the interest. If not dead, this model is at best limping and only in places where one would probably not want to spend one’s holiday – let alone time in the local commercial courts if things went wrong.
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The British model was, well, rather British: banking buildings that looked and felt like a St James’s club, curly writing on cheque books, a bank manager in a frock coat and very personal; a pleasant environment to talk about vulgar topics – like money. This was not an area that attracted the brightest in the financial world but in the days when “my word is my bond” meant something it was a model that was popular – and with reason. This world does still exist but only in a few genuine corners where partners continue to manage the business. Some of the outward trappings still remain in other banks but the reality behind these entities is that they are owned by vast parent banks that know a good marketing pitch when they see it. If you look under the bonnet they share a common balance sheet (in our sub-prime struck world this should resonate) and the systems and practices conform to those of the parent. For day-to-day banking these do a fine job but if clients are looking for a global and sophisticated wealth management service as well then they might be disappointed. So what does modern private banking look like? The answer is that it varies from curly writing deposit takers at one extreme to specialist asset managers at the
other who don’t even give you a cheque-book. Both of these have their devotees. Occupying the middle ground are the private banking arms of some of the biggest banks in the world who are attempting to offer a client something of the best that is offered by the specialists but linking the two together with tax advice and structures. Personal This is where HSBC Private Bank believes it has a real edge. On the one side are banking and lending. While there are no longer frock coats, the UK business is based in the old Conservative Club in St James’s, a traditional setting for a modern bank that is subsidiary of one of the best capitalised banks in the world, whose acknowledged strengths are in the most dynamic markets on the planet. The HSBC Private Bank model is very focused on lending and banking of the old sort, where there is a manager who knows the amily and the business of his or her client intimately and who is empowered to make decisions on that knowledge. It is a banking model that particularly suits entrepreneurs whose business and personal lives are inextricably linked. The average client to manager ratio is 50 to 1. Most competitors are 200 to 1.
Open architecture Asset management is the other side of the coin. This is not the old stock-broker model of putting together portfolios of stocks for individual clients. Nor is it product push of white labelled products grown in-house. Rather it is formed around asset allocation and research into the best financial products on the market, whether or not they are HSBC originated. This is a sophisticated service that only comes with scale. The hedge fund specialist research team, for example, advises on a portfolio of around USD50billion. Whatever the financial solution, the tax and the structure has to be right to minimise tax. If the portfolio is global, then the structure and tax advice cannot be parochial. Again, the old British model would have difficulty in dealing with this sort of sophistication. Is this “old fashioned private banking”? Certainly not in execution; quill pens and ledgers have no place in the modern world. In the sense of an institution that obsesses about its reputation, focuses on service and offers a joined-up solution, then it is certainly old fashioned in the best sense of that phrase. www.hsbcprivatebank.com
reductions in value. In addition, longer-term economic changes – lower
What are the prospects for with-profits?
inflation and consequently lower long-term investment returns – have resulted in lower payouts for fixed term policies than for similar policies
The prospects for many with-profits policies are still very good. In addition to
maturing in earlier years.
investment return smoothing and benefit guarantees, it’s worth noting that it is not in the insurers’ interests to neglect their with-profits business. This
These changes have often been presented in the popular press as insurers
is because there is often an alignment of interests between planholders and
‘slashing’ payouts. However, insurers aren’t in the business of printing money
shareholders. In a 90:10 fund shareholder dividends depend on the bonuses
– if they were then it might have been possible to maintain payouts at
distributed to with-profits policies. For funds where the shareholder profits
historic levels. Instead they have to invest their assets - in equities, property,
are based on charges less expenses, keeping with-profits business on the
bonds and cash - in order to produce the returns that support the payouts
books maintains the profit stream.
to their with-profits policyholders. In the long term they can’t pay out more than they earn although, in the shorter-term, they can smooth out some of
The asset mix backing with-profits policies generally includes a mixture of
the volatility in returns. In addition, with-profits policies often have minimum
equities and property, offering the prospect of good long term returns, as
benefit guarantees that offer security on death, at maturity or on MVR-free
well as bonds and cash, providing a degree of stability. The mix varies from
dates.
fund to fund and even from product to product within the same fund but, except where guarantees are particularly valuable, the equity backing ratio
The significant market falls of the early 2000’s have now largely worked their
(equities and property combined) is generally at a level that could generate
way through policy values and in recent years policyholders have seen year
good overall returns over the longer term. For example the equity backing
on year growth in their policy values again.
ratio for many with-profits bonds is currently in excess of 60%. However, the lack of demand for with-profits in recent years has caused
What about MVRs?
many insurers to scale back their offering or close their with-profits funds to new business. This means that cashed-in or maturing policies may be hard to
MVRs never seem like good news but what exactly are they? A unitised plan
replace. Also there may be limited scope in future for diversification between
will normally have a nominal value equal to the number of units multiplied by
types of policy and between insurers.
the unit price, which is used to determine the minimum payable where plan guarantees apply. An MVR is usually an adjustment made to the nominal
In summary, there are still a lot of with-profits policies out there, which is a
value where guarantees do not apply if the value of the plan, taking account
good thing because for many investors with-profits can play a valuable part
of investment returns since it started, is lower. MVRs clearly show the value of
of a balanced portfolio. There may be some work required to check this out for
the with-profits unit price guarantee. Where the guarantee conditions apply
individual policyholders but relevant information is becoming increasingly
to a payout, for example at maturity or on an MVR-free date, the minimum
accessible.
benefit has to be paid regardless of financial conditions. But if the guarantee period of investment, the insurer can apply an MVR to ensure that the payout No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments. Even where an MVR applies the payout can still be higher than the original investment. This is because the unit price will generally have grown since the plan started as a result of the addition of regular bonuses. Over the last year or so, MVRs have disappeared from many unitised withprofits plans but that doesn’t necessarily mean that now is the right time to surrender. In general this change simply reflects the improved investment conditions since the early 2000’s and the fact that the plan is now worth more than the minimum benefit. On the other hand, if a substantial MVR still applies to a plan and an MVRfree date is approaching then it is likely to be in the planholder’s interest to take advantage of the guarantee and surrender.
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By David Tiller, Marketing and Strategy Director, Standard Life Wealth. Do you prefer the Ostrich approach or the Squirrel strategy?
A
crude animal behavioural comparison is, of course, far too simplistic to describe our relationship with our savings and investments. Nevertheless it does serve to illustrate the point that few of us feel that we are paying sufficient attention to our investments. It is perhaps not surprising then that more people are retaining the services of a professional discretionary investment manager. When we think of other factors that are important in our lives then the case for discretionary management becomes compelling. Investment options are complex and take considerable time to understand. Markets are dynamic and the right decision now could prove disastrously wrong if not monitored frequently to reflect the prevailing conditions. Successful individuals rarely wait for events to happen. Quite simply we do not have time to do the depth of analysis required. We may be wealthy in monetary terms but poor in terms of spare time. We are also unhappy about being packaged, commoditised and treated like sheep. Most people who can afford it, will happily pay a small premium for genuine service. Instead of interminable menu-based voice recognition systems and poorly trained offshore call centres we want to deal with real people. We want the person at the end of the phone to know who we are and to value our custom. Better still, it is nice from time to time actually to meet the person we are dealing with and to put flesh and bones around the voice. Our lives are all unique. Each person or family has a different set of priorities. In many ways it is the differences that define us. Unfortunately, traditional ‘off the peg’ packaged financial products do not reflect these differences. Wealthy individuals are far less comfortable accepting this compromise. Instead we expect to get a solution that is tailored to our requirements.
