Financial supplement 2015-16 by Barrister Magazine

the barrister

Personal Finance & Wealth Management Supplement

Personal finance & wealth management supplement the barrister 2015

Supplement 2015

Personal finance & wealth management supplement the barrister 2015

Contents: 6

5 of the best collectible investments By Adrian Roose

Emerging market investment. Is this the end? By Danny Cox

Ten Tax Planning Points By Charlie Thompson

The last, last chance saloon By John Cassidy

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About turn - inheritance tax planning turned on its head By Danny Cox

Post Budget Review from a Tax Dispute Resolution Perspective By Karmjit Mader

Multijurisdictional financial services insolvencies on the rise By Steve Akers

Road test: Pension v ISA By Dave Downie

Auto- Enrolment staging dates loom ever closer By Matthew Mitten

Pension wealth down the generations By Julie Hutchison

Financial planning: the worldâ&#x20AC;&#x2122;s best kept secret Jason Butler

Personal finance & wealth management supplement the barrister 2015

5 of the best collectible investments By Adrian Roose, JustCollecting Be in no doubt.

the 1950s."

Ninety nine percent of the collectibles you can buy today will not make you money. It's only the rarest, most prestigious, most desirable pieces of history that offer investment potential. Yet if you know what you're looking for, you can find pieces that are not only great to own, but can make you a profit in the future too.

Watch out for 2005 re-issue, which lacks the value and desirability of the original.

Here are five to look out for.

3) Bob Dylan's Blonde on Blonde There are rarer records. There are more valuable records. But in terms of an LP you have a realistic chance of tracking down, or better still, discovering in your collection – US first pressings of Dylan's Blonde on Blonde are hard to beat.

1) Panerai Radiomir 3646 wristwatch Rolex is the most famous. Vintage Patek Philippes are the most valuable. Yet it is the lesser known Italian watch manufacturer Panerai that has offered classic watch investors the best return on investment in the past 10 years. Because the firm's Radiomir Ref. 3646, produced for divers in the Italian Navy in 1938, has grown in value by 13.7% a year on average since 2004. That's according to the JustCollecting Rare Watch Index, which states that the rare watches are worth £58,500 in top condition. Why the price growth? Their understated style appeals to today's watch clientele, while their use during the second world war gives them an important link to a historical event that few other wristwatches can compete with.

They're worth around £250 today, up 20.1% per annum from £40 a decade ago. Like first editions of books, first pressings are what record collectors most look for. A quick internet search of your record's catalogue number will set you straight. Music memorabilia expert Paul Fraser comments: "With Blonde on Blonde, look for a photograph of film star Claudia Cardinale in the gatefold. The record label used the photo without her permission on the first pressing. She was furious when she found out and Columbia quickly removed it from all future pressings. "

2) Chanel 2.55 Medium Classic handbag The Hermes Birkin is the king of the handbag world. The world record stands at $222,000, set by a crocodile skin "Birkin" earlier this year. And leading examples have grown in value by 9.6% a year since 2004, according to the JustCollecting Rare Handbag Index. But savvy investors know there are even more lucrative gains to be made. Step forward the Chanel 2.55 Medium Classic Flap Bag – up 11.6% a year since 2004. Originals in top condition are worth a relatively affordable £3,000. As the "2.55" name alludes to, the bag was launched in February 1955, and its classic elegance is making it hot property these days. Handbag expert Amanda Mull, writing on Purse Blog, explains: "Everyone from Urban Outfitters to Marc Jacobs has been accused of stealing from Chanel's signature bag, and there's a good reason for that - it's timeless, iconic and still as relevant to luxury customers today as it was back in

A first pressing of the UK edition of Jimi Hendrix's Electric Ladyland (the one with the naked women) is worth £1,000 today – up from 200 in 2004. Fraser comments: "Record collecting is making a big return in popularity. It's not just those who grew up with vinyl that are collectors, 20-somethings are also scouring the secondhand shops. The tangible nature of records, the artwork, and that warm sound – it all offers something not available from

Personal finance & wealth management supplement the barrister 2015

downloads. It's a key reason why prices for rare records are on the up." The Beatles' White Album - all individually numbered on the sleeve - is a staple of record collections throughout the world. Only a few have value. They're the low numbered ones. Examples below 1,000 can net you around £3,000.

