the barrister
Personal Finance & Wealth Management
Supplement 2009
Shaped by events. Proven by history. Over the thousands of years that storms have passed this way, some rocks remain steadfast – shaped by events undoubtedly, but holding strong nonetheless. While the tempestuous times we live in now have left virtually no-one unscathed, for the most adaptable of us, they may carve out new opportunities. With the investments in our portfolio running at a material discount to their underlying net asset value, we believe we will find rich-pickings washed ashore once the storm has passed. Find out more about how we’ve performed over the last five, ten or twenty years at www.british-empire.co.uk or call 0845 850 0181 quoting BAM/1009 for our brochure. You’ll see how we’ve ridden out rough times before and combed the beach for value. Past performance should not be seen as an indication of future performance. The price of investments and the income from them may fall as well as rise and investors may not get back the full amount invested. The trust uses gearing techniques (leverage) which will exaggerate market movements both down and up which could mean sudden and large falls in market value. Please refer to the Key Features Document for further details of the risks affecting your investment.
Halifax Share Dealing Limited is the Administrator and Plan Manager for British Empire Securities and General Trust plc. Issued by Asset Value Investors Limited which is authorised and regulated by the Financial Services Authority. Subscriptions will only be received on the basis of the current Key Features Document for the British Empire Securities and General Trust plc. If you are in any doubt whether the investment is suitable for you, please contact an independent financial adviser. Halifax Share Dealing Limited. Registered in England No. 3195646. Registered Office: Trinity Road, Halifax, West Yorkshire HX1 2RG. Authorised and regulated by the Financial Services Authority, 25 The North Colonnade, Canary Wharf, London E14 5HS. A member of the London Stock Exchange and an HM Revenue and Customs approved ISA Manager. We may record telephone conversations to offer you additional security, resolve complaints and improve our service standards. Conversations may also be monitored for staff training purposes. personal finance & wealth management supplement the barrister 2009
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Contents: More moves towards Bank transparency By Andrew Watt, Managing Director, Tax Disputes & Investigations Alvarez & Marsal Tax
Why Gamble With Your Future? – The Importance of Top-Up Insurance
By Justin Fenwick QC Chairman Bar Mutual Indemnity Fund Limited
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The way in which we approach retirement, and the ideas people have about their later life are changing rapidly in the UK By Andrew Tully, Senior Pensions Policy Manager, Standard Life
Protecting Your Pension Tax- Free Cash By Jason Butler
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Tips on making the most out of your Foreign Income and Overseas Investments By Deepak Goyal, foreign exchange specialist at Currencies Direct
The 2009 Finance Bill and its impact on highly paid individuals By Patricia Mock, director in the private clients practice at Deloitte.
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Look for the silver lining
How to Reduce the 50% Tax Rate!
By Ann Gregory-Jones, director, Haysmacintyre
A final UK tax amnesty
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By John Cassidy, partner at PKF, explains HMRC’s ‘new disclosure opportunity’
By Amanda Fyffe, ACA, MAE, Senior Manager, RGL Forensics
Investment: getting it right
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By Richard Cragg and Andrew Penman of Smith & Williamson.
The UK has one of the most complex tax systems in the world and, following changes announced in this year’s Budget, the position is set to get even more confusing
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By Danny Cox CFP, Head of Advice at Hargreaves Lansdown.
Pensions and the recession
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By Andrew Tully, Senior Pensions Policy Manager, Standard Life
Whose Wealth is it anyway?
By Christine Ross is Group Head of Financial Planning at SG Hambros Bank Limited
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More moves towards Bank transparency By Andrew Watt, Managing Director, Tax Disputes & Investigations Alvarez & Marsal Taxand
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hree recent, momentous announcements by HMRC, one of which is ‘ground-breaking’, may well lead to a flurry of activity in Chambers over the next few months. Private Banks in the UK will be considering how to respond to the information notices which have been or about to be served on them under paragraph 2, Schedule 36 Finance Act 2008. The holders of offshore bank accounts and structures, who are the ultimate targets of these notices, will be considering their options as crucial and
March if made electronically. The six weeks additional time to pay will make electronic filing attractive where the payment due is substantial.
hitherto confidential information is handed over to the taxman.
favourable penalties. However, HMRC note that in practice unprompted full disclosures are likely to result in a reduced penalty of between 10% and 20% and therefore those with domestic disclosures will be little worse off, if at all, than those with undisclosed offshore income. This contrasts sharply with the ODF where domestic and offshore disclosures were given identical treatment. Such discriminatory treatment should be challenged vigorously.
In late August, HMRC provided further detail for an initiative to the effect that this autumn, UK taxpayers are to be given a second and last opportunity to disclose irregularities connected with offshore funds. The conditions attaching to the New Disclosure Opportunity (NDO) are very similar to those which governed the Offshore Disclosure Facility (ODF), launched in April 2007. • To be able to take advantage of the NDO, taxpayers must have some tax irregularity associated with an offshore bank account, property, asset or structure such as a trust, stiftung or anstalt. Disclosures must include all tax unpaid. • The intention to make a disclosure must be notified to HMRC between the start of the NDO from 1 September until 30 November 2009. Failure to comply with this fairly narrow time-frame will mean taxpayers cannot take advantage of the NDO. Such notifications in September must be made on paper and online or on paper in October and November. • Disclosures on paper can only be made between 1 September 2009 and 31 January 2010. From 1 October 2009 disclosures can be made on-line and only online disclosures will be accepted between 1 February and 12 March 2010 when the NDO period ends. Tax due on a paper disclosure must be paid by 31 January 2010 and by 12
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• Disclosures can be made either by taxpayers themselves or by their duly authorised agents • HMRC has said that wholly domestic disclosures will be dealt with under a different process and will not attract the same
• The penalty payable under the NDO will be 10% of the understated tax but if taxpayers received a letter from HMRC in June 2007 alerting them to the ODF, the penalty payable will be 20%. In practice it is unlikely be simple for HMRC to prove that such a letter was either written to or received by any particular taxpayer and attempts to impose this additional penalty should be resisted. If taxpayers notified their intention to make a disclosure under the ODF but failed to do so, they will be required to pay a 20% penalty under the NDO. Where the tax payable is less than £1,000 no penalty will be payable. • HMRC remains keen to highlight that no criminal proceedings have been taken against anyone who made a full and accurate disclosure under the ODF. Prosecutions arising out of the NDO are likely to be rare, perhaps only where it transpires that the funds arose out of criminality other than tax evasion. • HMRC will issue acceptance letters by 12 July 2010 in most ‘low risk’ cases. Where their assessment suggests a higher degree of risk taxpayers may have several
personal finance & wealth management supplement the barrister 2009
months to wait for a decision. The second highly significant announcement by HMRC impacts directly on its ability to test-check disclosures under the NDO. Before the ODF, HMRC made separate applications to a Special Commissioner for leave to serve information notices under s20 (3), Taxes Management Act 1970 (now repealed) on the main UK retail Banks. This was ultimately successful but was a lengthy and fairly complex process. HMRC did the same again with a further four banks in March 2009. However, there are a large numbers of banks trading in the UK and in order to avoid the difficulty of going before a Judge in the Tax Chamber of First Tier Tribunal with a large number of separate applications, HMRC has been given blanket authority to serve information notices on over 300 UK banks with an offshore presence. Lawyers acting for the banks concerned will undoubtedly consider the legality of the short cuts taken in this particular process. The third announcement concerns a landmark deal between the UK and Liechtenstein – the Liechtenstein Disclosure Facility (LDF) - which will have repercussions beyond these two jurisdictions. Details of the LDF are embodied in a lengthy Joint Declaration and an even longer Memorandum of Understanding. Its principal features are as follows• The facility will run from 1 September 2009 for those with an existing asset in Liechtenstein on that date. Where the asset in Liechtenstein is acquired between 2 September 2009 and the final compliance date of 31 March 2015, those affected may participate in the disclosure facility from 1 December 2009. •
Under the terms of the agreement,
financial intermediaries in Liechtenstein (FIs) will have a crucial role to play in identifying UK taxpayers who are ‘relevant persons’ and who are eligible to participate in the LDF. - Individuals who the FI knows have, on or after 1 August 2009, a residential
At Brewin Dolphin, every investment relationship begins with a blank sheet of paper and the individual. We’re independently owned and we’re free to tailor portfolios to the individual’s needs. Our investment managers have the freedom to choose from the whole investment market, as do their clients. There are no in-house funds to ‘push’ or sell and we’re happy to give advice that is not always in our commercial interests. So you’ll find the way we do things is rather different to the way some other companies do them, and you’ll see that it all stems from the simple philosophy that guides everything we do: that the first thing we earn is your trust.
LISTENING TO WHAT OUR CLIENTS WANT HELPS US TAILOR- MAKE EACH PORTFOLIO TO SUIT THE INDIVIDUAL. IN OTHER WORDS, WE LET YOU SPEAK BEFORE YOU’RE BESPOKEN TO.
www.dentonspensions.co.uk
brewin.co.uk For more information please contact us on 0845 213 1000 or at info@brewin.co.uk Brewin Dolphin is a member of the London Stock Exchange and is authorised and regulated by the Financial Services Authority No.124444.
address in the UK, or have been resident in the UK for tax purposes, or for whom a UK address has been given under Liechtenstein anti-money laundering legislation. • A company incorporated in the UK or which, on or after 1 August 2009, has been resident in the UK for tax purposes, which has a beneficial interest in a bank or financial portfolio account in Liechtenstein or in another corporate entity, partnership, foundation or trust managed in Liechtenstein. Taxpayers already under investigation for suspected serious tax fraud – whether under Code of Practice 9 or who has been arrested for a criminal tax offence - are not eligible to participate in the LDF. Those who have been investigated in the past and who did not declare their Liechtenstein assets will be eligible to participate but will be subject to a significantly higher penalty • Having identified those who are eligible, the FI will be under a duty to inform the person that it has 18 months at the most either to satisfy the FI that it is not a ‘relevant person’ or to provide a certificate showing that it has registered with HMRC its intention to make a disclosure under the LDF and in due course a certificate from HMRC confirming that it has fulfilled its disclosure obligations. If the FI does not receive these assurances, it will be obliged to stop providing corporate and banking services to the UK individual or company. If the FI feels that compliance with this obligation make it liable to legal action for breach of its fiduciary duties, the Liechtenstein Government will review the situation and direct the FI accordingly. Ultimately HMRC has the right to obtain details of how that decision to make such a direction was arrived at.
where unpaid tax for up to 20 years will be recoverable, tax payable under the LDF will be limited to the years on and after 6 April 1999 (1 April 1999 for companies). Most importantly, taxpayers with a bank account outside of the UK and Liechtenstein which was not opened through a UK branch or agency, and unpaid tax liabilities covering more than 10 years, will be able to transfer that account to a financial institution in Liechtenstein and make their disclosure under the more favourable terms of the LDF. Clearly these assets would not be disclosable under a Schedule 36 information notice and HMRC has concluded that offering such favourable treatment represents the best hope for recovering at least some of the unpaid tax which is due. • Anyone eligible to take advantage of the LDF will have the option either to pay a single composite rate of tax of 40% of all omitted income, profits and gains to cover all UK taxes with no reliefs or other deductions; or, if more favourable, to calculate the actual liability in respect of each tax. This option can be exercised for each year in respect of which a disclosure is being made. Interest will also have to be paid on the unpaid tax and a penalty of 10% - or 20% where the taxpayer was notified of the ODF in June 2007. The full amount due has to be paid when the disclosure is made but HMRC will consider offers of instalment payments subject to evidence as to means and offers subject to timing of the sale of assets • Individuals, whose offence amounts to no more than ‘innocent error’ will have to pay no more than 6 years’ back tax and no penalty will apply. This is in marked contrast to the terms of the NDO.
• As an alternative to making a disclosure under the LDF, the ‘relevant person’ will be required to prove it is not liable to UK tax or is totally compliant with its UK tax obligations. Such proof can be given in various ways including notarised copies of tax returns and written confirmation by a UK qualified legal, tax or accounting adviser that it is compliant in the UK or has applied to make a disclosure under an HMRC disclosure facility.
• The LDF states explicitly the circumstances in which non-prosecution is guaranteed whereas the NDO is slightly ambivalent on that issue. Those who make incomplete disclosures may have their names published on the HMRC website in accordance with the provision in Finance Act 2009. The LDF also allows taxpayers and their agents to initiate discussions with HMRC on a no-names basis. Such discussions were outlawed years ago and there is no such provision in the NDO.
• In due course, in order that HMRC can be satisfied that full disclosure of unpaid liabilities has been, and continues to be made, banks’ and trust companies’ compliance with these obligations will be subject to periodic audit by HMRC. Unlike under the NDO,
To further demonstrate their commitment to tax transparency and to comply with obligations set by the OECD, Liechtenstein has entered into a Tax Information Exchange Agreement (TIEA) with the UK, This agreement, means each jurisdiction will be able to make specific
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personal finance & wealth management supplement the barrister 2009
tax information requests of one another. In due course, the two countries have expressed their intention to enter into a Double Tax Agreement. There is no question that these arrangements between the UK and Liechtenstein constitute a landmark agreement. We’ll watch with baited breath to see if there is a domino effect which leads to other so-called tax havens following suit.