The best managers spend considerable time with their clients really understanding their risk. This is because risk is the key to investment management. In choosing to invest you are taking a risk in anticipation of a reward. The risk may be small with commensurately small reward, such as with a UK Government Gilt investment (where the only risk is a complete meltdown of the UK economy). Or the risk may be high with high potential reward, such as a private equity investment (small unlisted companies can increase in value rapidly but many also fail). The risk a client is willing to take is often described by investment managers as their ‘risk budget’. Your discretionary manager’s job is to construct the portfolio that produces the highest return for your risk budget. Diversification and correlation Diversification simply means mixing different kinds of investment so that you are not relying on any particular market or investment type. The benefit is that diversified portfolios can produce higher returns for your risk budget. Diversification is a good thing but it also requires considerable skill. To create the best diversified portfolio requires access to as wide as possible universe of investment types and a deep knowledge of how they perform in the different conditions that occur throughout the economic cycle. If investments do well at the same point in the cycle they are regarded as correlated. If they do well at different times they are uncorrelated. Uncorrelated investments are what managers look for. If we look at an example of two relatively high risk and high return asset classes that are uncorrelated the benefits are clearly illustrated.
What does a discretionary investment manager do?
conditions do not apply to the payout and returns have been poor over the reflects the returns that it has earned on its assets.
How do you protect your investments?
Discretionary investment managers offer a highly individual service. They create individual investment portfolios designed to meet the specific needs of their clients. As a client of a discretionary investment manager you will be able to talk directly to your portfolio manager who should become a trusted colleague, ensuring that your best interests have priority. Each portfolio is unique and is structured to a specification agreed by the client and the manager. The manager takes on responsibility for actively managing the investments within the portfolio and has discretion to buy and sell individual portfolio holdings. Decisions to buy and sell reflect the investment manager’s view of world markets and their fit with client requirements. Discretionary investment managers look at your overall position regardless of the tax structures within which the investments might be held (ISA/PEP, Self Invested Personal Pension, Investment Bond etc.). This larger view ensures that every investment you have is working to maximum effect. A ‘piece meal’ approach typically brings an over reliance on certain assets and the client being exposed to greater risk than is necessary. Your risk budget
Please note this is a sample illustration only. By combining these a portfolio a manager can reduce risk and maintain high returns. SL Wealth approach While the 50/50 split Private Equity/Global Emerging Markets portfolio does demonstrate the value of diversification it is not robust enough to withstand all market conditions.
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An alternative investment approach is based upon institutional investment discipline, this demands the introduction of many more investment types. Most managers are limited to traditional asset classes: equities, bonds and some alternatives (such as property and Fund of Hedge Funds). However, some portfolios can also benefit from advanced institutional strategies. It is these strategies that enable clients’ risk to be tightly managed and to generate higher returns. The advanced strategies may enable the more efficient management of client’s portfolios. The diagram below illustrates the returns for risk for a traditional portfolio when compared to a more advanced strategy.
Relative Value A relative value investment is a way of generating returns even when markets are falling. The investment considers the return potential of different markets or market segments. An example involves the German and Swiss markets. These two markets historically have performed in line with each other. However, recently the German market has outstripped its Swiss counterpart. Evidence would suggest that this relative out-performance will not continue and the markets will return to parity. It would seem the Squirrel Strategy offers the best option for clients to follow when considering the management of their investments. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments.
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Investment Management
Barristers, like all self-employed people, are sometimes guilty of leaving their tax returns until the last minute and making mistakes as a result. With the deadline for paper returns moved forward to 31 October barristers would be well-advised to start reviewing their financial affairs now. By Anne Gregory-Jones, partner, Haysmacintyre
I
t was rumoured earlier in the year that HM Revenue & Customs (HMRC) was planning to pay extra attention to barristers’ tax returns, just as builders and online traders have been targeted in previous years. While it is difficult to say if there is any truth in this, one thing is for certain: any barrister can expect a Revenue enquiry into aspects of his tax return both from a VAT and a direct tax perspective. The normal rules applicable to self-employed individuals apply to barristers and this includes keeping evidence of expenditure, sometimes rather lacking in my experience. However there are two main areas where the taxation of barristers differs from that of other professions. These are both statutory concessions to reflect the facts that barristers cannot sue for their fees and that for many barristers fees can take a long time coming or have to be written off. However, the nature of the profession can also give rise to other issues. Up until ten years ago most barristers used the cash basis when submitting accounts to HMRC. However, the Finance Act 1998 made it compulsory to have accounts prepared on a true and fair basis which means an accruals basis must be used. As such barristers must now match expenses to the accounting period to which they relate. However, it is important to point out that junior barristers are entitled to retain the cash basis for the first seven years of practice, commencing when the barrister first holds himself or herself available for fee earning work. HMRC granted this concession in acknowledgement that for the first few years fees are at a minimum. The principal advantage of the cash basis is the deferral of income recognition and as a result a switch to the accruals basis would generally result in a certain income dropping out of account. It is possible that the recognition of the additional profits could be onerous, and as a result barristers can spread this “catch up” charge over a ten year period – although many prefer not to. This is because many barristers would expect to be earning sufficient profits by their seventh year to be higher rate taxpayers. The catch up charge will be assessable in the year in which it is deemed to arise therefore transforming what would be a 22% liability into one at 40% (on current rates).
that where a barrister holds a part-time judicial appointment, alongside his/her practice then the income from the part-time appointment will be assessable as employment income. However, travel expenditure from the barrister’s home or chambers to the place where the judicial duties are performed will not be allowable expenses.
However, those barristers using the home as an office may be able to claim a percentage of the utilities as a deduction. This is estimated on a case by case basis, and will be related to the amount of time spent working at home. What many barristers overlook, is that if a room is set aside in the home and used exclusively for business then this will impact on the main residence exemption when the property is sold.
Define Investment Policy
Review
Working with You
In addition, barristers should be aware that expenditure on ‘lunching’ away from home or the place of business, often a necessity for barristers, is not eligible for concessionary treatment. However, if a business is by its nature itinerant extra cost may be incurred wholly for business purposes. For barristers, it may be possible to deduct modest expenses if journey outside of the normal pattern are made.
Reporting
Implementation
With the pension contribution limit now at £235,000 per annum, it is advisable for barristers to consider pensions as a means not only of providing for their future but also for alleviating their tax liability.