4) Barbie #1 Barbie appeared in March 1959. And it's these first dolls that have the most value today. They're also the ones that traditionally have grown most in price. The rarer brunette version is the more valuable at around £5,800 for an example never taken out of its box. But blondes don't come cheap at £5,300. You can spot a #1 from the almost identical #2, released later the same year, by the small holes in Barbie's feet – used to attach her to a stand. Mattel produced only 350,000 #1s in total, making them rare today – especially as the company initiated a part exchange programme for old dolls in 1967. Did you know? Creator Ruth Handler based Barbie on a German doll called Bild Lilli – the doll form of the sexually-liberated comic strip character Lilli.

5) 1840 2d blue postage stamp The internet age has caused the value of many British stamps to crumble. What once were thought of as "hard to obtain" are now easily attainable with a few mouse clicks. Yet the advent of the World Wide Web hasn't affected the scarcest, most wanted stamps. The ones that are almost impossible to find no matter how good your computer. Which is why the 1840 2d blue postage stamp – the world's second stamp (the more famous Penny Black is the first) – is such an exciting proposition. Valued at £7,800 in 2004, one will now set you back around £26,800. That's an increase of 13.1% a year. What makes it so special? It's far rarer than its more famous cousin. Britain produced just 6.4 million 2ds, in contrast to the 68.8 million Penny Blacks.

Adrian Roose, JustCollecting

JustCollecting is a community and rewards club for collectors where members can buy, sell, share and manage their collections, earning exclusive loyalty points to spend on amazing products, special discounts and entry to fantastic competitions

• images acredited to Heritage Auctions

Personal finance & wealth management supplement the barrister 2015

Emerging market investment. Is this the end? By Danny Cox, Hargreaves Lansdown

The prospect of higher interest rates in the USA may be driving this, with investors exiting developing nations in favour of higher expected returns closer to home. The IIF (Institute for International Finance) described portfolio flows by international investors out of these regions as a key driver behind a perfect storm facing emerging markets. The IIF also pointed out that global trade has slowed sharply since the financial crisis. Growth rates of 7% were previously typical for international goods trade, but things have been much more sluggish since, measuring just 1.5% growth over the last year. Impact for UK companies UK companies are not immune. We are beginning to see more and more companies experiencing difficult trading conditions in once rampant emerging markets. Often, this is due to a commodity exposure, but some weakness is being reported by consumer markets in the developing nations too. Take Burberry for example. Like other luxury goods companies, it has seen strong growth in demand from Asian, Middle Eastern and Russian consumers in recent years. The share price has fallen over 15% since the spring as concerns over slower Chinese demand emerged.

Recent stock market volatility has been largely caused by fears over the Chinese economy, a sell off in the Chinese equity market and a devaluation of their currency. But is this the end for emerging market investment? Once upon a time there was an Economic Super-Cycle, with commodity prices rising at a staggering pace, and mining and oil company shareholders lived happily ever after. During this time, emerging markets were the only place to be. The rich mineral resources and abundant cheap labour were creating great wealth, enabling the emergence of vast new middle classes. Of course, things haven't worked out as smoothly as planned in recent times. First, the price of oil collapsed following OPEC's unwillingness to manage oil supplies. Meanwhile, China, the ever-expanding engine of global growth, has slowed. Official statistics suggest growth of 7%, but other pointers, like electricity consumption and freight traffic, suggest otherwise. Now newer forces are beginning to further hinder progress. Emerging market currencies, from the Brazilian real to the Russian ruble are weakening rapidly. Some leading emerging nation currencies have hit fifteen-year lows recently. This raises the cost of imports, squeezing citizens' real incomes.

Or drinks giant Diageo, which has been steadily lagging the wider market for almost three years as slower sales growth sapped investor confidence, leading to the company recently being suggested as vulnerable to takeover. But it's not all bad news Not all stocks with emerging market consumer exposures have been falling. Unilever and British American Tobacco (BATS) have shown good underlying performance, and in Unilever's case, its emerging market exposures still delivered twice the growth seen in its developed market positions . BATS, which earns most of its money in developing nations is still able to raise prices faster than volumes are declining, recording pricing gains of 5.3% at the half-year stage. Reckitt Benckiser too, is still generating rapid growth from developing nations, recording 7% top-line growth from the developing nations in the first half of this year. Margins are much lower, outside of Europe and North America, leaving the potential for catch-up in the future. So it's not a uniform story for the higher risk emerging markets. Commodity exporters like Russia look set for the hardest ride - there is an oversupply of commodities against global demand, which is flat at best - whilst China could