Andrew Watt Managing Director, Tax Disputes & Investigations Alvarez & Marsal Taxand 1 Finsbury Circus London EC2M 7EB Tel: +44(0) 207 715 5214 Fax: +44(0) 207 715 5201 Mobile: +44(0)7770 221051 Direct email: awatt@alvarezandmarsal.com
personal finance & wealth management supplement the barrister 2009
Why Gamble With Your Future? – The Importance of Top-Up Insurance By Justin Fenwick QC Chairman Bar Mutual Indemnity Fund Limited
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lsewhere in this supplement, you will find helpful guidance on many aspects of personal financial planning, from investments to pension arrangements. Most barristers take those matters seriously. Yet the statistics show that a large number of barristers are risking their future financial security by taking out inadequate professional indemnity insurance, year after year. When questioned, the majority of these would respond with the words “too difficult”, “too expensive”, or “why would I need it?”. This article seeks to put the debate into perspective. BMIF was set up over 20 years ago as a mutual insurer to provide accessible, affordable indemnity cover to the entire profession. However, its objective was always to cover small to medium sized claims, which comprised the vast majority of claims against barristers, rather than very large claims. That basic cover was for a minimum of £250,000.00, rising to £2.5 million, depending on income. Although for many years BMIF offered cover of an additional £2.5 million over and above the first £2.5 million, that risk was always fully reinsured. When I first became Chairman of BMIF 10 years ago, I was surprised and concerned to learn how little top-up insurance was purchased by members of the Bar. It soon became clear that one reason was that the providers of top-up insurance were not well known or always easy to get in touch with and there was a lack of awareness of the available sources of excess insurance. In order to remedy this, BMIF forged links with two brokers offering a programme of top-up insurance for barristers. As a result, for several years, barristers have been able to obtain a quotation for top-up insurance from either or both of these brokers simply by ticking the appropriate box in their renewal form. This has led to a significant increase in the number of barristers taking out top-up insurance. However there are still many who do not. In addition to now being readily available, by ticking a box, top-up cover is also offered at remarkably competitive rates. The premiums for top-up cover, except for those with a significant claims history or certain practitioners at the tax bar, are at a fixed price for each layer, which is not affected by area of practice, fee income or claims
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history. By comparison to those available for other professionals, the premiums are also extremely low.
then the losses in all 1,000 transactions may be aggregated and treated as one claim for the purposes of the limit of cover.
Many readers may however still point out that all of this does not answer the question of why they should need top-up cover at all, let alone cover at the higher levels available, currently up to a maximum of £100 million per claim. Although most claims remain small, in recent years there have been an increasing number of large claims where the potential exposure is significantly above the level of cover offered by BMIF. That experience reflects claims against other professionals; in particular solicitors where the largest claims notified have risen from about £50 million to almost £2 billion over the last few years.
Secondly, it is surprising how often barristers overlook the fact that professional indemnity cover is provided on what is known as a “claims made” basis. That is to say, even if the negligent error was committed several years before any claim was made, it is the professional indemnity policy for the year in which the claim is made which is relevant and which will respond, rather than the policy for the year when the error was committed. As a result, barristers need cover which will protect them not only in respect of the work that they are currently carrying out but also in respect of advice they have given in the past. With the provisions in section 14A of the Limitation Act 1980 permitting claims to be brought long after the expiry of six years in certain cases, or where the barrister has acted for infants or those under a disability, it can be seen that when fixing their level of cover for any given year, the barrister needs to take into account work done over the last six years and even longer.
As well as becoming larger, claims against barristers in commercial disputes have become more frequent. In an increasingly litigious society, claims against professionals, although once a rarity, have become commonplace and the sweeping away by the House of Lords in Hall v Simons of the protection once afforded to barristers has encouraged claimants to view barristers as potential targets. Although a barrister’s best protection is as always to exercise skill and care and to keep good records, including written notes of advice given, coupled with the robust defence of unmeritorious claims by BMIF, I predict that large claims against barristers are likely to increase over the coming years, particularly in the fall-out from the current financial crisis. When deciding how much top-up cover is needed, care must be taken to consider the range of likely claims. Although a broad brush approach of either “50 X the highest earnings in the last six years” or “as much as you can afford” may offer the simplest way, there are a few specific points worth bearing in mind. Firstly, there are the provisions for “aggregation” in the terms of cover. Although the size of individual transactions on which a barrister gives advice may be comparatively modest, it is important to remember that if more than one transaction is based on the same error, all claims arising from that mistake may, depending on the facts, be aggregated so that only a single limit of indemnity is available. To take a simple example, if a barrister negligently drafts an agreement for the hire purchase of a photocopier, and that draft agreement is used in 1,000 transactions,
personal finance & wealth management supplement the barrister 2009
Finally, and on a similar note, barristers should be wary of falling into the trap of assuming that once they have retired or gone on the Bench, they no longer need to worry about top-up insurance. Despite receiving a letter from me on their retirement from the bar stressing the importance of adequate run-off cover, a surprising number of those leaving practice opt to reduce their cover to the minimum of £500,000, to reduce their premium. Many others fail to extend their cover after the first six years when claims under Limitation Act section 14A or by infants remain a real possibility. The proper advice to those retiring is that that is the time when they most need top-up cover to protect them, as their income is likely to be significantly reduced and an underinsured claim would be potentially devastating. The real benefit of top-up insurance is that if you insure adequately, you should be able to face the risk of a claim, however unlikely, with the peace of mind that comes of knowing that you have sufficient insurance protection either to meet any claim, however unlikely, in full, or at least to persuade any claimant not to pursue you beyond your limit of insurance. Commercial claimants are unlikely to have much pity on those whom they consider to be inadequately insured.
The way in which we approach retirement, and the ideas people have about their later life are changing rapidly in the UK By Andrew Tully, Senior Pensions Policy Manager, Standard Life
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he traditional position where people worked for one company for forty years, received a gold watch on the Friday of their 65th birthday, and retired on the Monday is long gone. Increasing life expectancy, reducing state pension benefits, the inadequate private pension that many people have, along with changing retirement patterns suggest increased retirement income flexibility is required to match people’s needs and desires. Recent research carried out for Standard Life1 shows that many of the stereotypical ideas that society has about old age are flawed. Most people believe that the ‘time of our lives’ is when we are between 18 and 25 years old, when there is lots of fun and socialising, time to play sport and participate in hobbies and, generally, be adventurous. Retired people are often perceived to lead dull and unadventurous lives. But our research found the opposite to be the case. In reality, over 55 year olds are most likely to be active in the community, most likely to be travelling abroad and least likely to be lonely. Of all age groups, over 55s are most likely to be happy and content. In contrast, 18 to 25 year olds are most likely to be lonely and have financial worries. So what do people approaching retirement need, and what desires do they have for their future? One in three 46-to- 65 year olds want to keep working in new jobs, ‘on their own terms’, after the official retirement age2. This can mean different things to different people – there are a growing number of people easing their way into retirement through part-time working. Others want to start a brand new business. VSO, the overseas development charity, recruits ten times more people aged over 50 than twenty years ago, illustrating that people are choosing to use their skills and experience in different ways. And it’s not just work where things are changing. Two-thirds of more affluent 46-65 year olds plan to travel more in their longterm future, compared to 23% of their parents’ generation who planned to do likewise. While nearly a third want to learn a new skill, such as a useful hobby or new language2. The good news is that we are healthier and will live longer than previous generations. For the first time in the UK, the number of people over retirement age now exceeds the number of children. By 2050, it’s predicted that 65 year olds will live another 30 years, on average. A rapidly ageing population has implications for every part of our society, not least of which is how our economy evolves to remain sustainable.
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One consequence we will see is changes to our state retirement benefits system. State retirement age for women will gradually increase from age 60 to 65 over the next decade. And then it will further increase, for everyone, to age 66 in the mid-2020s, 67 in the mid-2030s and to 68 in the mid-2040s. Other Government announcements point in the same direction. Currently employers can prevent employees working past age 65, even if the individual wants to continue. But the Government is bringing forward a review of this default retirement age to 2010, with strong indications the restriction will be removed, and people will be able to continue working as long as they want to. All of this points to a new age of retirement. Employers won’t dictate retirement ages. Instead, people will be able to carry on working for as long as they want to, or need to. The financial services industry needs to find a way to provide the flexibility people will want and need as they deal with this new reality. Our research shows that the baby-boom generation want to travel, work, even launch new business ventures. But as well as being personally ambitious, people may also need to provide for financial dependants, such as their childrens’ university fees or parents’ care. These are complex financial needs but there are certain pension products which allow income to be taken when people want and need, switched on and off, as well as reducing or increasing as circumstances change. Self invested personal pensions (SIPPs) are one solution which may help people approaching retirement. SIPPs are known for giving people more control and flexibility around their investment options, including commercial property, bonds, shares, pension funds and mutual funds. And it’s easy to consolidate a number of other pensions into one SIPP to simplify your arrangements, and make it easier to keep track of your pension. SIPPs also give more options as people start to take their pension benefits. Since 2006, people can take some, or all, of their tax-free lump sum - normally up to one-quarter of their pension pot - without having to take any income. This lump sum can be used to help baby boomers set up a new business, pay off debt, help children through university or fund that holiday of a lifetime, with any remaining amounts continuing to be invested. Another way SIPPs can help people near retirement is by gradually phasing their pension income. SIPPs allow you to draw an income from your pension pot, rather than
personal finance & wealth management supplement the barrister 2009
buy an annuity. In fact, the pension tax rules don’t require you to draw an income at all. You can leave your pension fund invested as long as you want. This can help people who want to gradually ease into retirement - moving to part time working will usually see earnings fall - or who have other sources of income. While they may not want, or need, their whole pension income, taking some to top-up their part-time earnings can be very useful. And having the ability to vary this income up and down means that people can cope with ongoing changes to their working patterns. One point to note concerns the minimum age for taking pension benefits which will rise from age 50 to 55 from 6 April next year. For example, someone born on 7 April 1960 could have started drawing their pension from their 50th birthday on 7 April 2010 before these changes were introduced. Now, they will have to wait until 7 April 2015 – their 55th birthday – before they can touch their pension. Everyone reaching age 55 on or after 6 April 2015 is affected in the same way. In truth, few people can afford to retire completely on their 50th birthday, but as the line between work and retirement becomes blurred, some would like to access part of their pension. Anyone aged between 50 and 55 on 6 April 2010 who wants access to their lump sum or income may need to take action before April next year. SIPPs are one step towards providing for the flexible future that baby boomers aspire to. Put simply, people don’t grow old like they used to. Generation by generation we are living longer and the over 65s will be healthier with greater ambitions for their future than ever before. If we can make the connection between aspirations for retirement and the products available for long term saving, we will help people achieve their goals and also reduce reliance on subsequent generations. Sources 1 Standard Life research, May 2009 2 Standard Life research, January 2009 Tax and legislation are liable to change. This information is based on Standard Life’s current understanding of law and HM Revenue & Custom’s practice. Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circumstances. No guarantees are given regarding the
The articles in this supplement are intended for general information only and should not be construed as advice under the Financial Services and Markets Act
Would you like an expert to worry about your insurance for you? We’d like the job At Sydney Charles you will find a level of service more usually experienced at a Saville Row tailor or Ladies fashion boutique. Sydney Charles Insurance Advisers work with a select group of top tier insurers to match insurance cover to the individual needs of each client. We cover all insurance requirements under one roof from personal assets to business interests. Through our insurance contacts we can directly arrange the writing of bespoke policies. And we guarantee you personal service through your individually appointed insurance expert.
Not all insurance is equal The interests, assets and lifestyle of professional people are so diverse that mainstream insurers can find it difficult to provide the correct insurance cover to meet their individual needs. DIY insurance policy hunting often means a lonely voyage into a sea of hold music, anonymous call centres and unnamed operators demanding the 5th letter of you mother’s maiden name before they are able to discuss a policy with you. At the end of the process you may find your basics covered. However, when you want to make changes to your Fine Art collection, buy another Antique or find a new “Over and Under” for the Gun cabinet., the limitations of the policy can leave you without any cover at all. More alarming is the fact that some people get so fed up trying to obtain cover that they give up. Over time the urgency to adequately insure their assets dissipates as it is all put off until they have enough ‘spare time’ to deal with it. Unfortunately, in the experience of some clients who have subsequently sought our advice, this route is fraught with danger. Their ‘sorting out’ day never appeared and they found themselves unprotected or with inadequate cover when they needed to claim.
We look behind the hype Mainstream insurance companies also use marketing tactics such as TV advertising to persuade people to think simply about the ‘competitive’ premium rather than thinking properly about whether the cover they are buying is fit for purpose.
A policy like this may provide adequate cover for the average man in the street as they fit the customer profile for the policy. However, problems arise for individuals who have outgrown this mainstream profile and find that the insurance offered no longer meets all their needs. Sydney Charles Insurance Advisers was set up to respond to the needs of Professional people, such as Barristers and QC’s whose lives, families and assets have outgrown a typical mainstream insurer’s straightjacket. Your personal broker at Sydney Charles will provide you with individually tailored, reassuring levels of cover across all your private and commercial insurance needs. We provide each of our clients with an expert insurance broker who can navigate them through the sea of insurance products. They are available face to face, through their direct line, mobile or email.
How we can help At Sydney Charles we make the process of insuring your family, yourself and your assets simple, quick and easy. Each of our clients is allocated a personal broker who can be contacted seven days a week concerning any matter relating to any of their insurance needs. For some busy clients we manage their renewals for all their policies in one annual phone call.
• Synchronise renewal dates across your policies making the renewal process quicker and simpler for you. • Present our insurers with a portfolio of policies for negotiation rather than negotiating each policy individually. Our qualified brokers have over 50 years experience and a vast wealth of insurance knowledge from Fine Art, Antiques and Domestic & International Property to commercial Directors’ & Officers’ and Professional Indemnity insurances. Our expertise is available to handle your insurance needs, what ever they may be.