A potential stumbling block for barristers is ‘work in progress’. The UTIF 40 adjustment, introduced in 2003, requires all businesses to reflect income as it is earned even if not contractually due. This can cause problems as it is often difficult to estimate likely fee income from particular work, particularly legal aid. In most cases it will be necessary for prudent estimates to be made reflecting the proportion of the work undertaken. If a barrister works on a fixed fee basis then a reasonable proportion of the fee should be brought in as income. This proportion should reflect the proportion of the overall work done before the accounting date where it can be reasonably estimated. Another factor to consider is part-time judiciary work. It is important to note
Anne Gregory-Jones is a partner at haysmacintyre.
personal finance & wealth management supplement the barrister 2008
Setting Strategy
For many barristers a considerable amount of time is spent travelling to different parts of the country. Clearly, the cost of travel will be deductible in accordance with the usual rules. However, the lines are blurred when a barrister effectively works from home, visiting chambers only to meet with fellow barristers or clients. In these circumstances, travel expenditure from home to chambers will not, in most cases, be tax deductible.
The common mistakes made on tax returns can mostly be avoided if you do your return on a timely basis. By leaving it to the last minute, and completing the return in a rush it is much more difficult to provide correct and accurate information, and moreover limits the amount of thought that can be given to how to improve the tax situation or mitigate the liability. Keep your advisor well-informed. Although it can be a struggle to accommodate meetings with your tax advisor, it is essential to sit down at least once a year and discuss not only tax affairs but also wider financial issues such as pension planning and inheritance tax. More often that not, your financial affairs can be organised in a more fiscally advantageous way if only the adviser had been consulted at an earlier date. Barristers should see the annual tax return not as a headache, but an opportunity to review and re-organise their financial affairs for the better.
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Understanding your requirements
At Rensburg Sheppards we don’t just manage your investments, we look after you and your family’s financial affairs over the years and through every stage, from assessing your needs to meeting your objectives.
With over £14bn of client funds under management, this makes Rensburg Sheppards one of the UK’s top 10 independent investment management firms.
To find out more about how we build long term relationships and create solutions that are right for you and your circumstances, please contact
Professional investment management with a personal approach.
Chris Sandford 2 Gresham Street, London, EC2V 7QN Tel: +44 (0)20 7597 1166 Email: chris.sandford@rensburgsheppards.co.uk
www.rensburgsheppards.co.uk Member firm of the London Stock Exchange. Member of LIFFE. Authorised and regulated by the Financial Services Authority. Rensburg Sheppards Investment Management Limited is registered in England. Registered No. 2122340. Registered Office: Quayside House Canal Wharf Leeds LS11 5PU. Offices at: Belfast Cheltenham Farnham Glasgow Leeds Liverpool London Manchester Reigate Sheffield.
The importance of Business Structure for Sets of Barristers Chambers The first structure to consider is the cost sharing arrangement. It would be a naïve approach to assume that all contributions by the members of a set were tax allowable, with maybe a different view being taken if a set raises money for some specific capital item; for example a new computer system. By Jim Sweeney, Head of Taxation at Swindells & Gentry
T
he business structure of a set of barristers chambers is of importance
no reference to it. However, if the structure is the sharing of costs by the
to the success of chambers in the current economic and regulatory
members of a set of chambers it is difficult to see how it could achieve what
environment. I want to explore in this article, the implications of the
is now expected, that is the pursuit of common aims and objectives of the
business structure of chambers for the taxation of the chambers and the
chambers as opposed to those of the members.
taxation of the individual barristers. Before doing this I will set ‘business structure’ in a wider framework, looking at how different structures may
Of course, chambers today, even where the organisation is cost sharing, are
influence how chambers respond to the barristers’ aim to practice their
sophisticated and have management committees responsible for strategic
profession profitably and how they can respond to the economic and
planning and control. The key issue here is if there are aims and objectives
regulatory framework in which barristers practice their profession. I will then
and a system to ensure they are met, how will decisions be taken and what
show that the taxation issues need not necessarily conflict with the wider
structures facilitate decision making? I would maintain that it is impossible
business issues.
for all members of a set to take part in all decisions unless there are only a few members. This then leads to the need for a decision making organisation
It could be argued that the original structure of chambers involved only a
which will have rules governing its conduct where members are delegated
sharing of the costs of running an office. However, the modern chambers
to make decisions. There are two options currently in widespread use, that
have considerably different objectives to mere cost sharing. The economic
of a ‘service company’ and that of an ‘unincorporated association’. A legal
environment is now competitive and competition is actively encouraged by
partnership would also be a possible structure, but with a substantial change
Government. The modern chambers must invest in marketing both itself
in the legal liability of members. In conclusion, the business environment
as an entity and its members, and this need to market requires strategic
is putting a lot of pressure on chambers to adopt a business structure that
objectives and planning to reach those objectives.
will facilitate the delivery of advocacy services which goes well beyond the sharing of mutual costs.
To practice in the current environment requires a sophisticated shared There is, in chambers, an increasing need for capital
Turning now to the tax perspectives associated with business structures, I
investment; for example, information technology systems. In addition, many
will outline the tax effects of the structures that exist in sets of chambers
chambers are of a substantial size and the management of human resources
and outline the consequences both for chambers and for its members.
administration.
is consequently a significant task. The first structure to consider is the cost sharing arrangement. It would There is increasing demand to supply a demonstrably effective service and
be a naïve approach to assume that all contributions by the members of
in some areas of practice clients will insist on Quality Mark and or BARMARK
a set were tax allowable, with maybe a different view being taken if a set
compliance. Chambers, therefore, face increasing overheads in order to
raises money for some specific capital item; for example a new computer
facilitate members’ practice. The quality assurance standards impose a
system. The reason for this being naïve is because where there is no trading,
requirement to have aims and objectives, both financial and non financial,
mutual or otherwise the Lochgelly principle applies (Lochgelly Iron & Coal
and a plan of how they will be achieved, together with a way of measuring
Company Ltd v Crawford [1913] CTC267). The effect of this principle is that
performance against the plan and systems to take remedial action when
a member is only entitled to a deduction of such part of their contribution
necessary. These standards which involve strategic planning and control are
that has been applied to allowable expenditure. This means that in a cost
nothing other than sound business practice.
sharing arrangement that part of contributions applied to items such as entertaining, capital items like computers, fixtures and fittings, and new
How then does business structure contribute to success?
A business
structure should facilitate the achievement of chambers’ aims and objectives. BARMARK and Quality Mark are not prescriptive as to structure and make
26
personal finance & wealth management supplement the barrister 2008
premises is disallowable. In addition, any part of a contribution that creates a surplus in chambers is also disallowed.