Personal finance & wealth management supplement the barrister 2015

begin to see its economy gaining from vastly lowered import bills for energy, metals and minerals, once it has got over the chaos in its financial markets. Great fall of China Any long term or even short term chart would show the volatility of the Chinese stock market. It went up like a rocket in the first half of this year, so perhaps it is hardly surprising to see it has given much of this gain back. It has certainly not been helped by clumsy continued Chinese government intervention in trying to stabilise the market, which has made the situation worse by not allowing the stock market to find a natural level. This has spilled over into the developed markets because, in a global economy, worries tend to reverberate around the world. China is the 2nd biggest economy and responsible for 15% of the world’s output (GDP). China has a huge appetite for the world’s commodities and resources and the fear is that falling growth will mean lower demand for imports. What does this all mean for investors? It suggests there is no possibility of a rise in US interest rates this September and highly unlikely in December. What we are witnessing though is a broader emerging markets issue, while some developing economies also devalue their currencies to offset the problems in their own countries. This will be good in due course for the developed world as falling oil prices will feel like a tax cut for many consumers. We probably aren’t far away from seeing 100p a litre for petrol and diesel. It also shows we are perhaps still only halfway through the

financial crisis, which started in 2008. We are experiencing the ‘long middle’ – a time where we can expect to see a lasting period of lower global growth and inflation as well as low interest rates. However, this is not the end of capitalism, the end of the world or anything else but merely another painful corrective stage. In this type of environment, I believe investors should avoid companies with high borrowing and also attempt to steer clear of high debt levels themselves. Instead, look for companies with excess cash they can distribute to shareholders and businesses more in control of their own destiny. The long-term potential of emerging markets to deliver above-average rates of growth still seems good, although there are no guarantees. Brave bargain hunting could prove fruitful. Most importantly, take a long term view and be mindful of the risks. Past performance is no guide to future performance and you may get back less than yu invest. This is not a personal recommendation to invest. Danny Cox Hargreaves Lansdown Mobile - 07989 672 071 Direct - 0117 317 1638 Office – 0117 900 9000 One College Square South Anchor Road Bristol BS1 5HL

Personal finance & wealth management supplement the barrister 2015

Ten Tax Planning Points By Charlie Thompson, Assistant Tax Manager at Muras Baker Jones

Following George Osborne’s Summer 2015 Budget, it’s worth considering what basic tax planning steps can be taken before 6 April 2016, no matter what your personal situation is. 1 Incorporation The past year has seen significant changes to Entrepreneurs Relief and goodwill on incorporation and there are more changes to consider regarding Dividends (explained further below). Many barristers can still reduce their tax liabilities, however, through incorporation. 2 Dividend timing With effect from 6 April 2016, the income tax rate on dividends is changing. A broad comparison of the effective tax rates is below: Income up to Old effective rate New effective rate* £42,000 0% 7.5% £150,000 25% 32.5% £150,000+ 30.56% 38.1%

*First £5,000 of dividends is tax free.

One of the benefits of an owner managed limited company is that the continuing director/shareholder can determine when dividends are declared. Anyone with that level of control should consider declaring a dividend now, before 6 April 2016 in order to lock in the lower tax rates on dividends. 3 Pension Contributions The government recently announced a consultation on the taxation of pensions which could see relief restricted for higher (40%) and additional (45%) rate tax payers. Currently, an individual can contribute £80 to their pension and the Government will contribute £20 with higher earners receiving further relief through their tax returns. The limit to contributions is called the Annual Allowance and for 2015/16 it is £40,000 (including the Governments contribution). Amounts up to the £40,000 limit can be contributed, with unused amounts from the past 3 years also available, as long as the contributions don’t exceed 100% of the individual’s qualifying income, such as trading profits or salary.