Our Exclusive Offer We are offering the readers of the Barrister a free personal insurance consultation. To take advantage of this offer please call and quote BAR09. You can also contact us for any other insurance advice. Please contact Philip Lepp, MD, or Sophie Jones, General Insurance Manager, on 01481 739970.
Let us take care of everything you’ve worked for
Once appointed your broker manages your particular mix of family, personal and commercial insurance protection. The same broker takes care of your insurance needs from policy inception to renewal and should you need to claim then the same person will handle it. By organising our service in this way your broker can take a holistic view of your insurance needs which means we can deliver great value for you as we; • Ensure the cover you are buying is the cover you expect. • Negotiate for you with the top tier of insurers. • Have access to bespoke, broker only policies not available elsewhere on the high street. • Eliminate duplication of cover between your policies.
Sydney Charles Insurance Advisers Limited, Maison Allaire, PO Box 612, Smith Street, St Peter Port, Guernsey, GY1 4NZ General Enquiries: info@scial.co.uk Please quote BAR09
Protecting Your Pension Tax- Free Cash By Jason Butler
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ew pension rules were introduced in April 2006, with the objective of ‘simplifying’ what had become an extremely complex pension world. The new rules set relatively simple criteria for maximum contributions and benefits, including the amount which may be received as a tax-free lump sum. However, for those individuals who had accrued pension benefits, prior to 6th April 2006, which provided more generous benefits than the new rules would otherwise allow, special ‘transitional’ protection was available. One aspect of this transitional protection, which is not very well understood, relates to the impact on tax-free lump sum benefits, now known as the pension commencement lump sum (PCLS). There are four types of PCLS protection: 1.Scheme specific – where the lump sum is greater than 25% of the fund value but no other benefit protection has been applied for; 2. Transitional protection for standalone lump sums - where there are no other pension benefits and no formal protection has been applied for; 3. Where primary protection has been applied for and the pre-6th April 2006 lump sum is > £375,000 (i.e. >25% of the then lifetime allowance of £1.5m); 4.Where enhanced protection has been applied for and the pre-6th April 2006 lump sum is > £375,000. What follows is a simplified explanation of the way that transitional protection works and the implications for future investment and financial planning.
1.Scheme specific – where the lump sum is greater than 25% but no other benefit protection has been applied for In this scenario the total value of tax-free cash available on 5th April 2006 is increased in line with the growth in the lifetime allowance (LTA) of £1.5m from 6th April 2006 to the date benefits are taken, PLUS an additional amount based on the growth of the scheme’s assets. The formula used to calculate this entitlement is: Lump sum available @ 5th April 2006 (indexed
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by LTA) + (25% x [retirement fund – 5th April 2006 fund (indexed by LTA)]).
alone lump sum benefits is made; or • If the fund paid as a pension.
The ultimate amount of tax-free cash entitlement will depend on whether the pension fund experiences good or bad future growth. Let’s look at an example of good fund growth. Mike Jones had a fund of £900,000 on 5th April 2006 and a lump sum entitlement of £600,000. He takes benefits in 2010/11 when his fund is worth £1.6m. The
maximum lump sum he may take is £850,000 [i.e. £600,000 x (£1.8m/£1.5m)] +
Let’s consider the example of Jane Swift, who has an executive pension plan from a previous employment. The plan was worth £500,000 on 5th April 2006 and Jane had an entitlement to take the entire fund as a tax-free lump sum at that time. The fund grows to £1.5m when she comes to take benefits. Even though lifetime allowance has only grown by 20% (from £1.5m to £1.8m) over that period, Jane can take the entire £1.5m fund value as a taxfree lump sum.
(25% x [£1.6m - (£900,000 x (£1.8m/£1.5m)]. Let’s now take the same scenario but assuming poor fund growth. Mike had a fund of £900,000 on 5th April 2006 and a lump sum entitlement of £600,000. He takes benefits in 2010/11 when the fund is worth £1m. The
maximum lump sum he may take is now £720,000 [i.e. £600,000 x (£1.8m/£1.5m)] +
(25% x [£1m - (£900,000 x (£1.8m/£1.5m)]. Higher fund growth will, clearly, allow Mike to take a higher lump sum. In this situation it might be better for growth assets to be held within the pension fund and more defensive assets to be held on other wrappers, such as an offshore bond or ISAs.
2. Transitional protection for standalone lump sums - where there are no other pension benefits and no formal protection has been applied for In this scenario the entire fund must qualify as a lump sum on 5th April 2006 based on HMRC rules for occupational schemes applying at that time. This means that 100% of the entire fund value can be paid as a tax-free lump sum, whenever benefits are taken. However, protection is lost if: • ‘Relevant benefit accrual’ occurs (which means that additional contributions are made or defined benefits are increased above a small amount); • If pension benefits are not taken in their entirety (i.e. benefits are ‘phased’ over several months or years); • If a transfer IN or OUT of other than stand
personal finance & wealth management supplement the barrister 2009
Where stand alone lump sum protection applies, it therefore makes sense to maximise returns, as, under current rules, the entire amount would be available as a tax-free lump sum. A transfer of a poorly performing or investment-restricted plan to, say, a selfinvested plan to improve the chances of higher returns is possible but this must not be mixed with non-stand alone lump sum benefits and benefits must be ‘activated’ all in one go.
3. Where primary protection has been applied for and the lump sum on 5th April 2006 is > £375,000 In this scenario the amount of tax-free lump sum entitlement as at 5th April 2006 is protected and is indexed by the growth in the lifetime allowance (LTA) from 6th April 2006 until the date benefits are taken, i.e. the lump
sum is not calculated as a percentage of the fund. The calculation is: Pre-5th April 2006 lump sum x (current LTA/£1.5m) = maximum lump sum. For this reason if the pre-5th April 2006 lump sum is > 25% of the fund, it could become < 25% of fund on crystallisation if the fund grows faster than the LTA. It should also be noted that no tax-free lump sum is available from any pension contributions made after 5th April 2006. To illustrate how this works in practice, let’s consider Barry Meads, who has an executive pension plan (EPP) worth £3m on 5th April
2006 with a lump sum entitlement of £2m (based on HMRC occupational pension funding rules applying at that time). Barry applied for primary protection plus lump sum protection of £2m. He takes benefits in 2010/11 when the LTA is £1.8m. The maximum lump sum he may take is therefore £2.4m (£2m x £1.8m/£1.5m).
on 5th April 2006 and a lump sum entitlement under HMRC rules at that time of £1.5m. He applies for enhanced protection and lump sum entitlement of 50% ((£1.5m/£3m) x 100). Darren’s fund is worth £5m when he takes benefits, therefore his maximum lump sum entitlement is £2.5m, being 50% of the whole fund.
Let’s now look at the case of Mandy Withers, who has a personal pension which was originally funded by a transfer from an occupational scheme, with a ‘certified’ amount of tax-free lump sum. Her plan was worth £2.4m on 5th April 2006 and there were no protected rights benefits (i.e. the value of invested rebates arising from contracting out of the state second pension or – previously - SERPS). The certified amount of tax-free cash on 5th April 2006 was £0.5m and Mandy applied for primary protection and lump sum protection of £500,000. She takes benefits in 2010/11 when the LTA is £1.8m. The maximum tax-free lump sum is therefore £0.6m (£0.5m x £1.8m/£1.5m).
Or consider the case of Sophie Farrow, who had £2.4m in a personal pension on 5th April 2006. The plan was funded from a transfer of occupational benefits and thus the lump sum entitlement under HMRC rules on 5th April 2006 was £480,000, i.e. 20%. Sophie applied for enhanced protection and lump sum entitlement of 20% ((£480,000/£2.4m) x 100). Her fund is worth £3m when she takes benefits and the LTA is £1.8m. Therefore her maximum lump sum entitlement is £600,000, being 20% of the whole fund.
We now know that the pension lifetime allowance will be frozen for five years after 2010/11. This increases the likelihood of high investment growth converting a lump sum entitlement that was > 25% on 5th April 2006 into one that is < 25% and also of the entire fund breaching the indexed lifetime allowance. A more defensive pension investment strategy might therefore be more appropriate, perhaps balanced by holding growth assets either in one’s own name or another wrapper, such as an investment bond or ISA.
4. Where enhanced protection has been applied for and the pre-6th April 2006 lump sum is > £375,000 In this scenario the lump sum is protected as a percentage of the fund as at 5th April 2006, not the cash amount as it is for primary protection. The formula is: [(lump sum on 5th April 2006/fund on 5th. April 2006) x 100%]. The eventual lump sum entitlement is calculated by applying the resulting percentage to the fund when benefits are taken. The lifetime limit is not relevant as enhanced protection applies. Let’s look at the example of Darren Jones, who had £3m in a pre-March 1987 executive plan
understanding of pension rules and investment principles are not just desirable but essential when formulating a plan of action. If your eyes are glazing over by now, don’t worry, there are professional advisers out there who understand (and even love) this stuff. A small investment in their fees might be the best investment you ever make so that you can get your hands on as much tax-free cash from your hard earned pension, when the time finally comes to turn on that pension tap. Jason Butler is a Chartered Financial Planner and Investment Manager at City based Bloomsbury Financial Planning. He has twenty years’ experience in advising successful individuals and their families on wealth management strategies. Jason can be contacted on email: jasonbutler@bloomsburyfp.co.uk Tel: 020 7194 7830
In this scenario maximising fund growth clearly makes sense as the fund is protected a g a i n s t exceeding the lifetime allowance and the lump sum entitlement is preserved as a percentage of the fund. LAWRENCE GRANT Help is at hand For the lay person with significant p e n s i o n benefits prior on 5th April 2006, far from being simplified, the options available can be complex and are highly sensitive to the chosen investment s t r a t e g y pursued. A thorough knowledge a n d
CHARTERED ACCOUNTANTS TO THE BAR With some 20 years of experience in barristers’ tax and accounts affairs, we would be delighted to assist you in paying the least amount of tax permissible by law and keeping your tax house in order.
We offer a fixed fee scale which has gone unchanged for over a decade! Call, fax or e-mail us for our FREE Barristers’ Tax-Deductible Expenses Checklist. Lawrence Grant, Chartered Accountants, 2nd Floor Hygeia House, 66 College Road, Harrow, Middlesex HA1 1BE. Tel: Fax: E-mail: Web: Contact persons:
020 8861 7575 020 8863 9198 lgmail@lawrencegrant.co.uk www.lawrencegrant.co.uk Graham Busch or Justine Davies
personal finance & wealth management supplement the barrister 2009
13
WEALTH MANAGEMENT The Personal Wealth Management Service As a Senior Partner of the St. James’s Place Partnership, I offer a personal bespoke wealth management service. I provide face-to-face advice and specialise in meeting the financial needs of people who have successfully created capital, or who earn higher incomes, and whose circumstances and requirements can be more complicated than usual. Whether a simple issue, or a complex multi-faceted problem, I provide wealth management on an individual basis, bespoke to your personal needs.
The need for advice
Reducing the amount of income tax you pay.
Solutions to remove the Inheritance Tax burden.
How to beat falling interest rates.
Planning for your future.
One to One bespoke advice.
Tips on making the most out of your Foreign Income and Overseas Investments By Deepak Goyal, foreign exchange specialist at Currencies Direct
T
he international opportunity for UK Barristers is significant both in terms of fee potential from international clients and also for investment in property and financial products. Emerging markets make ideal hunting grounds for profit hunters and holiday homes overseas offer a common sense way to enjoy time off and at the same time nurture a nest egg for the future. The global reach of the British justice and legal system has created ongoing global demand for UK Barristers expertise around the world. Some might say the global element was more than just a small consideration in their professional livelihood. One should never take anything for granted, however our foray into the global marketplace has a trade off which often includes expensive charges for making and receiving international transactions, poor foreign exchange conversion rates when you need to buy currency and most importantly the potential to lose on foreign income if the exchange rates move against you over a period of time. But how can you ensure that you are getting the most out of the international element of your life and work? More importantly can you be sure that the income that you receive or investments that you make overseas actually translate into positive returns both financially and otherwise? Since de-regulation of the foreign exchange markets, individuals and businesses have been able to access specialised providers of international payments and foreign exchange. Through these providers, individuals and businesses have benefited from products and services which previously they may not have had access to. Let’s look at some of these in more detail.......
I receive fees and income from Europe and the Far East, how can I stop losing on exchange rates? Foreign income is growing for barristers in the UK; as the public purse tightens, overseas client income is fast becoming an important
16
income stream. The majority of the Bar Council’s members work on a self employed basis which it key to think commercially about running your business most efficiently and profitably. Overseas work contracts are typically agreed at the front end, especially when it comes to fees and timelines. A European project lasting 6 months may be worth €100k in income for your business, however the trickle of payments into your bank account may occur over a period of time. Although your client is paying an agreed price for your time and services, your actual income in terms of £ will depend entirely on the exchange rate you can achieve as and when the money comes in – something you cannot control. Whereas a property investment is something that can easily be dumped if the numbers no longer add up, a contract for your services is seen as much more final, particularly as your professional reputation is at stake. So how can the risk of exchange rates be managed when it comes to income earned in $ and €. The answer is simply a product called Salary Risk Protection which is a simple way of protecting the income that you earn against foreign exchange loss. Using the forward contract principle, you are able to protect monies that you are certain to receive in the future. Without such protection, the lucrative €100k project might only bring in the same amount of £ as a lower value local contract. Tip number 1: Protect your international income against exchange rate loss using Salary Risk Protection ensuring that you are paid appropriately and adequately for your services.