From the above it can be appreciated that members of chambers must
or more years surpluses being taxable in the first year of the arrangement.
be aware that if this is the structure of their chambers, they will need to
However, this must in fairness depend on the accuracy of earlier tax
know from chambers how much of their contributions are disallowable in
treatment. It also needs to be noted that the arrangements with HMRC are
order for them to be able to complete their Tax Return Forms. However, it
currently under review.
is administratively more complex than this. Where there is expenditure on items for which Capital Allowances are available, a member will need to know
The arrangement offered by HMRC offers significant advantages over a cost
their share of these so they can make their own claim for Capital Allowances.
sharing arrangement. Another advantage is that enquiries into members
In addition, making the information available can be very difficult where the
personal tax positions will be minimised. This is because where a member
year end of chambers does not coincide with that of the members, resulting
of chambers which operates a cost sharing structure is the subject of an
in two years accounts needing to be analysed and apportioned.
enquiry and the contributions to chambers are not properly split between the allowable part and the disallowable part, then every member of the
It might be assumed that one way out of the administrative complications
chambers could potentially be the subject of separate enquiries. However,
of this is to use a company as it is a legal entity. However, if there is still only
the apparent downside is having to adopt a more structured form of
cost sharing, there is still no trading and the Lochgelly principle still applies,
arrangement between the members. As discussed earlier, it seems that in
so members’ contributions will still need to be split.
a modern environment a more structured arrangement between members is needed in order to respond to the business environment in which the
The way out of the administrative issues of cost sharing is to have an
profession now finds itself.
arrangement whereby all the members’ costs are allowable in full and chambers is a taxable entity responsible for dealing with all the tax issues
If these arrangements are adopted this could also be a good time to
relating to non-allowable expenses, capital payments, and surpluses. There
incorporate the requirements of BARMARK and Quality Mark. Even if it is
are two ways of doing this. The first is to set up a service company that is
not proposed to adopt these quality marks formally, they are a good guide
actually trading, that is, supplying services for which the members pay.
to business practice. It is vital for any business to have explicit aims and
However, the cost transparency of a cost sharing arrangement would be lost,
objectives, a plan to achieve them and a control system to enable the plan to
and may cause existing members to have less control over their chambers.
be monitored and altered where necessary.
The alternative is to take up the arrangements with HMRC that are available to Trade Protection Associations. These arrangements are contractual and not
Changes to business structure can be a very emotive issue because it touches
statutory and are available to unincorporated associations and companies.
on issues of control and authority. If a member’s view is that he or she is a
The overall effect is to treat either an unincorporated association or a limited
sole practitioner sharing costs, he or she may not be happy having decision
company as a trading entity and tax it to Corporation Tax in its own right. To
making delegated. However, it seems to me that for many members, more
take up these arrangements there needs to be a formal constitution of the
will be gained by entering into a more formal structure in order to benefit
Trade Protection Association. A company, of course, will have this by virtue of
from being able to practise more effectively. To conclude this from the tax
its Memorandum and Articles of Association.
perspective, it is very important to ensure that the tax issues of chambers are dealt with effectively whatever the structure. To ignore this issue can lead to
The contractual arrangement referred to above has the substantial advantage
enquiries, with subsequent penalties and interest.
that it reduces the administrative burden associated with the members own taxation. Just as payments to chambers will be tax deductible unless they are loans, all receipts from chambers will be taxable receipts in the hands of the members and tax deductible in chambers own accounts. One interesting point is that payments from such an arrangement cannot be ‘dividends’
Jim Sweeney, F.C.A.
(taxed income) because this arrangement is not statutory. Chambers will
jims@swindellsandgentry.co.uk
therefore pay Corporation Tax on their ‘profits’ and be able to claim loss relief
www.swindellsandgentry.co.uk
for their losses. There are other accounting issues arising from entering these arrangements. How the financial arrangements between the members are accounted for or how surpluses for the year are apportioned to members, and how surpluses from earlier years are dealt with needs to be laid out in the constitution. There is also the issue of the taxability of surpluses made prior to entering the Trade Protection Association arrangements. HMRC may insist on three
personal finance & wealth management supplement the barrister 2008
27
Can financial advice really be impartial if the sole means of paying for it is through commission? The value in financial advice isn’t about selecting the cheapest possible product, or selling the next investment bubble in waiting. Value comes from developing financial strategies for people, which takes into account their circumstances, goals, and capacity for risk says Dennis Hall.
F
as the new set of carbon fibre clubs you’ve been eying, added to which it
Financial advice isn’t too dissimilar from my golfing analogy. There’s no end
involves several hours on the driving range and you’re itching to get some
to the number of self professed experts ready to proffer their advice, and
instant results that you can apply to your game. Oh and there’s the fact that
then there’s a whole financial services industry staffed with people ready to
you wouldn’t be able to afford the shiny new clubs as well.
help you buy a new financial product offering their advice on the basis that it will be paid for by commission. But I come back to my earlier point about
There was no contest really, you already knew deep in your heart that the
impartiality and question whether advice really can be impartial if the sole
shiny new carbon fibre clubs would give you the edge you were looking for,
means of paying for it is through commission.
and the few pointers that the golf shop pro gives you should be more than
or as long as I can remember, financial advice has, by and large, been
These “fee” agreements may well allow the adviser to use the independent
enough to improve your handicap once more.
The value in financial advice isn’t about selecting the cheapest possible
paid for by commission from the sale of a financial product, and that’s
label, but what about their impartiality? Surely by structuring fee
And so it goes on, each time you reach a plateau you invest more and more
product, or selling the next investment bubble in waiting. Value comes from
still the case today. It is understandable therefore, that for some there
arrangements that are linked to the size of a financial transaction, and not to
money into buying newer and better equipment. Each time you do, the
developing financial strategies for people which takes into account their
can be a mental block the first time they are asked to pay a fee for financial
the quality and quantity of advice, it creates a bias toward selling products. It
golf shop pro spends half an hour with you adjusting your grip and giving
circumstances, goals, and capacity for risk. It also should be about financial
advice. A mental block also appears to afflict many independent financial
is almost as though the adviser, when thinking through the fee structure, has
you more tips to bring some improvement your game, and besides, the
coaching and education, putting control back into the hands of the client,
advisers (IFAs) despite being obliged to offer their clients the option of paying
assumed that a product will be the desired outcome in every situation.
commission from the equipment sales pays for the advice.
ensuring that it does not sit solely with the financial services industry. Your financial adviser should not be trying to sell you the equivalent of a new
by fees. People who might be tempted to consider a fee based adviser will most likely
But what if you had chosen the other option, the option that didn’t rely on
set of clubs each they meet with you. Instead they should create strategies,
I mention this because I am confused by the difference between commission,
be attracted to the idea that the advice is both independent and impartial.
advice linked to the purchase of new products?
and then help you implement them as cheaply as possible, without a
and the fees charged by some financial advisers. They talk about a fee basis
But unless the adviser is fee only, meaning that commission is always rebated
and then describe something that sounds very much like commission? In
back to the client, there is a question mark over the impartiality. Yet for some;
You meet a different Pro, he doesn’t work in the shop so doesn’t earn
fact a significant proportion of advisers and their firms have taken, as the
paying for advice without using commission might be a leap of faith too far.
commission; he tells you what his fees are, and you blink; hard. Lessons are
Dennis Hall is a fee only Chartered Financial Planner with Yellowtail Financial
basis of their fee calculation, the old Life Assurance and Unit Trust Regulatory
Perhaps it would help if I shared an analogy that I use with our clients, to
not cheap. However you’ve made the commitment and so you hand over your
Planning.
