The barrister Financial Supplement 2009

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

20 28

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

T

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.

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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

E

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

T

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

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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.

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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.

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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.

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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

12

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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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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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

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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

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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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Contacts: Andrew Costard - Tel.: +44 (0) 207 597 3034 - andrew.costard@sghambros.com Andrea Steel - Tel.: +44 (0) 2380 302 609 - andrea.steel@sghambros.com SG Hambros Bank Limited, Norfolk House, 31 St James’s Square, London, SW1Y 4JJ

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