International Assets – buying investment property or holiday homes overseas Whether an investment property held within your portfolio, or a holiday home for the family over summer; overseas bricks and mortar purchase presents a good opportunity for long term capital gain. Property investment is not
personal finance & wealth management supplement the barrister 2009
a risk free business – bubbles such as Dubai have recently felt the impact of falling demand and over saturation, which means care must be taken on choice of property So what drives our decision to buy a specific property? The location’s potential? capital gain forecasts? Personal recommendation from a friend or your IFA? One factor certainly takes the common sense precedent – affordability. If you have a budget of £200k for your dream holiday cottage in the South of France, what can you actually afford? Assuming an exchange rate of 1.3 Euros to the Pound, you’re budget would be €260k, right? The retail banking channel in the Uk is the most commonly used mechanism to convert currency. It is convenient however the 2-3% cost of using a retail bank will have a huge impact on your buying power. Retail banks have been known to charge up to 4% on such conversions – Your €260k budget could have just shrunk to under €250k. Tip number 2: Use a non bank specialist provider for the exchange. With typical margins of around 1%, they represent an immediate financial advantage against your retail bank.
Timing your transactions with the help of a specialist The next challenge comes on deciding when to pull the trigger on the transaction. The daily up and down movement in the US $ exchange rate can be anything up to 3%. If you make the transaction at exactly the right time, you could reduce the price of your investment by several thousand pounds. You could easily spend a valuable day trying to second guess the exchange rate and transact at the perfect moment. You could also end of much worse off if you don’t succeed. In some cases your property investment decision may only be possible as and when certain exchange rates are achieved, for example you may only be able to afford an investment if the Euro exchange rate hits 1.25. How can you improve your chances of achieving this?
Tip number 3: Use a dedicated dealer to watch the market on your behalf. A dedicate dealer can keep you informed of market movements and even make the deal for you if you give them pre-defined instructions such as “buy the Euros when the rate hits 1.3”
Spot or forwards? Covering yourself against future exchange rate movement Over the last 12 months, currency markets have fluctuated by up to 35%. Private and Corporate investors have struggled to keep up and most have not protected themselves against these movements. Imagine agreeing to buy a property only to be told that you need to pay an extra 20% or 30% on the cost price because of the exchange rates. Many investors have had their hands forced in forgoing their deposits and defaulting on investment plans on the back of market moves. A spot transaction (the transaction is agreed and transacted at the same time) would normally be used as and when the purchase was exchanged or completed. The time lag between an agreement to purchase and the physical settlement of monies overseas creates foreign exchange
risk. Left unmanaged, this foreign exchange risk can quickly erode potential for capital gain and even jeopardise the investment altogether. With access to specialist provider’s products, investors can now enter into forward contracts – a fundamental tool of the trade in managing foreign exchange risk. A forward contract is an agreement made by you to purchase a specific amount of currency, at a specific exchange rate, within a specific time frame. You are able to agree a forward contract at the time you agree to buy a property. Let’s assume that you’re ski chalet in Switzerland is agreed at a price of 300k Swiss Francs. At an exchange rate of 1.8 (£/CHF), the investment will cost you the equivalent of £166,667. Let’s assume that the deal will take 3 months to complete and will involve an immediate deposit of 10% followed by 3 instalments of 30% on a monthly basis. Over the course of the three month buying period, if the exchange rate moves towards 1.6, the property will end up costing well over £166k, perhaps even £20k more. If you buy a forward contract to purchase 300k CHF over a 3 month period at an exchange rate of 1.8, you will immediately create certainty
in your costs and protect yourself against adverse movements in the exchange rate. You will transact at an exchange rate of 1.8 using your forward contract regardless of where the spot market is trading at that point in time. This does also mean that if the exchange rate moves to 2, you will forgo the better exchange rate and be obligated to use the 1.8 rate you have booked forward. Tip number 4: Understand how much risk you are willing to take. If you want to fix the real cost of your property purchase, contact a specialist foreign exchange provider to quote on a forward contract. Decide on how much you want to buy forward – do you want the whole amount to be locked in or would you prefer to fix only half of the amount and speculate on the remaining half?
Deepak Goyal is a foreign exchange specialist at Currencies Direct, a London based specialist provider of Foreign Exchange and International Payments. Deepak can be contacted on 0207 847 9421 or deepak.g@currenciesdirect.com . All of the above facilities are also accessible through the Member Services section of the Bar Council website.
MEDIUM SIZED FIRM OF THE YEAR
The 2009 Finance Bill and its impact on highly paid individuals Barristers and others who are self employed may feel the effect of the increased tax rates much sooner than others due to the way in which profits are allocated to tax years By Patricia Mock, director in the private clients practice at Deloitte.
T
he changes to the taxation of highly
also due to be restricted for those earning in
instead of 2010/11 thus saving 11 months
paid individuals in Alistair Darling’s
excess of £100,000. The restriction will mean
worth of tax at the new higher rate.
2009
on
that personal allowances are tapered away at
22 April 2009 have certainly come as an
a rate of £1 of personal allowance for every
However, there are important factors to
unwelcome surprise to many. Two of the most
£2 of income above £100,000. At 2009/10
consider before changing your accounting
significant changes brought about by the 2009
rates this means that those with income
period, as it may not always be advantageous
Finance Bill are:
over approximately £113,000 will receive
to do so. A self employed individual must
Budget
announcement
no personal allowances, and will suffer a
first consider the level of profits that would
• the increase to a 50% tax rate; and
marginal rate on income between £100,000
be brought into charge a year early, and the
• the restriction of higher rate tax relief for
and £113,000 of 60%.
extent of overlap profits that would be relieved
pension contributions.
by changing the accounting date, which would
Self Employed Individuals This article will look at these changes in detail
otherwise not be relieved until retirement. The loss of deferral of tax payment is also
and offer some potential ways to alleviate the
Barristers and others who are self employed
important – actual tax payments may be
tax burden they will create.
may feel the effect of the increased tax rates
accelerated. Each individual’s circumstances
much sooner than others due to the way
will be different, and therefore it is difficult
in which profits are allocated to tax years.
to offer general sweeping statements that will
Many individuals have selected an accounting
apply to everyone. It is advised that individual
Despite the fact that this increase will affect
date ending early in the tax year, to provide
tax advice is sought before considering
only 1% of UK taxpayers (around 350,000
the maximum deferral in paying tax on this
changing your accounting period.
individuals), the news is something of a shock
income. For example, if an individual’s
to the highly paid, as this is the first time the
accounting year ends on 30 April, for
The loss of higher rate relief for
tax rate has been increased for many years.
2010/2011 their accounting period will be
pension contributions
The increase to a 50% tax rate will affect those
from 1 May 2009 to 30 April 2010 and tax
with incomes over £150,000 and is set to come
on this income will be payable on 31 January
From the 6 April 2011, higher rate relief for
into force from 6 April 2010, for the 2010/2011
2012. However, this means that profits from 1
pension contributions (currently 40% but
tax year. Coupled with the proposed increase
May 2009 will be taxed at the higher tax rate
increasing to 50% from 6 April 2010) is to
of ½% in national insurance, this will mean
of 50%, despite the fact that the new rates will
be removed for individuals with an annual
an overall marginal rate of 51.5% on income
apply from 6 April 2010.
relevant income of more than £180,000. This
Increased tax rate
over £150,000
means that individuals earning in excess of this It may, therefore, be worth considering a
amount will only get relief against their income
An increased dividend rate of 42.5% (instead
change of accounting date to mitigate the
tax liability for all pension contributions at the
of the 32.5% currently in place for higher
effects of these new rates and alleviate this
basic rate of taxation (currently 20%).
earners) is set to apply from the same time.
tax burden. For example, if an individual
Effect on personal allowances From 6 April 2010, personal allowances are
18
were to change their accounting date to 31
Those individuals with a relevant income
March, profits from 1 May 2009 to 31 March
between £150,000 and £180,000, will have
2010 would not be subject to the 50% tax rate
their higher rate relief tapered away, or
as they would fall into the 2009/10 tax year,
effectively reduced depending on their level of income.
personal finance & wealth management supplement the barrister 2009
An opportunity to invest in prime London residential property for just £50,000 The London Central Residential Recovery Fund has just been launched. The only Fund exclusively capitalising on discounted pricing of residential property in areas like Knightsbridge and Mayfair. The Recovery Fund will cherry pick a prime portfolio, renovate to add value and let to corporate tenants for long term capital growth and immediate rental yield. Geared at an almost unbeatable borrowing rate of 1.5%* and poised to capture the bottom of the market, it aims to return 15% per annum. Doubling an investor’s stake in five years. The Fund offer period is now open. Eligible for SIPPs, SSASs, PEPs & ISAs
Contact: Hugh, Manager to the Fund Tel:+ 44 (0)20 7723 1733 fund@londoncentralportfolio.com
Any information contained in this advertisement relating to the London Central Residential Recovery Fund Limited is in summary form and is not complete and is subject in all respects to the placement memorandum issued by The London Central Residential Recovery Fund Limited and approved as a financial promotion under Section 21 of the Financial Services and Markets Act 2000 by LLP Services Limited (authorised and regulated by the Financial Services Authority in the UK). Prospective investors should be aware that investment in the fund involves a high degree of risk. The value of an investment in the fund may go down as well as up and investors may not get back the amount originally invested. The investment may be illiquid until the fund is wound up after eight years. Prospective investors should review the “Risk Factors” set out in the placement memorandum. London Central Portfolio Limited (LCP) is not authorised to give any investment advice to individual investors and if you require such advice it is recommended that you should contact your Financial Advisor. This unregulated exchange traded fund is not regulated in Jersey. The Jersey Financial Services Commission has neither evaluated nor approved: (a) the scheme or arrangement of the fund; (b) the parties involved in the promotion, management or administration of the fund; or (c) this prospectus. The Jersey Financial Services Commission has no ongoing responsibility to monitor the performance of the fund, to supervise the management of the fund or to protect the interests of investors in the fund. Application will be made for the listing of the ordinary shares of the fund on the Channel Islands Stock Exchange. Any reference to the London Olympics in 2012 is merely referring to the fact that it is taking place and not any endorsement or recommendation of the fund by the Olympic Delivery Authority or the British Olympic Association. * We refer to 1% over Meespierson (C.I.) Limited Base Rate which for sterling tracks the Bank of England Base Rate (currently 0.5%).
Although these changes will only apply
infrequent contributions for 2006/7, 2007/8
designed to reduce income below £150,000. It
from 6 April 2011, in order to prevent the
and 2008/9 exceed £20,000 will get an
is not clear whether the steps outlined above
forestalling of these new rules, for example by
increased special annual allowance equal to
will be caught under this rule.
making large pension contributions before 6
the lower of that average and £30,000.
April 2011, the government have introduced measures that took immediate effect from 22
Contributions paid, in the period 6 April
April 2009.
to 21 April 2009 inclusive, in excess of the
Summary
normal ongoing pattern also avoid the charge
For high net worth individuals who are affected
Anti-forestalling measures currently in place
(although they reduce or eliminate the special
by the increased tax rates and reduced pension
The
by
£20,000 or £30,000 allowance for the rest
tax relief, the attraction of receiving returns as
allowance
of the 2009/10 tax year, as do any normal
capital rather than income is obvious, bearing
ongoing contributions paid during the year).
in mind the differential in tax rates of 50% and
anti-forestalling
introducing
a
measures
special
annual
work
for 2009/10 and 2010/11 that will operate alongside the normal annual and lifetime allowances
that
were
introduced
18%. There is likely to be an increased focus
from
2006/07. These measures only apply to
on investments yielding capital returns, such
What can be done?
individuals whose income is at least £150,000
as property. Structured investment products yielding a return which is subject to capital
in the tax year, or one of the two preceding
Whilst there are a number of things that can
gains tax rather than income tax will become
years.