Association (LAUTRO) commission formulas.
explain our thinking?
cash for a series of lessons. But you’re still not sure whether you’ve made the
commission to sweeten the deal.
right decision, particularly since you’ll need to continue playing with your old dull clubs for the rest of the year.
Consider the following extracts from some of the fee agreements I’ve seen
I turn to the world of golf to help me make my point, and the following is a
recently:
fair reflection of my own journey up and down the fairways.
A fee of between £100 and £290 for advice on insurance is payable prior to the
It’s actually relatively easy to get started in golf and there’s an endless supply
he wants to see what you can do. So he asks you to take a few shots, the first
advice, plus between 12 and 24 times the monthly insurance premium (e.g. for
of self professed experts who will tell you where you’re going wrong, and
few times without a ball. You’re a bit nervous under scrutiny, and you know
a £100 per month premium, between £1200 and £2400) on application, and
what to do to put things right. Sometimes the advice is good, after all just
you’ve picked up some bad habits, but eventually you settle down and you
we will use any fee [surely that should read commission] received from the
how many ways can there be to hold a club? But eventually you reach a point
hit a few reasonably decent shots, some a little bit left and some a little bit
provider to offset against your fees.
where reducing the number of strokes you play reaches a plateau. Unable to
right, but you’re happy enough. And then the pro asks you to step away from
improve your game any further you figure it’s time to spend some money, and
the tee.
It’s time for your first lesson, and the pro sets you up with a bucket of balls,
the extra distance promised by the new titanium thingamajig club would
or
improve your game considerably. Or you could take some lessons instead.
He takes the club from you, sets up a row of balls and then holding the club with just his left hand, he steps up to the tee. You watch in awe as ball after
• For lump sum investment solutions we would expect to charge an implementation fee of between 1% & 5% of the funds invested
With only limited time and money to deal with the problem, you’re forced
ball flies straight, true and at least fifty yards further than your best shot. It’s
• For regular savings or protection-based solutions, we would expect to charge
to make a decision between; better equipment or a series of lessons. The
clearly not the equipment that’s the problem.
an implementation fee which is broadly in line with the average market
options look like this; the golf pro working in the shop offers to analyse your
commission rates
swing, and he might even give you some playing tips before recommending a
Having seen what’s possible with a dull set of clubs and just a single handed
• Our normal annual servicing fee would be 0.5% pa of funds under
new set of clubs. He won’t charge you anything despite analysing your swing
grip you listen carefully as your coach deconstructs your swing and slowly
management for investment clients and 2.5% pa of the amount paid for any
on his fancy indoor golf swingometer, but he will make some commission on
begins to rebuild your entire game. It’s not instantaneous, and you sometimes
regular premium contract
the new set of clubs he sells you (which you happen to know are 30% cheaper
feel you’re going backwards. Old habits linger and it takes practice, but
• For ongoing planning & advice reviews our fee would be up to an additional
on the internet).
eventually it starts to fall into place. Moreover you feel more in control, you’ve been coached and you’ve been educated. You begin to understand why when
0.5%pa of the funds under management The other option is to spend some time and money on having a few lessons
you change the way you hold your club the ball flies differently.
and some individual tuition. The cost seems quite high, almost as much
28
personal finance & wealth management supplement the barrister 2008
personal finance & wealth management supplement the barrister 2008
29
From Pupilage to judge the legal career can be complex and financially erratic. By Julia Whittle, Principal, Punter South Financial Management
T
he nature of the legal profession doesn’t lend itself to effortlessly
retirement benefits can be taken by drawing income directly from the fund
created bountiful pension schemes, manicured financial advice with
rather than having to buy an annuity. This flexibility also has benefits for
carefully crafted tax mitigation strategies.
estate planning as well as phasing in retirement income as earned income falls. Finally, benefits can be taken any time after 55 years of age, with 25%
Lack of time, variable pay, and variety of employment status can mean that
tax-free cash and contributions qualifying for tax relief at the full 40%,
the legal professions are often least well catered for in terms of financial
assuming tax is being paid at that rate.
Group independent financial advice
£215,000 in his pension scheme grew by 9% last year in a relatively low-risk
Many Chambers now source financial advice for members as a facility, should
portfolio, which meant that, for virtually no cost, he had a return of £19,350
members wish to use it. There are good, reputable fee-based advisers available,
at the end of the year, rather than £378 through the regular premium route. If
experienced in working with a variety of different legal professionals. Advice
John had gone for the guaranteed option of investing his pension scheme in
days can be offered on specific subjects or as general advice at reduced rates.
cash, he then would still have produced £9,675, compared with £189 via the
This can make life easier and encourage positive financial decision-making
regular premium route (based on a cash return of 4.5% in both cases).
rather than the inertia many extremely busy professionals suffer from. This is a simple and effective route and maximises the 40% tax relief on Summary
pension contributions, while it is still available. Using contribution periods
Pensions considerations and extra benefits aren’t going to make or
innovatively allows further contributions for the eager beavers.
break Chambers but they may help make life easier for existing and new members.
planning education and support and end up despite a potentially sparkling income history with far less wealth created than they should have.
A group SIPP which could be arranged by your Chambers with portable pots allows barristers to have their own personal and private SIPP, but also
As with other professions, mobility is desirable, perhaps necessary, and the
benefits from the administration cost savings associated with a group
model of not hitting senior positions until 50 when children have grown
scheme. Even more useful is the option to use institutional-level asset
up no longer applies. In fact, many barristers don’t even believe they will be
management, allowing a reduced-cost structure and level of expertise not
practising at the age of 50 as the pressures are so great.
ordinarily available to individuals.
There should be something to ensure barristers are financially secure... While many Chambers have given such consideration to general staff, the common belief is that barristers will largely fend for themselves and that Chambers shouldn’t interfere. The reality is that barristers have more financial options open to them than many groups, but also the least time available with work and family commitments to consider them. While I’m not implying that pensions and benefits are going to make a significant difference to tenancies, they do play a role in retention and in the image of a modern, caring business environment.
Phil is a barrister who has acquired several different pension schemes over the CASE STUDY 1 Group SIPPs
years, as he changed careers and moved legal firm firms twice. He believed he
In 2002, Punter Southall Financial Management was asked to advise the
should keep his retirement annuity contract due to the availability of enhanced
members of a top ten firm’s friendly society, where funds were limited and
rates, but as he later found out, this had no effect on his circumstances. He
members exposed to significant equity risk, which was fine for some partners
had £150,000 in this scheme, which, within the with profits fund, achieving a
but not for those approaching retirement. We started providing bespoke fund
return of 3% pa. He has 12 years to go until retirement.
services to individual partners. Using asset allocation to manage risk more effectively meant we could aim for superior risk-adjusted return with lower-
He has two other pensions, totalling £100,000. Just by consolidating his
equity content for retiring partners, as well as something quite different for
benefits of £250,000 into a SIPP, he has improved his overall return over the
younger partners. Partners were extremely pleased and contributions
12 years by 3.5%, based on low-risk returns of 6%.Costs are also reduced by
financial planning.
rose significantly.
0.65% pa, as older schemes are often more expensive.