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Broadly, those earning £150,000 and over will see their tax relief on pensions being curtailed with effect from April 2016. For every £2 over this threshold £1 will be taken from their Annual Allowance, until only £10,000 is left of the allowance. Any one within this bracket should consider making a contribution before 6 April 2016. In addition, some individuals will already have contributed the maximum before the Summer Budget on 8 July 2015, due to the new legislation enacting these changes, these people now have another Annual Allowance to contribute before April 2016. Those earning over £150,000 per year may also like to consider incorporation, in order that the company receives a corporation tax deduction, although the Annual Allowance limits will continue to apply. 4 Rental income and mortgage interest relief The Summer Budget also saw details of restrictions due soon on mortgage interest and other finance costs for buy to lets and other residential rental businesses. The restriction means that interest will not be simply deducted from rental income; instead 20% of the interest charge will be deducted from your tax liability. This can have implications even if you pay income tax at the Basic Rate (20%), but Higher (40%) and Additional (45%) rate payers especially will find that their tax liability will increase to reflect the reduced relief they are receiving. The change is being phased in over 4 years, starting in April 2017 as follows: i) From April 2017 the deduction from rental income will be restricted to 75% of the total interest cost, with the remaining 25% being available as a basic (20%) rate tax reduction. ii) Starting in April 2018, 50% of the interest will be a normal deduction and 50% given as a basic (20%) rate tax reduction. iii) In the 2018/19 tax year, 25% of the interest will be deducted from rental income and 75% given as a basic (20%) rate tax reduction. iv) From April 2020 all financing costs incurred by a landlord will be given as a basic (20%) rate tax reduction. For example, A Higher (40%) rate payer with annual rental income after other expenses of £15,000 and mortgage interest costs of £2,000 each year will have taxable rental income in 2016/17 of £13,000. In 2020/21, the taxable rental income will be £15,000 with £400 (£2,000 at 20%) deducted from their tax liability. These changes affect partnerships as well as individuals, where they receive rental income from residential lets. Individuals with large rental businesses and large mortgages could have been basic rate payers under the old rules, however under the full restriction they could have a heavy tax liability despite making little ‘real’ profit. To take an extreme example, assuming that tax rates remain constant except for the interest restriction: 2016–17 2020–21 Gross rents 500,000 500,000 Repairs and other tax deductible costs (180,000) (180,000) Interest on mortgage (300,000) Net rental profit 20,000 320,000 Personal allowances (11,000) Taxable income 9,000 320,000 Basic rate tax at 20% 1,800 6,357 Higher rate tax at 40% - 47,286 Additional rate tax at 45% - 76,500 1,800 130,143 Less interest relief at 20% on £300,000 – (60,000) Net tax liability on rental income 1,800 70,143 Tax increase 68,343 Net income/(cost) 18,200 (50,143)

Personal finance & wealth management supplement the barrister 2015

By the time the full effect of the restriction has come into force in 2020/21 the tax liability increases by £68,343 but the disposable income falls to a net outgoing £50,143. This individual would have a tax charge despite little or no profit. The effects of these changes can be mitigated in a number of ways, for example you may wish to consider: A) Transferring ownership to a lower earning spouse; B) Owning your rental property through a limited company; C) Investing in commercial property, which is not affected by these changes; D) Invest in a Furnished Holiday Let, which is also unaffected.

5 Rental income and the wear and tear allowance Currently, furnished residential lets can claim a 10% deduction from their profits based on their gross rents less council tax or rates. The Government has abolished this from April 2016, in future relief will only be available as items are replaced. Landlords should be aware that their tax liabilities may increase as a result. 6 Capital Gains Tax Consider realising gains within your tax free Annual Exemption (£11,100 in 2015/16). You can re-purchase the shares after 30 days or buy them through your spouse to ensure no value is lost and a higher base cost on the final disposal. 7 Inheritance Tax – small gifts

works well if it is documented properly as gifts out of capital don’t qualify. The gifts must also have an annual theme which makes them suitable for covering school fees and similar items. 9 Inheritance Tax – annual exemption Each year you can give away £3,000 from your estate in addition to the exemptions above. Any unused amount is carried forward for one year, so you could gift £6,000 out of your estate every 2 years. 10 ISA allowance and the Help to Buy ISA In the 2015/16 tax year, the maximum ISA allowance is £15,640 which can cover stocks, shares or cash. The income and gains from the ISA are free from Income Tax or Capital Gains, although it could still be part of your estate for IHT. Consider using your allowance before 5 April 2016 or it is lost for that tax year. The Government is also launching a new ISA on 1 December 2015 for individuals yet to purchase their own home. The government will contribute £50 for every £200 put into the ISA up to £12,000 plus £3,000 from the government. The ISA must be taken out within the next 4 years and each individual can take one out so a couple can save £30,000 towards a house. Contributions can come from almost any source, so you can contribute to relatives if they are over 16 and they don’t already have an ISA. The maximum deposit per month is £200.