For 2009/10 therefore, those with
be done to reduce the impact of these potential
highly sought after – although not always easy
a relevant (broadly total) income of at least
changes, it is important to bear in mind that
to achieve in practice. The pension changes
£150,000 in either 2007/08, 2008/09 or
there are several anti-avoidance provisions
are also likely to lead the affected individuals
2009/10 are potentially caught.
intended to stop individuals planning their
to focus on whether their pension savings are
way around the new rules. That said, there are
still efficient, or whether other investments
This special annual allowance was originally
various tax planning ideas that will mitigate
should be considered.
set at £20,000, although £30,000 may be
the effect of the above changes, including the
available in some cases. So pension savings in
following:
excess of this amount that are not protected (see below) will be taxed at 20% in 2009/10,
• Those with spouses whose incomes are less
via an individual’s self assessment. This
than £150,000 might consider paying into a
means, therefore, that any contributions above
pension scheme for their spouse. Relief is
the limit will receive only basic rate relief,
currently available to the spouse at his or her
due to the 20% tax charge, which effectively
highest marginal rate. The maximum that may
claws back the higher rate relief claimed. For
be contributed with tax relief is determined by
2010/11 the charge is expected to be 30%.
the spouse’s relevant UK earnings;
• Those who exceed the £150,000 threshold
Protected pension contributions
by a relatively small amount may find it worthwhile making gift aid payments, as
The good news is that the special annual
these will be deducted in calculating relevant
allowance charge will only apply where
income, and may therefore take them below
pension contributions are in excess of the
the threshold. Another option might be to
individual’s
pattern.
invest in a vehicle in which the income receipt
Therefore any normal ongoing contributions,
is deferred (e.g. deferred interest deposit
in existence before noon on 22 April 2009
accounts). As the income is taxed on a receipts
are protected. These must be paid at least
basis, the deferral may prevent the individual’s
quarterly, although a limited relief on up
income exceeding the threshold in that year.
to £30,000 of contributions has now been
However, bear in mind the potential effect in
introduced for those paying contributions
the year of receipt. There is a specific anti-
less frequently. An individual whose average
avoidance rule which counteracts schemes
20
pre-existing
normal
personal finance & wealth management supplement the barrister 2009
If you are planning to invest – don’t! Invest in Planning – and only then invest - but mind the Tank Top. It is a bit of a corny line – but nonetheless true. After all, when you think of our day to day work, most of us try to be as organised and efficient as we possibly can – yet when we go home something strange happens, especially with our personal finances. Compare this to when you are running a business - you wouldn’t even think of operating without being properly prepared - with a business plan, some financial projections and of course some basic targets. Then you would have probably also prepared some cash flows, a balance sheet and even an auditor to come in to check it all for you – perfectly organised; and yet when we shut our front door, any form of financial planning and organisation seems to go out of the window, and when asked about our own financial affairs most of us turn into dribbling idiots. Seemingly most of our financial decisions seem to get relegated to the latest best idea from a financial adviser or salesman, or alternatively being persuaded into joining in next fashionable financial fad. Whether it is because financial services are dull, possibly incomprehensible, or just that we have all got more interesting things to do at home, for some reason most of us don’t seem to bother planning. In fact what normally happens is that we then tend to collect a series of financial products over the years. These seem either to have been “a good idea at the time”, or were flogged to us by that persuasive salesman who caught us off-guard one day. Usually evidence of this “financial magpie” approach can be located in the third drawer down on the left hand side of your desk at home. The contents would in all likelihood include some old endowment policies, a pension scheme and some old ISAs and PEPs, along with some National Savings certificates and Premium Bonds. There is also often every chance that there will be some old share certificates and allocation papers for old demutualisations and privatisations and some ageing unit trusts probably invested in some bombed out technology fund. Also there might be a slight scratching sound in the back of the drawer, which upon further investigation turns out to be an old bent Krugerrand which you had bought for your grandson. The sum total of your family finances! Of course all our personal finance drawers will vary and some will in fact bring out quite an array, but they tend to all have one thing in common – none of them have any form of financial planning applied to them. As families we will all have different specific requirements but often similar needs. For example, we probably all have to consider everything from education fees to pensions and health care. However, we tend to address each only separately. The answer lies with the need for professional planning across all your family’s assets and liabilities. All our families are different across all the generations, but when linked together the strength of the family is far greater than the individuals who are just targets to be picked off the by the next salesman. So there is an important phrase for us all with our money – “If you are planning to invest – don’t! Invest in planning.” Now for the investment. Here again we have to avoid the fashion fads of the investment markets. Whether it has been internet “dot coms”, emerging markets, telecoms companies or even banks – they all appeared at their peak to be sure fire winners. This year’s fashion fad is next year’s tank-top It is easy to be drawn into the popular shares and investments of the time but more often than not these in fact turn out to be just bets on stocks, with all the investment discipline of a punt on the 2.30 at Newmarket. Good investment process and discipline is a continuous process of managing the risks we are willing to take against the potential returns we want to achieve. Too much risk and you can’t sleep at night: too little risk and your returns are likely to be meagre. A good discipline is to have a broad range of asset classes with everything from shares to bonds, commodities to property and foreign currencies to timber as well as many other classes and also spread around the globe. The reason for such diversification is to try and manage the volatility, and we can manage that then you are more likely to improve the predictability of your returns. It may sound somewhat duller than a punt on a share, but for your longer term investments dull but more predictable can be quite attractive. It’s not that you can’t have a punt or a bet, but only do it with money you are prepared to lose – and for me that does most certainly not include my pension. So first do your planning and only then apply your disciplined investment process across those asset classes and around the globe – that’s how to manage your finances and not lose the stuff. Justin A. Urquhart Stewart
www.7im.co.uk
information@7im.co.uk
020 7760 8777
Look for the silver lining Investing during a time of low interest rates, low inflation, volatile stock markets and high taxation is a challenge. Government borrowing is at an all time high: recession and the credit crunch far from over. Danny Cox CFP, Head of Advice at Hargreaves Lansdown, looks for current investment opportunities and how to navigate through choppy waters.
T
here have been few shelters from the economic storm. The private investor has seen huge values wiped from their ISAs, stock markets investments, pensions and with profits plans. It has been a miserable two years. The four main asset classes have been savaged by the financial crisis: Between 1st August 2007 and the 1st March 2009 UK equities fell by 36%, corporate bonds by 12%, commercial property by 33% and the interest from the average deposit account to less than 0.5% (source: Lipper, FTSE All Share, Markit IBoxx sterling corporate index, IPD UK Property index).
At the time of writing. the UK stock market is more than 2,000 points lower than the peak it reached in January 2000. No wonder that the 2009 Barclays Equity Gilt study described the last ten years as the “lost decade” for equities. The general consensus is that with public borrowing at record levels, tax revenue falling and unemployment rising, the economy is in real trouble. Taxes are already on the rise but against this doom and gloom there has been a sharp recovery in equities and bonds since March, including 11 consecutive days of growth in the FTSE 100.
Markets have rallied for several reasons:
24
Holding a cushion of cash in readily accessible accounts is the bedrock of a good financial plan. Cash deposits should be held in the name of the spouse who pays the lowest rate of tax, saving up to 40% of the interest now and up to 50% from April 2010.
• The threat of a total meltdown of the financial system seems over. • With the threat passing, asset prices in sectors which had collapsed on the assumption that firms would go bust, suddenly looked very cheap once confidence in their long term survival was restored. Buyers moved in and prices recovered. For example, shares in Barclays have increased from the low at 51.20p to 306p, a rise of 600%. Shares in Taylor Wimpey have increased over a 1000% to 38.75p. • Businesses which had rapidly run down their supplies in the face of falling demand had to start replenishing their store rooms leading to a boost to inventories in March and April. • The housing market fall seems to be slowing and in some areas may be bottoming out, although talk of another boom seems premature. Since investors have suffered the pain they need to ensure that their investments and pensions are in the right place to profit from any recovery and get their plans back on track. Making the most of cash is important since virtually all cash investments, while secure, do not provide a real (above inflation) return after tax.
personal finance & wealth management supplement the barrister 2009
The Bank of England Base Rate is 0.5% (July 2009) and with no short term prospect of inflation, is likely to remain so until at least the next General Election. Banks and building societies continue to tempt investors with fixed interest rate deals, some which pay 5% before tax. The next interest rate move will be upward so within five years, a 5% return on savings could look poor. In my view investors should not be fixing for more than 12 months. Inflation will return, but not tomorrow. Rises in the cost of council tax, energy and commodities is painful in the pocket, but cannot be controlled by interest rates. True inflation is driven by wage rises, but average earnings are currently falling as employers cut wages or put staff on shorter hours. What is more, unemployment continues to rise. This suggests that inflation will not return for some time. That said, keep an eye on National Savings Index Linked Certificates. There are two certificates, a 3 and a 5 year, with the tax free return being 1% above the rate of inflation as measured by the Retail Price Index (RPI). Even with RPI being zero or negative, the 1% tax free return is equivalent to 1.67% gross to a high rate tax payer. Between spouses, £60,000 can be invested over two certificates and with new certificates introduced every 6 months, plus reinvestment options when they mature, this could be the start of a large, tax free and inflation proof cash holding. Index linked gilts are an alternative. However, new issues are always in demand from pension funds looking to match their liabilities and generally these are priced above par (their
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Contact If you would like any more information about us please call Judith Wright on 020 7405 5550, e-mail: judith@evanshart.co.ukpersonal or go to www.evans-hart.co.uk finance & wealth management supplement the barrister 2009
3
nominal value). Turning to higher risk investments such as shares and bonds, one strategy to capitalise from the recovery is to buy those stocks which have fallen significantly in value. This assumes that at some stage the share price will recover further, which is far from a given. Even with a recent 400% rise in value, the Royal Bank of Scotland share price remains a fraction of it’s 12 month high. In the past, large companies have come out of recession quicker than smaller companies. Large companies are likely to have better capitalisation which will help them to weather the storm. However, this isn’t always the case and there have been some high profile, large company collapses (Lehman Brothers, Woolworths, Zavvi to name a few). Certainly the banks feature as being amongst our largest companies and perhaps they have the longest road to recovery. You would also expect America to come out of recession first: the credit crunch’s obituary cannot be written until the US housing market bottoms, but ultimately the biggest growth stories in future are likely to continue to be in the emerging markets and infrastructure. Investors have to decide how actively they want to manage their investments. Those
who take a real interest in their investments may feel confident making the key decisions themselves. Others will prefer someone to do it for them. Despite the FTSE 100 making no headway over the last 10 years there are many fund managers who have made good returns. Finding a fund manager who makes money when markets rise is easy. Finding those that consistently beat their peers, whatever is happening in the market is harder, but not impossible.
26
The relatively new kid on the investment block is the Absolute Return fund, designed to provide a positive return regardless of market conditions. Absolute Return funds are essentially hedge funds, but based onshore, fully regulated, and aimed at the average investor. Strategies vary from fund to fund and include short selling and using financial instruments such as options and derivatives. Absolute return funds could be a long term solution for those who want a return above cash and inflation but without the risk of a standard equity fund. Absolute return could easily form a core holding in a portfolio, complemented by higher risk satellite funds. Regardless of how the investment choices are made, investors must make as much use of tax allowances and tax breaks as they can. The gap between capital gains tax at 18% and the new super tax rate of 50% seems huge. The new super tax rate, the erosion of personal allowance for those earning over £100,000 and increases to national insurance contribution rates could just be the start of further tax rises. It is widely predicted that VAT will increase above 17.5% in future. Sheltering investments within an ISA is essential. A couple under 50 can shelter £14,400 and those over 50, £20,400 (after 6th October 2009) into an ISA per tax year, protecting investments from additional taxation. Returns from an ISA do not need to be detailed on a tax return. Considerable savings can also be made on initial and ongoing charges, by purchasing through a fund supermarket. Doing so can not only save money, but also make valuations easier and substantially reduce paperwork. Pensions have been further complicated by this year’s Budget. Higher rate tax relief on pensions is under threat and anyone earning more than £43,875 should make hay while the sun shines. Those who have earned more than £150,000 since April 2007 can still pay large pension contributions and receive basic rate tax relief, but higher rate tax relief is restricted, broadly to either £20,000 or £30,000 - the exact amount depends on your recent contribution
personal finance & wealth management supplement the barrister 2009
history. The rules are complicated, the HL Guide to Saving Tax has more details www.H-L.co.uk/guides. This leads to building pension income in both spouse’s names being even more important. Pension income is ideal for the age-related personal allowance and basic rate tax relief is available even if the individual is a nontaxpayer.
Danny Cox is a Chartered Financial Planner and Head of Advice for Hargreaves Lansdown. Direct line: 0117 317 1638
Please note that the past performance of a fund is not necessarily a guide to future performance. Tax reliefs are subject to change and the values of these relief will depend on circumstances. This should not be viewed as advice or a recommendation to invest.
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This is a financial promotion and is not intended as investment advice. Past performance is not a guide to future performance. The value of your investments, and the income from them, can fall as well as rise and you may not get back the original amount invested. The value of overseas securities will be influenced by fluctuations in exchange rates. The information contained in this advertisement should not be construed as a recommendation to buy or sell a security. Issued by Newton Investment Management Limited (Newton), The Bank of New York Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No. 1371973. Newton is authorised and regulated by the Financial Services Authority.
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24/4/09 14:22:36
How to Reduce the 50% Tax Rate! By Ann Gregory-Jones, director, Haysmacintyre
I
t was no surprise to anyone that in the
transfer the income leaving the ownership of
£170,000 investments in a pension could be
April Budget the Chancellor announced an
the asset behind.
very attractive. The gross investment of up to
increase in tax rates. Given the economic
situation some tax changes were anticipated,
£20,000 will qualify for 50% tax relief. • Gift Aid
however it did come as a surprise that the 50%
If you are about to start drawing benefits from
rate would apply from April 2010 to all those
Payments to charities under the gift aid
a personal pension, it is worth considering a
with income over £150,000, whilst the capital
scheme reduce the tax payable at the higher
technique known as staggered vesting. Under
gains tax rate remains the same. At the same
rates of tax. The change to a 50% rate will not
this arrangement part of your tax free cash
time the Chancellor announced that personal
affect the charity but will mean a greater relief
entitlement is taken each year rather than all
allowances would be reduced from April 2011
for the individual and possibly reduce income
at once when you retire and treated as part of
for those with income over £100,000. In effect
levels so that they fall below the 50% tax rate.
your income. By such means you can reduce
this means a marginal tax rate of some 60% for those with income between £100,000 and
the amount taken as pension subjected to tax. • Salary Sacrifice
This technique can be used whether you are
£105,000.
buying an annuity or electing for draw down
The obvious way of reducing the effective tax rate is to try to incur capital gains tax rather than income tax. This however is easier said than done.
There is a great deal of anti-
avoidance legislation devoted to preventing exactly this, much of it dating back some thirty years till the last time that the rate differential was so great.
If you are an employee or you have employees
i.e. leaving the fund invested and drawing
then it can be advantageous to sacrifice
income from the fund.
salary in return for a non-cash benefit, often a pension contribution.
Such schemes are
becoming increasingly common but it is important to remember that it does involve a variation of the employment contract and thus needs to be considered carefully.