Legal Professionals have more financial options open to them than many
In most cases, the friendly society members had retirement annuity plans
The effect of this was his £250,000 had grown to £563,049 on retirement,
groups, but also the least time available to consider them.
or personal pension plans. The trustees agreed that each member should
rather than the projected return based on leaving the old scheme intact of
consider setting up a group SIPP with all of its inherent advantages and
£336,222 – an overall increase of 60%.
Borrowing to strategically plan for funding The new rules combined with the SIPP vehicle provide increased contribution freedom and a good deal of personal control for legal professionals in their
The benefits of borrowing to fund pension payments can provide a simple
flexibility. The issue of the more onerous compliance requirements for the
solution with the benefit of added value in terms of real returns.
older regimes adding to costs was also a factor. As a result of the change, funds increased from £5m to £15m, with greater flexibility and potential
So what could Chambers offer to make life easier ? There are many ideas out
Consolidating existing arrangements
there but the ones proving most popular are described below:
Many barristers have a myriad of old pension schemes: retirement annuity
• group SIPPs – individual portable pots with individual access
contracts, personal pension plans, even frozen final-salary remnants, often
• consolidation of existing benefits; with focussed investment management
including old style with-profits funds littered around to confuse matters. The
• protection;
general perception is that they are stuck with what they have, or that it is
• financial advice services.
CASE STUDY 2 Borrowing against partnership equity (for Partners)
too much hassle to change anything. This is not the case and a great deal of
John is a partner earning £250,000 and currently contributing £4,200 per
added value can be achieved by seeking clarity on the options available.
annum into his pension. He stopped funding his pension annually and
Group SIPPs – portable pots The pension freedom now available post A-day is ideally suited to legal professionals earnings. A SIPP (self-invested personal pension) is similar to a conventional pension in that it receives contributions and transfers from other arrangements with the aim of providing pension benefits. However, it differs in several ways. The fundamental difference, as the name implies, a SIPP does not have the investment choice of only one provider. It is, in effect, a wrapper which can contain any investment approved by Her Majesty’s Revenue & Customs for pension purposes. So the individual is free to choose the most suitable investments for their circumstances. Secondly, a SIPP offers flexibility –
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personal finance & wealth management supplement the barrister 2008
CASE STUDY 3 Consolidating existing arrangements
Partnership protection Many legal professionals will have life cover written as pension term assurance, which will now count towards their £1.5m lifetime allowance for approved pension savings, reducing their ability to make tax-efficient contributions to fund towards retirement. Where the aggregated value of the funds exceeds £1.5m, the estate could suffer a 55% tax charge on death. Although the lifetime allowance is going to increase, the issue for many people will remain. The question is: is it really worth getting 40% tax relief on relatively small premiums for the risk of penal tax charges on death? Barristers are often expected to arrange term assurance individually whereas arranging it as a group can significantly reduce costs.
returns for the members, while costs were reduced, as was partnership involvement in the management of the scheme.
borrowed to fund his £215,000 pa allowance. He borrowed in the form of an unsecured loan, negotiated by the partnership againsthis equity, which enabled him to qualify for tax relief on his interest payments. With typical lending of 1% over base interest only, he borrowed £129,000, which cost him £4,200 pa. He had to write a personal cheque for £38,700, which equated to the higher-rate tax relief he was shortly to claim back on his tax return, but his partnership released this balance from his tax reserve. So, in reality, John is continuing to pay £4,200 pa, but now has £215,000 in his scheme for the following year rather than £4,200 increasing annually. The
personal finance & wealth management supplement the barrister 2008
31
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April Showers- Taxation of Trusts after Finance Act 2006
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By Stephen Horton, barrister.
B
enjamin Franklin was known to say that “In this life nothing can be said to be certain, except death and taxes”1 and whilst we must all agree that you never can quite tell just what exactly is around the
corner, any good gambler will tell you that some things are such likelihoods as to be almost inevitable. We all know that we will get caught in the rain during April’s infamous showers, England will always lose a penalty shoot out and, another staple of April more in-keeping with Franklin’s views, the new tax year under a Labour government will bring with it the implementation of rules to close off formerly effective tax mitigation vehicles and this April was no different. This April saw the introduction of rules contained in the Finance Act 2006 which changed the inheritance tax treatment of trusts. With the sixth of October seeing the deadline for transitional relief in relation to the replacement of pre-FA 2006 interests, now is a good time to review these rules, look at how the taxation of trusts has changed and question whether tax planning with trusts is still effective in 2008. The Way Things Were – Old school tax mitigation before 22 March 2006
asset’s market value6. As such, in order to mitigate CGT settlors would seek hold-over relief in order to defer this notional gain. Before 22 March 2006 hold over relief was given limited application to life interest and accumulation and maintenance trusts but was more freely available for discretionary trusts. Hold over relief operates in such a way that under election, both by the donor and the donee, the donee can take the asset at the donor’s cost price so that the capital gain is not realised and thus not chargeable until the donee disposes of the asset. For discretionary trusts before 22 March 2006 hold over relief was generally available because the transfer was a non-arm’s length disposal which is a chargeable transfer for IHT and not a PET7.
Hold over relief for interest in possession or accumulation and maintenance trusts before 22 March 2006 was only available for particular types of
‘Business Asset’8 such as unquoted shares in trading companies and was, therefore, not widely available for these types of settlement. The Major Changes – What can we expect from new settlements?
Inheritance Tax Before 22 March 2006 a trust was an effective method of removing assets from an individual’s estate in order to mitigate inheritance tax (IHT) on death. For example on creating an interest in possession trust, i.e. one in which a beneficiary has an immediate right to the income accrued by the fund, the property was deemed for IHT to form part of the beneficiary’s estate2 so that
the termination or gift of this interest in favour of another would constitute a potentially exempt transfer (PET). Equally as important it was considered to be a PET on the part of the settlor and would be free of IHT should they live for seven years after the settlement was created3.
Gifts into an accumulation and maintenance trust, effectively a discretionary trust whereby trustees have the power to either accumulate the trust’s income or apply it for the maintenance of a beneficiary, were, until 22 March 2006 also PETs. The settled property would no longer comprise part of the settlor’s estate and provided that they survived a period of seven years would
be free from IHT. These types of trusts were not subject to any charges4 and as such were a popular method of passing assets on to children and grandchildren.