*Please note this article is intended as a summary at the time of writing in August 2015 of a number of complex issues. Professional advice should be sought before undertaking any of these transactions.

Gifts made from your estate within the last 7 years before death still form part of your estate for Inheritance Tax, subject to a number of reliefs. For example, the small gifts exemption of £250 per recipient means that you can distribute £250 to your children and grandchildren each year.

8 Inheritance Tax – gifts out of income Normal expenditure out of income is potentially a very valuable tax relief, where you make gifts from your disposable income and the gifts leave your estate. This

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Charlie Thompson is an Assistant Tax Manager at Muras Baker Jones Limited, an independent firm of Chartered accountants based in Wolverhampton. He can be contacted on 01902 393000 or Charlie. thompson@muras.co.uk

The last, last chance saloon John Cassidy, partner at Crowe Clark Whitehill, emphasises the benefits of action in the last few months of the HMRC disclosure facilities

Introduction Six years ago I wrote an article in this magazine titled ‘A final UK tax amnesty’. That article was all about an announcement from HM Revenue & Customs (HMRC) in July 2009 that, from 1 September 2009, a ‘New Disclosure Opportunity’ (NDO) was to be offered to help individuals bring their UK tax affairs up to date at a lower than usual cost. ,As it turned out, its realistically useful life was very short and it was not the final UK tax amnesty! Just a month later in August 2009 HMRC announced out of the blue that various agreements had been reached with the small Principality of Liechtenstein, including the Liechtenstein Disclosure Facility (LDF), also due to start on 1 September 2009. The LDF enabled anyone with tax problems relating to Liechtenstein assets to come forward and make a disclosure on very beneficial terms. Perhaps more importantly, it also enabled anyone without a Liechtenstein asset to do the same as long as a Liechtenstein footprint was established there first such as a bank account. Crucially, the LDF was more beneficial than the NDO so many cases that had already registered for the latter quickly jumped into the former.

HMRC later announced yet more facilities relating to the Isle of Man, Jersey and Guernsey; these were not as beneficial as the LDF so have not been widely used but this again demonstrates that the NDO was far from the final amnesty despite HMRC’s assertions at the time. We are now just a few months away from the end of all of the disclosure facilities and they will not be replaced by anything comparable or remotely as beneficial. Anyone with tax to declare should therefore come forward immediately as after 31 December it will be too late. The LDF has undergone significant changes over its six year life but it remains an extremely beneficial tool for regularising past tax problems, whether related to offshore or onshore matters. The LDF in a nutshell The detail of the LDF is complex but it is a simple process of disclosing to HMRC, hence a lot less stressful, costly and intrusive than an investigation by HMRC, with more control retained by the advisor. HMRC takes a back seat while the advisor builds a report making a full disclosure of the relevant circumstances, tax issues and figures. The key benefits are: • a shortened assessment period, from 1999-2000 rather than 20+ years potentially available to HMRC

Personal finance & wealth management supplement the barrister 2015

• a fixed penalty of 10% up to 2008-09 and 20% thereafter • the Composite Rate Option (CRO) and the Single Charge Rate (SCR) which can be very beneficial in certain circumstances (see below) • a guarantee of no prosecution for the tax offences • access to HMRC’s bespoke service. The first three points above are the main financial benefits of the LDF and are potentially available only if an offshore asset (any asset, not necessarily a Liechtenstein one) was held at 1 September 2009. The CRO/SCR is an alternative method of calculating the tax liabilities under which, broadly, a figure is determined based on income and capital gains that is then deemed to cover all taxes, which can be very beneficial. There is no need to hold an offshore asset either currently or in the past; as long as taxpayers are not being investigated criminally or under Code of Practice 9 (COP 9), they are eligible to register for the facility upon the acquisition of relevant Liechtenstein footprint. Changes were announced in August 2014 restricting access to all of the beneficial terms, for example if HMRC was already aware of the liabilities prior to the LDF process being started. Crucially, however, nothing changes the ability to access the LDF, just all of its terms, and the final two bullet points above remain available to everyone. Whilst prosecution may not always be contemplated, HMRC has been increasing such activity so the risk cannot be ignored. Also, HMRC’s bespoke service includes access to a named person who can be engaged openly, on a no-names basis if need be, who is an experienced investigator hence pragmatic, ‘grown up’ dialogue is the norm. Common scenarios where the LDF could be beneficial The benefits of the LDF are clear where the undeclared tax is linked to an offshore asset. For example, if family members inherited a Swiss investment account 20 years ago the LDF enables an full and frank disclosure of the facts and all income and gains – from 6 April 1999 only, not the full 20 years - without any possibility of prosecution and with relatively low financial penalties. If the assets were not declared for Inheritance Tax (IHT), the LDF forgives any liabilities pre 1999 and, if the IHT liability is later, the CRO/ SCR can be used to validly extinguish it entirely. Undeclared IHT in relation to offshore assets is, in my experience, commonplace for a myriad of reasons including executors being unaware of the deceased’s secret offshore assets or family members burying their heads in the sand through fear of what action might be taken if their relative’s past tax misdemeanours were revealed. Even if the full beneficial terms are not available, the LDF always guarantees no prosecution thereby providing comfort for worried inheritors. There are also other scenarios where using the LDF may be