For many the best solution
will be to take advantage of what legitimate planning is available rather than trying to
• Change of year end for sole traders/ partnerships
convert income into capital. If you are in business and have an accounting Below are some of the steps that can be taken to mitigate the income tax rate:-
year end, other than 5 April or 31 March, then you could consider changing your year end to that date. The benefit would be to remove profits from the 50% rate of tax due next year,
• Equalisation of income between spouses
Since separate assessment of spouses was introduced the most obvious tax planning has
to the current lower rate of 40%. In addition the additional profits this year may be reduced by any overlap relief that is available for setoff against the profits.
Investments It is worth restating the old adage that you should not let the tax tail wag the investment dog. However, if it is possible to take advantage of the capital gains tax rate of 18% then it makes sense so to do. There are a number of tax wrappers that enable a generation of tax free or at least tax efficient income and these are summarised below:
• ISA’s
It is possible to invest up to £7,200 each year in an ISA where income and capital gains are tax free. From 6 October 2009 those over 50 can invest £10,200 and from 6 April 2010 this will apply to everyone. By making use of the
involved equalising the income between the
The downside of this of course is that you will
allowances each year, it is possible to build up
spouses.
be paying tax on profits a year earlier than you
a significant tax free portfolio.
The object is to ensure that both
spouses utilise their personal allowances at
would otherwise do.
the lower rates of tax. This is usually achieved by transferring cash or other assets between
• Pensions
• Investment Bonds
If your income is between £150,000 and
Investment
the spouses but it is important that these are absolute gifts between them, you cannot just
28
personal finance & wealth management supplement the barrister 2009
bonds
issued
by
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companies enable you to invest in a wide
investment or debt security bought at a price
range of assets. The bonds are tax efficient in
lower than its face value with the face value
that the underlying funds are generally taxed
being repaid at the time of maturity. It does
at no more than 20% on income gains. It is
not make periodic interest payments or
possible to withdraw up to 5% per annum of
have so called coupons, hence the term zero
the original investment for up to 20 years with
coupon bond. Investors earn return from the
no further tax liability. Any withdrawals in
compounded interest all paid at maturity plus
excess of this will be liable to tax at the top
the difference between the discounted price of
rate, less 20% in the year of encashment.
the bond and its par or redemption value.
Thus it is possible to defer high rate tax for 20 years or more and by careful planning the
• National Savings
tax on the final encashment can be reduced or avoided altogether.
Many national savings products (but not all) provide tax free returns.
For example,
These bonds can be arranged offshore and in
Premium Bonds, Fixed and Index-Linked
this case the funds do not suffer tax, however
Saving Certificates.
they will not be able to recover any withholding
high levels of security which is a bonus in
tax, for example on dividends.
Furthermore they offer
The same
today’s market times.
However, generally
tax deferred 5% per annum regime applies.
the returns are poor.
Having said that, if
But on final encashment there is a potential
one anticipates higher inflation in the future
liability to basic as well as higher rate tax.
then the index-linked certificates, which offer inflation plus 1% per annum tax free could be
• Unit and Investment Trusts
attractive.
Dividends from Unit and Investment Trusts
Whilst the 50% tax rate could be a burden
are treated in the same way as dividends
therefore, there are a number of ways of
from shares – in other words there is a credit
mitigating the effect, much will depend on the
to cover the basic rate tax liability but if you
circumstances of the individual. It is also of
are a 50% taxpayer the dividend will suffer a
course unknown whether this proposed tax
total of 42.5% tax. There are, however, some
increase will go through as planned as there is
opportunities for avoiding tax on income.
scope for a change of Government before April 2010. Even if there were to be a change in
Split capital and investment trust attracted
Government it is not certain that the capital
a poor press some years ago because of the
gains tax rate would remain at 18% and this
closely interrelated structure of some trusts
needs to be borne in mind.
and their failure to perform.
However, the
theory of these trusts is sound and those trusts that are structured to generate no income but
Anne Gregory-Jones
capital gains could benefit from a renaissance. Haysmacintyre Trusts investing in overseas equities do not generate
Fairfax House
much by way of dividends, focussing on capital
15 Fulwood Place
growth instead. Unit and investment trusts are a
London
good way of investing in overseas stock markets.
WC1V 6AY
• Zero Coupon Bonds T +44 (0) 20 7969 5500 A zero coupon bond is a fixed interest
30
W www.haysmacintyre.com
personal finance & wealth management supplement the barrister 2009
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A final UK tax amnesty John Cassidy, partner at PKF, explains HMRC’s ‘new disclosure opportunity’
H
M Revenue & Customs (HMRC) announced in July that from 1 September 2009, a ‘new disclosure opportunity’ (NDO) will be offered to help individuals bring their UK tax affairs up to date at a lower than usual cost. Clients may save money by using this scheme, but they will need to act quickly as the registration period will close on 30 November 2009.
HMRC’s objectives For many years HMRC has been refining its operations and tactics to collect as much tax as it can at the lowest possible cost. It now targets high risk taxpayers or sectors with discrete projects and is well aware of the common misconception that income received outside the UK is never taxable here.
In 2007, HMRC offered the Offshore Disclosure Facility (ODF). Any taxpayer with under declared tax was allowed to calculate the total amount due and make an offer to HMRC in full and final settlement of all years up to 2005/06. Once HMRC accepted the offer a binding contract was created, thereby closing off those years once and for all. The 10% penalty that had to be paid was also lower than could normally be achieved in many cases – but HMRC was prepared to accept low penalties because the project meant it would collect a large amount of tax at very low cost.
While this was not a total amnesty - taxpayers had to add the 10% penalty and interest to the tax due – it was a simple, streamlined system to achieve closure for errant taxpayers. Unfortunately for HMRC, far fewer people than expected came forward: the total additional tax collected was only around £400m. In my view this was down to two factors:
1. The lack of publicity. There were no TV or press adverts and no national awareness campaign: the banks had to inform their customers. Since the ODF I have come across several individuals that could have used it but who genuinely knew nothing about it.
2. Taxpayers were required to calculate and report up to 20 years of arrears: very few normal tax investigations cover such a long period, even if the irregularities go back that far. The sheer scale of the task of calculating the relevant income from so long ago when records no longer exist was simply far too daunting for many. Similarly, the scale of the payments required (possibly tax, interest and penalties for 20 years) was off-putting to say the least – often wiping out most of the individual’s available capital.
NDO – different banks Partly because of these problems and partly to focus on different financial institutions (the ODF concentrated on customers of the main high street banks) HMRC decided to offer a second, and final, disclosure opportunity.
The NDO focuses on account holders of the hundreds of other banks operating in the UK. Again, the opportunity is not a true amnesty as penalties and interest must be paid in addition to the arrears, but penalties will be limited to 10%. However, HMRC recognises that many individuals with tax problems linked to offshore accounts may not have been fully aware of the ODF, so the NDO is open to all to use – although individuals that HMRC wrote to about the ODF face 20% penalties if they use the NDO.
32
personal finance & wealth management supplement the barrister 2009
Who can use it?
Any UK resident individual, company or trustee who has failed to declare overseas income and/or gains that are taxable in the UK Unlike the ODF, HMRC do not intend to offer a similar facility to report UK income and gains that have not previously been declared with a guarantee of a 10% penalty rate.
What is covered?
Those who use the NDO must report all matters wrongfully omitted from their tax returns in any of the prior 20 tax years. This includes any UK or overseas income not reported and all taxes, including PAYE and VAT underreported and must cover all legal persons with a liability, with separate scheme numbers and disclosures for the individual and any company or trust controlled by the individual.
What’s in it for your clients?
They can save money by owning up to past tax inaccuracies and putting them right at relatively low cost. Penalties under the new disclosure opportunity are shown below, but, if HMRC catches an individual at a later date, it could charge penalties of up to 100% of the tax due. NDO penalty rates: 20% of the tax due if the individual received a letter from HMRC regarding the previous ODF but chose not to disclose 10% of the tax due if the individual did not receive such a letter 0% where the disclosable income is less than £1,000 0% on pre-death liabilities of a deceased taxpayer. Getting up to date now means that clients will not have the worry and cost of a detailed tax investigation into years up to 2007/08 at some future date. The bare minimum penalty HMRC will agree to in such cases is expected to be 30%. Also, it is much less likely that HMRC will prosecute the client or use its new powers to ‘name and shame’ the taxpayer publicly if the NDO is used. However, the NDO should not be used where tax is underpaid as a result of an innocent error by the taxpayer: with appropriate advice and evidence of the error, matters can usually be put right without triggering penalties.
How will it work?
Stage 1: a client or their agent applies for a registration number and HMRC will then make a disclosure pack available to them. The registration period runs from 1 September 2009 to 30 November 2009 or 1 October 2009 – 30 November 2009 if applying online. Anyone who currently has a disclosure to make should think carefully about the relative merits of coming forward now or waiting until the NDO starts. Stage 2: complete and submit the disclosure pack to HMRC. This will involve disclosing the income and gains not previously declared over the last 20 years and then calculating the amounts of tax, interest and penalties payable. In most cases, HMRC will expect a cheque for the full amount due when the disclosure pack is submitted. The completed pack must be submitted to HMRC by 31 January 2010 or 12 March 2010 if submitted online. Stage 3: HMRC reviews the disclosure. In ‘low risk’ cases, where the calculations are considered correct and complete, HMRC will send an acceptance letter out.
What if your clients don’t use the NDO?
HMRC may already have obtained details of individuals’ offshore assets from financial institutions - it already has rulings against a number of financial institutions requiring them to supply specific details for all UK based account holders and others are expected to follow suit. This information is likely to be sufficient to enable HMRC to launch an investigation into each individual’s affairs. It also has significant new statutory powers (Schedule 36 Finance Act 2008) allowing it to supplement data from a bank by demanding documents and information from taxpayers and third parties. Any subsequent investigation is likely to lead to large penalties - ignoring the NDO hoping not to be found is not a good idea.
What should clients do? The only sensible option for individuals, companies or trustees who have not fully declared their income in the past is to make a full voluntary disclosure to HMRC now. But anyone contemplating this approach should seek expert advice on how to do it in a way that keeps penalties and risks to a minimum whilst reducing exposure to further investigation and potential prosecution.
For a free initial consultation on the NDO for any of your clients, contact John Cassidy on 0207065 0455 or email john.cassidy@uk.pkf.com.
personal finance & wealth management supplement the barrister 2009
33
Pensions and the recession By Amanda Fyffe, ACA, MAE, Senior Manager, RGL Forensics
It started with US subprime mortgages in 2007
expensive to provide, due to a variety of factors
Typically, individuals will invest in a mixture
- a year later the credit crunch had a tight grip
such as increased administrative costs, an
of secure and more risky investments with
on the UK economy, with newspapers awash
increase in life expectancy, and the valuation
the hope that they will receive year-on-year
with articles on how deep the recession is
of pension fund assets in a company’s accounts
returns, building a pension fund which can be
biting. We have seen countless reports of
(FRS17).
The increase in costs has driven
used to purchase an annual annuity on their
businesses failing, unemployment rising and
the closure of many DB schemes to both new
retirement. However, the financial crisis has
our savings suffering. But what will happen
and existing employees. In 2008 only 26% of
had a dramatic impact on the stock exchange
to our pensions? How will an individual
DB schemes were open to new and existing
and the value of securities. Many DC scheme
be impacted on retirement as a result of
members, compared to 35% in 20061.
funds have dropped in value, thereby reducing
the current economic crisis? And how will
Despite the reduction in DB schemes, the
funds available for the purchase of an annuity,
this impact on pension claims arising from
financial crisis has led to some benefits
and leading to press coverage that pension
a personal injury/fatal accident? Lawyers
for
funds are one of the many casualties of the
involved in pension claims need to be aware
Commonly, once in receipt of annual pension
credit crunch.
of how the downturn in the economic climate
benefits, an individual will receive an annual
In combination with reducing fund values,
has, and will continue to, impact pension
increase in line with the Retail Price Index
individuals are finding it harder to maintain
claims.
(“RPI”) .
Therefore, the recent decline in
contributions into their DC schemes due to
Pensions are a long-term investment and it is
the RPI has led to employers’ future pension
financial pressures and job losses. Research
therefore assumed that any short-term ‘blips’
liabilities reducing. Furthermore, the recent
carried out by Prudential last year found that
in the economy, and the impact to pension
increase in corporate bond yields, the returns
voluntary contributions into DC schemes
funds, will be resolved by the time retirement
from
pension
have almost halved3, which will contribute to
comes around.
However, comments in the
liabilities, has led to a reduction in the pension
depressed DC pension funds on retirement.
press about the impact on pension funds
deficit shown in the employer’s accounts. It is
Furthermore, the Budget earlier this year
appear to be contradictory, ranging from
the combination of these factors that have led
announced
pension funds bearing the brunt of the credit
to pension funds being portrayed in the press
contributions for high earners will be reduced
crunch losses to pension funds being one of
as the ‘beneficiaries’ of the credit crunch.
from 2011 - which will also contribute to the
the few beneficiaries. These comments add to
However, when looking at this from the DB
reduction in funds contributed into DC pension
the uncertainty of what has really happened
members’ perspective, those that are already
schemes.
to pensions following the financial crisis
retired will see a marked reduction in the
For DC members retiring in the next couple
and whether they are accurate depends on
annual increase they receive in their pension
of years, there will be limited opportunities
perspective and the type of pension scheme.
benefits, resulting from the falling RPI.
for them to recover from recent negative
For those who are yet to retire, and are
returns and, on retirement, individuals will
Defined benefit schemes
fortunate
scheme
receive a lower annual pension. Prudential’s
A defined benefit (“DB”) scheme is where the
membership, their pension benefits will be
research tells us that those retiring in 2009
benefits on retirement are largely provided by
secure by the formulaic rules of DB schemes
can expect to receive £884pa less than those
an employer and the employee may or may not
and any impact to their benefits will be limited
who retired in 20084. This situation will also
make personal contributions into the scheme.
to the future performance of the RPI.
lead to individuals delaying retirement to try
employers
2
which
providing
are
enough
off-set
to
these
against
retain
DB
schemes.