Inheritance Tax
Because the settlor and trustees are connected persons for the purposes
of capital gains tax5 (CGT), settlement of property into trust was, and is, a disposition otherwise than by way of a bargain made at arms length. Therefore the transfer is deemed to be done for consideration equal to the
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personal finance & wealth management supplement the barrister 2008
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Th antiq about veand draft Le s over import alisat in oppo wi the the ha private e e capit ff of et ag On ipl ing sta nc y. e old fewer boasts a mark concern ry of allow er areas, pri only do nt polic will fac d to had ve of vernme that no oth t they detail s prove ing ha . s in which l so As in into go d rights value sons bu is cost-cutt ment ha ende£74 crimina billion. nslated vate pri s extof Govern ditions ion. Th not tra n pri X secure er in the Labour members al pens s for the con intentio privatis ry, the p.21 ILEdience for its minim page onate contra e latest au cation re passi ries. Th phemism, the l impli To mo ld. rea a ve he the page be I eu n ld ha ers are u and proved field tha monds sons cou They prison , to yo the ap justice page Editor: Nigel Sim vate pri g. tisation to use ere pri rowdin ine.com 2715 g or priva vices. wh Ltd erc gaz – a din being, 766 ov t’ ion rma 0 gra in e are 087 rporat ing ou n ser @barriste the de ent Co The on y ence is probatio ‘contract email: info nagem against The re tightl a differ dia Ma munity a stand , HMP made yne ever mo ers: Me – of com made more prison rek Pa Publish people now 10 British ld have not to: ctor: De packing ing Dire Pritchard 000 tely run . There are opened cou y chose : Alan ent of Publish 423 st priva tead the ans more duction have 1992 treatm 01223 The fir but ins me the which ed in n and Pro ting Park Tel: t t ls of en sig 9 jai rke of tha op , De o s les e Prin the ma claim ention Wolds, nd Wa p.42 ed int Cambridg no int ers in in Engla e Home Office has encourag prison y had others Th and the ndards erators m fit op sta 1997. fro te ve pro ce sin priva impro the benefit out. ent of lped to enging missing s also involvem and has he by chall ere prison on estate me. Th research Private prison y field. innovati their ga at the re that oss the to up n in an ion. Wh right acr tor prisons to ensu decisio s assert sec wtel.com n means e for thi ry latest public nc ide od www.la l ev t m er s the ve is no rea include the mos
)NVESTING IN FINE ART AND ANTIQUES
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HE 4HE !TTRACTIONS OF T ENT DNA evidence in the !LTERNATIVE )NVESTM ESTION OF TRUST court ! QU room -ARKET !)-
39
mendations of Sir David Review of the Clementi’s Regulatory Fram ework for Lega Services. Its l aim is to put consumers of services at the legal heart of regu lation.
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Why experts need training
22
Immunity For ExpertsA Step Too Far
Criminal Justi ce: Another Ma jor Overhaul
law
The essence of all the changes following FA 2006 was that from 22 March 2006 all settlements would have the same treatment as discretionary trust settlements had before the changes. This means that instead of transfers into and out of trust being a PET and thus tax free upon the settlor surviving seven years there will be a charge of 20% of the value of the property in excess of the settlor’s available nil-rate band. So S creating a settlement above £312,000 will have to pay tax at 20% on the amount that exceeds that nil-rate band. Each settlement inherits the settlor’s cumulative total of gifts in the previous seven years as part of its nil-rate band. So, if S has made gifts equal to the value of £12,000 in the past seven years then he may settle property to the value of £300,000 without incurring a charge to tax. Each new settlement is also subject to a ten yearly charge9. This charge is on
will not exceed 6%10.
There is also a charge upon any of the property leaving the settlement, this includes the settlement coming to an end11.
Accumulation and maintenance trusts are now subject to stringent
Fea tur es CURIOUS TIME 8 JUST S FOR CRIM INAL ICE
What is going on? of rapidly falling Why, during a period is criminal justice official crime levels apparently mired almost perma in nent right about crimin crisis? Are ministers what are the implical justice failure? If so, ations? By Richard Garsid Centre for Crime e, Acting Director, and Justice King's College Studies,
12 THINKING ACROSS THE DIVIDE
Lord Carter’s report heralds a revolution in the way legal aid servic procured. Solicit es are ors and barris each been lookin ters have themselves, but g at the implications for to little consideratio date there has been n of the impac relationship betwe t on the of the legal profes en the two branches sion.
By Richard Miller, director, LAPG
14
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Alan Pritch Cambridge Printin g Park Tel: 01223 ard 42300
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st modern mea ns to ensure tha t research into the law incl udes the very latest decision in any field
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PUNISHMENT, PENANCE AND i]ZgZ id egdiZXi i]Z ZmeZgi Wji IMPACT: THE VAGARIES OF On 20th July, SENTENCING HomWZ e Secretary, i]^gY eVgin anno Xdhih XVc ^h id ZchjgZ i]Z ÆegdeZg VcY POLICY. uncedgYZg John d the lates Reid, of bulk t reorganisa processing centr ‘rebalancing’ Sentencing has tion, as he calle es Wgdj\]i V\V^chi hdbZWdYn l]d hbddi] VYb^c^higVi^dc d[ _jhi^XZ or never for parental comp minor offenders; been so popul d it, of the crim a media issue system ‘in favou ar ensation orde inal justice as during the r of the law abidi rs for those of 2006. What children aged summer lVh V l^icZhh VcY Vh V gZhjai d[ ng majoi]gdj\] djg aZ\Va hnhiZb with has not surfac 10-years-old rity’. reasoned discus ed or under who criminal dama sion of senten is a commit The rebalanci ge; principles and cing penal policies. i]Z bVccZg ^c l]^X] ng ]Z isdg h]Z base custody of serio speeding up the retur d on five key prote n to cting the publi us offenders priorities: c from violent conditions who breach By Professor victim of crim the Christine Piper, their licence; \VkZ Zk^YZcXZ s and communiti e; putting of Social Scien School community servi and extending es first; build ces and Law, confidence in ce. ing public University Brunel sentencing; a tighter grip offenders; and on all The simple, spee document itself dy, summary justice. contains no references to less than 34 The document the word ‘toug , which is over This h’ or ‘tougher’. contrasts mark contains 24 40 pages long, edly to just new proposals to caus one . This is just es of crime, reference short of the and that is three Hilar record set by a reference y Armstrong Michael How the mid-90s, p.20 UK Gove to ’s responsibi ard, in Exclu when he anno rnment lity for the Socia sion Unit and unced a reba of the system. to open up legal urges South Africa l the need for lancing services mark liaison. et More reform The main p.21 LAPG launc points in the hes Carter discu paper inclu additional 8,00 de an This forum ssion 0 new prison is the third places; unan decisions by major attem imous to refor the Parole Boar pt by New Labo m the criminal d before priso are released; ur justice system. ners attem that Parole Boar pt was in 1997 The first d members shou have experienc Editor: Nigel , with the publi e of being a ld the Crim Simmonds victim; no autom cation of e and Disor third-off disco 0870 766 2715 der Act, whic atic introduce unts for guilty email: info@barriste h d ASBOs, pare pleas; the end automatic relea rmagazine.com nting orders, to extended se at the halfway point on curfews, sex Publishers: Media sentenced to offender orde those drug four years or Management rs, more; the intro treatment orde Corporation Ltd Publis duction up hing rs and the Director: Derek p.30 setof the youth Payne justice syste Design and Produ m. It ction:
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the amount comprised in the settlement above the nil-rate band which it inherited from the settlor. The rate at which the tax is charged is calculated
Est. 19 99
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work is free from influence by their represent ative activities.