The benefits payable on retirement are pre-
that
tax
relief
on
pension
and recoup lost fund values.
defined by a formula set out in the scheme
Defined contributions schemes
For DC members retiring in the future their
rules which include the number of years’
A defined contribution (“DC”) scheme can be
fund value is still uncertain and will be largely
service and final salary of each individual. It
either an occupation scheme provided by an
driven by the investments of their scheme,
is the responsibility of the employer to provide
employer, where contributions are made by
the future performance of the economy and
individuals with annual pension benefits on
the employer and the individual, or a private
any contributions they are able to make.
their retirement and the risk of investment is
scheme where contributions are made by
Regardless of the type of pension scheme
borne by the employer.
the individual only. However, the risk of
an individual is a member of, they will be
DB schemes are becoming increasingly more
investment is always borne by the individual.
impacted - the extent of this impact will
34
personal finance & wealth management supplement the barrister 2009
depend on the recovery of the economy, with
pressure on the State purse for a number
injury claims is less profound.
DC members retiring in the short term hit the
of years, with the 2006 announcement to
is no loss of basic State pension as receipt of
hardest.
increase State retirement age to 68 years from
other State benefits, such as incapacity benefit,
2044 intending to ease the strain of future State
generally
State pension benefits
pension liabilities. However, the recession has
qualifying years.
The State pension celebrates its centenary
now added to this burden by causing a rise in
contracted into the S2P then there could be
this year after the introduction of Pension Day
unemployment, with many high earners now
a loss arising due to a reduction in earnings,
on 1 January 1909. Over the years the State
out of work. An increase in unemployment
and consequently, a reduction in the NICs they
pension has changed and the introduction of
results in a loss of National Insurance
would have paid towards their S2P.
SERPS, and later the State Second Pension
contributions (“NIC”) and tax receipts for the
The calculation of State pension benefits is
(“S2P”), has enabled people to ‘top up’ their
Treasury creating an even greater challenge
intricate, requiring detailed records of life long
State pension to provide them with greater
for the Government to provide for future State
NICs made. Therefore, in personal injury/fatal
benefits on retirement.
pension costs.
accident claims, where a loss of state pension
The rules governing the calculation of an
For those who are eligible for the basic State
is anticipated or claimed, the most cost
individual’s basic State pension are dependent
pension/S2P, the benefits received are largely
effective and accurate method of calculating
on the number of qualifying years a person has
unaffected, regardless of the decline in the
the loss is to obtain pension forecasts from the
built up during their working life. Currently,
economy.
Department for Work & Pensions (The Pension
the full basic State pension of £4,953 (2009/10)
to which State pension benefit increases
Service).
is only payable with 44 qualifying years for
are linked, will affect future annual pension
The recession has had a significant impact
men (39 years for women).
payments.
the
on our pensions and the fallout will be felt for
Eligibility for the S2P and the value of
recession could be further reform or even the
several years to come. Consequently, Lawyers
payments depends on a person’s earnings and
demise of the State pension system altogether,
will need to keep abreast of both economic
whether they are contracted out of the S2P.
brought about by escalating administration
and legislative changes to ensure pension loss
However, there are proposals to reform the
costs and future liabilities.
claims accurately reflect the changing future of
However, the decline in the RPI,
Another
repercussion
of
S2P, abolishing the ability to contract out for
count
towards
an
Often there
individual’s
However, if a claimant is
pension funds and the State pension system.
DC scheme members and introducing a flat
Impact for pension claims
rate S2P. Furthermore, the Pensions Act 2008
In claims arising from a personal injury/fatal
1 Pension Protection Fund - The Purple Book
puts into law an automatic enrolment in the
accident, a loss of pension benefits can often
2008
Personal Account scheme for eligible workers
form a material proportion of an individual’s
2 Up to a maximum percentage
from 2012. This scheme is aimed at those who
claim. For claimants who are members of DB
3 www.pru.co.uk
do not have access to an occupational pension
schemes the calculation and quantification of
4 Ibid
scheme and individuals are required to make
pension losses will remain largely unaffected
5 In addition to 3% Employer contributions
a minimum contribution of 4% to supplement
because
and 1% tax relief from the Government
their State pension.
calculating pension benefits from DB schemes.
American Express announced that from 1 July
However, claimants who are members of
they are temporarily ceasing payments into
DC schemes will suffer more since it is DC
employee pension schemes until 1 January
pension funds that have been hit hardest by
2011 to cut costs. However, under the new
the recession. Due to the uncertainty of when
Amanda Fyffe, ACA, MAE
legislation employers will no longer be able
the economy will recover, and the insecurity
Senior Manager
to adopt this cost cutting measure and will be
of individuals being able to continue to make
RGL Forensics
obligated to contribute 3% into individuals’
pension
Personal Accounts unless employees elect to
expected future benefits from DC schemes is
opt out.
speculative. To limit speculation, losses from
Aside from legislative reforms, many believe
DC schemes can instead be quantified on the
the State pension, even including a S2P, does
basis of contributions that would have been
not provide sufficient income for retirement
made into the scheme. In this way, claimants
and should not be relied upon as a person’s sole
are
source of income after they stop working. But
leaving them free to invest the money, and
what are the implications for the State pension
the speculation of future returns on those
following the downturn in the economy?
contributions is removed.
The UK’s ageing population has been putting
For State pensions, the impact to personal
5
of
the
formulaic
contributions,
reimbursed
their
the
lost
approach
calculation
of
of
contributions,
personal finance & wealth management supplement the barrister 2009
35
Investment: getting it right When deciding how to invest, the right asset allocation and an understanding of the tax implications are both crucial to success, argue Richard Cragg and Andrew Penman of Smith & Williamson, the investment management, tax and accountancy firm
T
he
seen
– the view from 30,000 ft – and the broad
incomes, but if inflation remains low, or goes
exceptional economic turmoil that has
past
two
years
have
brush questions they ask are along the lines of:
into negative territory they are unrewarding
been reflected in a magnified form in
investments.
the behaviour of investment assets. Equities
• Are economies expanding or contracting?
have plunged then recovered, commercial
• Is inflation likely to rise or fall?
Commercial property has a very different
property has weakened, gold has broadly
• Will interest rates rise or fall, and is credit
cycle to that of equities, (on average seven
maintained its dollar value but sterling has
likely to become easier or harder to obtain?
years vs four) given the time it takes to acquire
fluctuated between $2 and $1.35=£1 over the period.
land, secure planning permission, finance To answer these questions, we look at surveys
and anchor tenants and finally build and let.
of business, consumer and investor confidence,
The type and location of the property are also
The burden on high earners seeking to create
manufacturing order books, trends in oil and
crucial to its success and market valuation.
a personal portfolio that best reflects their
base metal prices and leading indicators, not
Many
preferred balance of risk and reward, income
just in the UK but globally. The UK is not the
leveraged, and with falling asset values, a
and capital gain has been further aggravated
tail that wags the dog, but China may be,
number risk breaching their covenants; others
by tax changes that make private pension
and we pay particular attention to Chinese
will be unable to renew their borrowings when
schemes less attractive.
consumer data, car sales, property prices,
they fall due. In both cases, this could perhaps
oil imports and cement production. Having
lead to forced sales at distressed prices.
property
companies
are
highly
Moreover, in the current climate of rising tax
done this, we form our views of how this will
rates and closer scrutiny from HM Revenue
influence the economic cycle, and then relate
Gold acts generally as a diversifier in
& Customs - for example, by forcing banks
it back to our expectations for the individual
portfolios; it is the ultimate store of value,
to disclose information on account holders -
asset classes.
rising as the dollar falls and acting as a haven
the effect of taxation on investment returns is climbing up the agenda.
The importance of diversification
What are the merits of each asset class?
when investors fear that currencies will be debased through printing money. Note that physical gold can and does behave differently
Equities clearly have the greatest exposure
This improves the balance of risk and
to the global economy, and in general give the
reward – provided that the assets chosen are
highest returns but also the highest risk. Those
uncorrelated – and asset allocation, that is,
who wish a lower risk profile could consider
from listed gold mines, which have additional political, financial and operating risk, but often pay dividends, whereas bullion does not. At times of uncertainty, when investors cannot
the weighting of the portfolio in various asset
corporate bonds, since while the interest
classes, has demonstrated higher returns than
rate is fixed, a recovering economy leads to
funds, which capitalise on anomalies in
stock picking.
improving profits and hence improved interest
valuations of different equities or derivatives,
cover on a company’s borrowings. This in turn
can provide superior returns, but so much
In our view, it is less important to pick the “best”
reduces the risk of default and leads to higher
depends on the quality of management that it
property fund than it is to decide whether to
ratings.
is hard to generalise. Recent scandals, the lack
be in property at all. For the purpose of this
bonds
see clearly the prospects for equities, hedge
of transparency and marketability and their
article, we confine our investment universe
Government
almost
diminished ability to borrow in current credit
to equities, government securities, corporate
complete safety in terms of the interest
conditions have diminished their appeal, and
bonds, property, gold and certain alternative
payment and redemption price, but returns are
possibly their performance.
investments such as hedge funds.
correspondingly lower, and any hint of a rise
provide
in inflation leads to higher yield expectations
How does asset allocation work? Asset allocators adopt a “top-down” approach
36
Our view
and hence a fall in bond prices. Index-linked securities capitalise on inflation, and have
So how do we at Smith & Williamson view the
considerable tax benefits for those on high
investment universe at present?
personal finance & wealth management supplement the barrister 2009
Taking investment first, we see a second
progressive reduction in portfolio exposure to
portfolios should be balanced to ensure that
half global economic recovery, propelled by
Western economies in favour of Asia (excluding
one spouse isn’t paying tax at 50% while the
the delayed impact of the various stimulus
Japan). Overall, however, we expect portfolio
other is at 40% - or even 20%.
packages and the ending of destocking in
returns to be relatively modest for some years
the manufacturing sector. This has been
from mid-2010.
• Capital gains tax.
anticipated by survey data and various leading indicators and has driven the global equity
Individuals can make
gains of up to £10,100 per annum tax free. By
Tax
maximizing this annually you can gradually
rally that began in March. Low interest rates
increase the base cost of the portfolio, reducing
continue to provide support to equities by
The principal point to bear in mind is the
driving cash out of bank and building society
widening difference between income tax and
the amount of gains chargeable in future.
deposits, but while technical patterns point to
capital gains tax (CGT).
At 40% and 18%
• Losses. Where losses have been, or will be
further significant upside potential by the year
respectively investing for capital returns
triggered these must be offset tax efficiently.
end, we see risk further ahead.
seems very attractive.
After next April, the
In some cases losses can be offset against
gap widens with the introduction of a 50%
income instead of gains, which with such
US and UK consumers have accumulated
income tax rate for incomes over £150,000
divergent tax rates can be advantageous.
unprecedented levels of household debt that
per annum.
will have to be run down over many years,
that the CGT rate will also increase next April,
• Individual Savings Accounts. With an annual
while government taxation rises to reduce the
though it is not anticipated that this will match
investment allowance of £7,200 (increasing to
frightening budget deficits and to pay for the
the income tax rate.
£10,200 from next April, or October for those
It has been widely speculated
bank bailouts. By mid-2010, the year-on-year
aged 50 and over) all investment returns are
contribution from the stimulus packages and
Remember that dividends are taxed more
tax free, and withdrawals can be made when
inventory correction will have run its course
favourably than other income.
Higher rate
required. People who invested the maximum
and Western economies could experience a
taxpayers currently pay 25% tax on net
annual amount in ISAs, and their predecessor,
sudden loss of momentum that might unsettle
dividends received, versus a headline 40%
the
equity markets. Indeed, we expect several
higher tax rate. These amounts increase to
introduction in 1986, may now be enjoying
years of sub-trend economic growth in the
36.11% and 50% respectively next April but
tax-free returns on portfolios worth hundreds
West.
the difference remains.
of thousands of pounds.
Excess capacity in both labour and equipment
While tax should never be an overriding issue
• Tax efficient investments. The more high-
should
low,
in investment decisions, it’s essential to be
risk investor can consider the advantages of
making
ensure
that
index-linked
inflation securities
stays
Personal
Equity
Plans,
since
their
somewhat
aware of the tax implications of investment
investing in VCTs or EIS companies, where
less attractive, and the combination of low
decisions and how this can influence the
certain income tax and capital gains tax reliefs
economic growth and tight credit means that
outcome.
are available on investments of up to £200,000
rental income and capital appreciation from
appear to yield capital returns but are taxed to
commercial property remains elusive. Property
income, such as, relevant discounted securities
investors take a long view, and significant
and hedge fund investments.
cash has been raised by funds seeking to buy
certain returns from shares subscribed in
For
property from distressed sellers, although we
Venture Capital Trusts (VCTs) and companies
Williamson
suspect that it is too early for such a strategy
qualifying under the Enterprise Investment
to bring gains.
Scheme (EIS) may be exempt from tax
Richard Cragg, global strategist,
For example, .some investments
and £500,000 per annum respectively.
However, further
information
from
Smith
entirely – including potential exemption from
richard.cragg@smith.williamson.co.uk
There are some bright spots in our universe
inheritance tax for EIS shares. Clearly, a good
tel 020 7131 4763
however – China and India – both of which
working relationship between your investment
are likely to record strong economic growth
manager and tax adviser is essential.
through 2010 thanks to their huge home
Andrew
Penman,
tax
&
director,
andrew.penman@smith.williamson.co.uk
markets and comparatively low exposure to
The examples below indicate where it can be
world trade. The world’s economic centre of
possible shave a few thousand pounds off your
gravity is shifting decisively away from the
tax bill.
tel 020 7131 4379 www.smith.williamson.co.uk
over-indebted West to the cash-rich East, but these economies are still under-represented
• Married couples. With the introduction of
in global portfolios, and we recommend a
the new 50% income tax rate it is vital that
personal finance & wealth management supplement the barrister 2009
37
The UK has one of the most complex tax systems in the world and, following changes announced in this year’s Budget, the position is set to get even more confusing By Andrew Tully, Senior Pensions Policy Manager, Standard Life
T
he budget introduced changes to income tax and national insurance (NI), and to the tax relief given on pension contributions for people with higher income. The pension changes, in particular, may have an immediate impact as changes were effective from 22 April 2009, the date of this year’s Budget.
Looking at the income tax position first, two changes come into effect from 6 April 2010. The first is the introduction of a new 50% upper rate of tax which applies to any income in excess of £150,000. The second sees the gradual removal of the personal allowance – the first slice of a person’s income, £6,475 in this tax year, which is not subject to income tax. This allowance starts to reduce when income reaches £100,000 and completely disappears for those earning approximately £113,000 or more. Further changes will flow through in April 2011 with all rates of NI increasing by 0.5%. For the self-employed, this means the primary rate of 8% which is applied to a band of profits, currently between £5,715 and £43,875, will rise to 8.5%. And the upper rate of 1% for all profits in excess of £43,875 will climb to 1.5%. The cumulative effect of these changes will see taxes increase, particularly for those with higher incomes. As shown below, a self-employed individual with a constant chargeable income of £200,000 will see their tax bill shoot up by around £8,500 between this tax year and 2011/12.
2009/10
2011/12
Chargeable Income
£200,000
£200,000
Total National Insurance
£4,739
£5,710
Personal allowance
£6,475
NIL
Total income tax
£69,930
£77,520
Take home income
£125,331
£116,770
Reduction in take home income
£8,561
This example is for illustrative purposes only and assumes all tax and NI thresholds remain at 2009/10 levels Another significant impact of the budget alters the traditional tax efficiency of pension contributions, for people with higher income. From April 2011, people with income of £180,000 or more will only receive basic rate tax relief on pension contributions. This is a major departure from the current position where people get tax relief at their highest marginal rate, and will make pension saving less attractive in future for those who are affected. Making a major change from a future date opened up the potential for people to cram as much money as they could into their pension under the existing rules. To prevent this happening, the Government brought in new rules from Budget day limiting the pension payments which can attract higher rate tax relief between 22 April 2009 and 5 April 2011, for those people who have income of £150,000 or more. Just to be clear, the rules don’t prevent large payments being made, they simply reduce the tax benefits. The new rules are particularly complex and, in some situations, downright unfair. The first point to note is the income threshold. The rules impact on those people who have income of £150,000 or more. This is a cliff-edge, so those with income of £149,999 or less are not affected, and can continue making pension contributions in a very tax-efficient way. Crucially, income is not just earnings but comprises all taxable income, including dividends and income from rental properties, investments and savings. For those who do have income of £150,000 or more, higher rate tax relief will only be given on a certain level of pension payment. This amount varies and is influenced by the frequency of pension payments before Budget day. If you paid regularly (this is defined as more frequently than
38
personal finance & wealth management supplement the barrister 2009
quarterly) then you can continue to pay that amount, or £20,000 per year if greater, and receive higher rate tax relief on the whole payment. Any contributions above this level will only receive tax relief at basic rate (20%), with the new tax charge being levied through an individual’s self-assessment tax return. However, there is one exception to this. Where future contribution increases are ‘pre-determined’ – for example, if payments go up in line with earnings - then higher rate tax relief will continue on that increased payment. For those who paid irregularly - for example, people making single or annual pension payments - the £20,000 figure above may be replaced if the average of the irregular payments made in the last three years is higher, although there is an upper limit of £30,000. For example, if you made payments of £50,000 in 2006/07, £40,000 in 2007/08 and £60,000 in 2008/09, the average payment is £50,000. This is above the upper limit, so you would receive higher rate tax relief on the first £30,000 of any pension payment in this tax year and in 2010/11. Extra care needs to be taken if you made both regular and irregular payments, as the limits interact. People who weren’t paying any pension contributions in the recent past will be able to pay up to £20,000 and receive higher rate relief. The rules also cover any pension payments made by an employer. Let’s say Philip earns £200,000 and his employer paid a £50,000 pension contribution last year. There would have been no cost to Philip – this was effectively ‘free’ money. If Philip’s employer paid it this year, and assuming there was no past history of any pension contributions, Philip would face a tax charge of 20% on the payment above the £20,000 threshold. This means a tax bill of £6,000 (20% x £30,000) would be levied through his self-assessment return at the end of the year. So what do all of these complex rules actually mean in practice? For those people with income below £150,000, pension planning can continue as before. There is even an argument that it should be accelerated. If people expect their income to exceed £150,000 in future then paying into pensions now, while higher rate tax relief is available, seems an obvious move. And now the link between pensions and higher rate tax relief has been removed for some, it may be easier for a future government to extend these provisions to people with lower incomes. If you think this is likely, or even possible, increasing current pension saving is the logical step. For those people with income above £150,000, seeking financial advice is essential. There are some legitimate ways to manage income to bring it below the £150,000 threshold. If you can’t achieve this, consideration should be given to paying in as much as attracts higher rate tax relief this year and next, while this benefit is still available. After 2011, pension saving will become less tax-efficient for those with income above £180,000. Advisers will be able to compare the ongoing benefits of pension saving against other alternatives. Options such as Individual Savings Accounts, qualifying life policies, Venture Capital Trusts (for those willing to take more risk), and offshore investments, may become more attractive. While these changes will adversely affect some people, and the tax and NI increases will impact on many more, my overriding concern is the continual tinkering of rules. Only three years after major pension simplification changes were introduced, the Government has introduced further complexities which people will find hard to understand. It is a disappointing move which does nothing to encourage more saving. We need clear, simple rules for the long-term to encourage more people to save and help address chronic under-saving in the UK.
Tax and legislation are liable to change. This information is based on Standard Life’s current understanding of law and HM Revenue & Custom’s practice. Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circumstances. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments.
personal finance & wealth management supplement the barrister 2009
39
Whose Wealth is it anyway? Planning to mitigate the effect of inheritance tax. By Christine Ross is Group Head of Financial Planning at SG Hambros Bank Limited
W
hilst many families wish to plan to mitigate inheritance tax few are willing to gift a substantial proportion of their wealth during their lifetime. Families are generally concerned about the ability of their offspring to manage significant wealth at a relatively early age. There is a desire to work with the younger generations to help them learn to manage the family money. Until recently, family trusts offered the ideal solution – the ability to gift assets into trust and continue to control the family wealth until this
nil rate band or business assets are being transferred (certain business assets are exempt from IHT after a minimum ownership period of 2 years).
daughter of £5,000
Inheritance tax traps
• Normal expenditure out of income is not subject to inheritance tax. This is a grey area, but generally as long as this expenditure does not reduce an individual’s standard of living this is exempt. As an example, the funding of school fees for a grandchild might
could be passed directly to the beneficiaries.
• The only effective way to remove assets from this tax is to give them away during lifetime, a major problem when none of us know for how long we will live, and in particular, where the liability is caused by the value of property that is used as a main residence or second home.
Inheritance tax (“IHT”) is a tax collected by the UK Government on any transfer of assets to an individual or to certain types of trust. It is commonly levied on an individual’s estate on death, but it can also be charged in respect of certain gifts of assets during lifetime.
Currently IHT is payable at a rate of 40% on estates valued above a threshold: the “nil rate band”, which for the current tax year is set at £325,000.
• The result, historically at least, of rising property prices is that more people now fall into the scope of IHT
• There are gift with reservation of benefit rules. These mean that it is not possible to give away assets whilst continuing to benefit from them (as is possible in some countries). For example, it is not possible to give away the home and continue to live in it, without paying a commercial rent to the new owners (e.g. children).
The Finance Act 2006 contained substantial measures to alter the treatment of trusts for inheritance tax purposes. The most significant of these changes included:
By use of careful planning it is possible to ensure that IHT is at least reduced if not eliminated completely. It is worth being aware of the exemptions from inheritance tax.
• An inheritance tax charge of 20% on gifts into trust that exceeded the prevailing inheritance tax nil rate band
• Transfers between husband and wife are exempt from inheritance tax, (although this may not be the case where one spouse has a non UK domicile)
• Every 10th anniversary, charge of 6% of the value of trust assets in excess of the nil rate band These changes affected those with a UK domicile, or non domiciled individuals who have lived in the UK for 17 out of the last 20 tax years – resulting in them becoming ‘deemed domiciled’ for inheritance tax purposes.
• Each individual may make a gift of £3,000 per annum which would immediately fall outside of the estate for inheritance tax purposes. This is known as the annual exemption. If this has not been used before, then it is possible also to make an additional gift of the same amount in respect of the previous year.
Gifts to trusts continue to be free of tax at the point of transfer if the value is within the
• There is an exemption in respect of gifts in respect of marriage of a son or
40
personal finance & wealth management supplement the barrister 2009
• There is a small gifts allowance – an unlimited number of gifts of up to £250 may be made
fall into this category. It is also possible to make regular payments into trust using this exemption. • It is possible to make gifts of unlimited value, and as long as the donor survives for seven years from the date of the gift the value will fall outside of the taxable estate. This is known as a Potentially Exempt Transfer (“PET”) • Finally, gifts to registered charities and to political parties are not subject to inheritance tax.
There are also investments that have inheritance tax advantages. Shares in unquoted trading companies (including those listed on the Alternative Investment Market) qualify for business property relief after two years of ownership, which means that their value is not included in the taxable estate. Shares in companies that qualify for the Enterprise Investment Scheme (EIS) fall into this category, so combined with their income and capital gains tax advantages, make them amongst the most tax efficient investment options. Investments in woodlands also have IHT advantages.
An alternative: Partnerships
Family
Limited
A Family Limited Partnerships (FLPs) is an alternative to a trust that allows the donor to pass on to the next generation a proportion
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of his assets whilst continuing to control that part of the family’s wealth. A gift of assets to a FLP is regarded as a potentially exempt transfer, so there is no charge to IHT at that point. The gift will be totally exempt from IHT provided the donor survives a further 7 years.
What is a limited partnership? A limited partnership is a specific type of partnership. The partners will be ‘limited partners’ and will have limited liability in respect of the partnership’s activities. However, one partner must act as the ‘general partner’ who has unlimited liability and deals with the management of the partnership – in effect the ‘managing director’ of the partnership.
A limited partnership effectively carries on a business (in the case of FLPs the business is usually that of investment of the family wealth) and the general partner controls the management of that business. Where investments are managed for the partnership, it will be necessary to appoint an appropriately authorised investment manager in order to comply with regulations laid down by the Financial Services Authority. The limited partners have no control over the decisions regarding the management of the partnership.
Children may be limited partners. It is preferable, but not essential, that children have all attained age 18 at the time the partnership is established. It is also advantageous if a family is complete. If more children are born, it would perhaps be necessary for the partnership shares to be re-worked to benefit the new arrival and this may have tax consequences for the other partners. The donor can be involved in the management of the partnership through an interest in the general partner. The general partner is usually in the form of a separate legal entity which must hold a small interest in the partnership, e.g. 1%.
A partnership is transparent, so all income and gains arising will be attributed to each partner on a pro rata basis in accordance with their percentage interest in the partnership. Many families do not wish distributions to be made in the early years, and in such cases it may be possible to structure the partnership so
42
that access to the family wealth is restricted. However, tax liabilities on partnership income and gains will arise fall on each partner. Therefore it may be possible simply to distribute only sufficient for each partner to meet their individual tax liabilities.
the tax. Such a solution can simplify the administration of an estate, therefore reducing the associated costs.
Christine Ross is Group Head of Financial Planning at SG Hambros Bank Limited There are several variations with regard to structuring the general partner, depending upon the circumstances. However in order for the planning to be effective, the parents or grandparents who donated funds or property to the FLP must be unable to benefit under the FLP as a result of any interest held in the general partner.
Careful structuring is important in order to ensure the FLP reflects the donor’s wishes and is optimum for both tax and practical purposes.
Which asset classes might be suitable investments in an FLP? The FLP can hold a wide variety of tangible and intangible assets. However, it would not be suitable for holding assets such as a property which is used exclusively by members of the family, e.g. a main residence or holiday home. Conversely, an investment property that is rented out could be a suitable investment. The profits realised by the partnership can be used to meet the personal expenditure of the people who receive partnership shares, or it can be reinvested in the business. The precise tax consequences will depend on a number of factors. A FLP can be part of a tailored solution to meet a family’s needs.
The last resort Finally, there is life assurance. Many individuals wish to provide their beneficiaries with a capital sum in order to fund the inheritance tax liability. The policy proceeds will be available to the trust beneficiaries who may use this to pay the tax liability. Having funds readily available can provide greater choice to executors and beneficiaries of an estate, especially where consideration might have to be given to the speedy sale of property in order to fund
personal finance & wealth management supplement the barrister 2009
personal finance & wealth management supplement the barrister 2009
Fabrice Corre SG Private Banking
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