22
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The Bill sets out a number The Bar Coun of key features cil is legal system, of the to be which must an approved be upheld unde new regime. r the regu These include lator and has supporting the of law, improving rule already access to justic taken action e, protecting promoting the and to sepa interests of cons rate these umers, prom competition oting funct and promoting ions. The Bar adherence to professional the Standard principles. Thes s Board e principles inclu independence de was estab and integrity, lished at RUTH EVAN the duty to act best interests in the the S of clients and beginning of Bar Standard Chair of the confidentiality. are crucial princ s Board. These this iples for any year to take legal system. over the Coun cil’s regulator work. The membersh y If implemen ip was appo ted, the Bill Nola n inted on principles I]Z egdheZXi Servi d[ \^k^c\ Zk^YZcXZ will establish 6ai]dj\] gVgZan ZmegZhhZY and has no ces Boar a Legal the d to oversee conn ection repre sentative side. the work of “app roved l^icZhhZh ldgg^Zh bdhi ZmeZgi Y^gZXian! ]VkZ The Board’s remiwith the ZmeZgi regulators” to actl^icZhhZh in the publi (called “Fro t is Regulators” c interest. nt Line to by Clementi) The be Coun cong VcY ^i ^h cd ldcYZg# >c i]Z XVhZ ValVnh Zc_dnZY i]Z hVbZ . cil ratulated on is These appr regulators must setting us up oved so quick ensure ly. This will d[ E]^aa^eh k HnbZh :L=8 '((% that their regu ^bbjc^in [dg hj^i Vh di]Zg ensure that latory will we be running with full 8] P'%%)R i]Z Xdjgi gjaZY i]Vi l^icZhhZh# I]Z ^bbjc^in ^h cdi effectiveness p.6
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The Legal Servi ces Bill: The Bar Stand ards Board Pe The Draft Lega rspective l Services Bill carries forward of the recom most
and Law Co reases , 9, a inc s system In 199 nded ry damage recomme ents to the if the judicia n em er, the improv icated that ards fair seven ke aw last and ind not ma . For the the d uld ore uld wo ent sho ent has ign ply is not parliam Governm s and this sim years ndation recomme ugh , presidents good eno n, yer Langto ry Law Inju hard al Ric son By n of Per Associatio
14
ESS ENT IAL
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MICHAELMAS
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under a formula but for purposes of brevity suffice it to say that the amount Capital Gains Tax
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personal finance & wealth management supplement the barrister 2008
conditions for qualification for preferable tax treatment. Previously for an
Under the new rules a young person of 18 may be given significant amounts
accumulation and maintenance trust to qualify for preferential treatment
of cash or valuable assets and many are wary that these may not necessarily
one or more beneficiaries must have been entitled to the trust property or be
be used wisely, the new rules have removed this flexibility and security.
granted an interest before the age of 25, until that time the income must be
As far as tax planning is concerned, are settlements still tax effective regimes?
either accumulated or applied for the maintenance of the beneficiary and all
The answer to this question remains yes. The most effective utilisation of a
beneficiaries must have a common grandparent or the settlement must be
trust would be to create a discretionary trust within your available nil-rate
less than 25 years old. Whereas now the beneficiary must become absolutely
band, this can be up to £312,000 perhaps £318,000 if your annual exempt
entitled to the property at 18, grant an interest in possession at that age is
amount is still available or even double this amount between husband and
not sufficient .
wife. The creation of a nil-rate band trust such as this will allow the trust to
12
pay no or minimal tax throughout its life. New nil rate band trusts can be Because of the strength of opposition voiced to the government, when these
created every seven years and it would be wise to do so. Trusts which incur
changes were being developed, over beneficiaries potentially being given large
the ten yearly charges may exist for decades before an equal amount of tax
amounts of money at such a young age, age 18 – 25 trusts were developed.
will have been paid as would be on transfer upon death. This is especially
An age 18-25 trust is an accumulation and maintenance trust which was
true if the transfers into the trust are done on a tax efficient basis such as
such before the beneficiary reached 18 but allows absolute entitlement to be
gifts out of income or through the gifting of particular types of business or
to the ten yearly charging regime as described above but there are charges
but a trust is also a useful way in which hold-over relief can be utilised so
when the beneficiary becomes absolutely entitled after 18, on the death of
that assets can be passed on at their base cost to future generations thus
the beneficiary and on application of the trust property for the benefit of the
deferring CGT.
takes into the account the length of time since the beneficiary became 18 and
Despite the restriction of what was formerly a very effective tax mitigation
the inherited cumulative total of gifts in the seven years before it was created
vehicle, there are many ways in which trust settlements can be properly used
deferred until the beneficiary reaches 2513. Age 18 – 25 trusts are not subject
beneficiary14. The rate is reached through the application of a formula which
as discussed above15.
agricultural property which are subject to generous reliefs18. Not only this
to reduce a settlor’s potential tax liability. However, it must be said that the economic policy behind these changes have not properly allowed for the
Accumulation and maintenance trusts may also still be continued to be
potentially more serious social implications for young people receiving large
created in favour of bereaved minors in order to receive favourable tax
sums of money or controlling interests in businesses.
treatment however these can only be created under a will and not in
lifetime 16.
Where a beneficiary takes a new interest in possession they are no longer
1 The Works of Benjamin Franklin, 1817
deemed to take a beneficial interest in the underlying property unless it is
2 s.49 Inheritance Tax Act 1984 C.51 (IHTA)
conferred under a will or replaces a pre-March 2006 interest in possession
3 s.3A IHTA 1984
17
before 6 October 2008 . Whereas previously IHT would only have been
4 s.71 IHTA 1984
payable on the death of the beneficiary, now these trusts are subject to ten
5 s.286 (3) (a) Taxation of Chargeable Gains Act 1992 C.12 (TCGA)
yearly charges in the same way as discretionary trusts.
6 s.17 (1) (a) TCGA 1992 7 s.260 (2) (a) TCGA 1992
Capital Gains Tax All settlements created after 22 March 2006 may utilise hold-over relief as discretionary trusts do under s.260 TCGA 1992. Upon creation of the settlement the settlor may elect for the assets to be taken at cost price and upon the beneficiary becoming absolutely entitled to the assets both the beneficiary and the trustees must join the election to take advantage of the relief. However where the trust concerned is a settlor interested trust i.e. one in which the settlor has or may potentially receive a benefit, hold over relief is not available.
8 s.165 (2) TCGA 1992 9 s.64 IHTA 1984 10 ss.66 – 67 IHTA 1984 11 ss.65, 68 & 69 IHTA 1984 12 s.17 IHTA 1984 13 s.71D IHTA 1984 14 s.71E IHTA 1984 15 s.71F IHTA 1984 16 s.71A IHTA 1984 17 ss.49 & 58 (1B) IHTA 1984 18 ss.104 & 116 IHTA 1984
The Final Result – What effect have the changes had? From a policy perspective there is one aspect of the changes that has caused quite a stir far beyond any tax planning point which may have arisen, that being the fact that previously an accumulation and maintenance trust could be used by a settlor to pass on his estate to a child without the concern that a young mind could easily be swayed into frivolous dissipation of his assets.
34
personal finance & wealth management supplement the barrister 2008
personal finance & wealth management supplement the barrister 2008
personal finance & wealth management supplement the barrister 2008