less obvious but can still be beneficial: 1. UK business activities Perhaps a self-employed tradesman has deliberately under-declared cash earnings over 15 years, so HMRC could prosecute or investigate under COP 9. Not all of the beneficial LDF terms will be available because he did not previously own an overseas asset, but he will be immune from prosecution and will not be subjected to a lengthy, intrusive, stressful investigation. Similarly, if money has been extracted from a company and hidden in an overseas bank account over many years the CRO/SCR could be available to cover an array of taxes such as corporation tax, PAYE, NIC, tax on overdrawn directors’ loan accounts and the undeclared income tax on the extracted funds and the bank interest. 2. Trusts Trusts are complicated and tax issues are often overlooked such as periodic 10 year charges. If the trust held an offshore asset at 1 September 2009, the trustees might again be able to use the CRO/SCR so that tax is calculated on all income and gains and then deemed to cover all taxes, including the 10 year charges which disappear entirely. The LDF can also have wider benefits such as tidying up the tax position of the trustees, the settlor and the beneficiaries generally as well as obtaining certainty. For example, there may be question marks over the domicile status of the settlor and excluded property status of the trust assets hence the LDF can be used to fully disclose all the relevant details such that the issues can be aired and agreed with HMRC. 3. Remittance basis taxpayers I have encountered many examples of remittance basis taxpayers making mistakes as, in reality, the remittance basis is complex. For example not appreciating the important difference between capital and capital gains; careful use of one credit card overseas, only for the bill to be paid directly to the bank’s UK processing centre; and the misunderstanding that, post 2008, all income from prior years could be remitted as the remittance basis no longer applies. The LDF can also again be used to tidy matters up and to gain certainty going forward, for example if offshore monies have become horribly mixed it may be possible to make some sensible assumptions and estimate the different elements and, once HMRC has accepted the report, the taxpayer can take steps to separate the funds properly.

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historically, they were considered to be none of HMRC’s business. What’s next? This time we really are coming to the end of the final beneficial disclosure facility. HMRC has announced that a new facility will be put in place once the LDF comes to an end but, whilst we do not yet know the detail, HMRC has also made it very clear that it will not contain beneficial terms, for example the penalty will be at least 30% of the underpaid tax and there will be no immunity from prosecution.

There are also new penalties relating to offshore matters as well as ongoing discussions on additional, draconian penalties including the potential to take a percentage – up to 100% potentially - of the offshore assets, not just a percentage of the tax. Draft legislation has also been issued relating to the planned ‘strict liability’ criminal offence where offshore assets are concerned.

What should clients do? HMRC’s logic is that there was previously no way of obtaining data on UK investors in offshore jurisdictions where confidentiality was paramount. That will change in 2016 when the Common Reporting Standard (CRS) is implemented. Broadly, the CRS obliges overseas financial institutions in over 90 countries to provide details of UK residents who own foreign assets automatically each year. HMRC will, therefore, have the relevant data to uncover any associated tax, so there is no need to offer the carrot of beneficial disclosure terms that were enjoyed under the LDF. Even if there is no perceived problem, HMRC may still start questioning targeted taxpayers which could unearth technical errors such as those associated with the remittance basis. I wonder how many remittance basis taxpayers have recently – or ever – had their overseas structures and transactions reviewed from a UK tax perspective given that,

Not every case is suitable for the LDF. However, for now, it remains an excellent disclosure mechanism so should always be considered.Now is also the time to check that everything is in order, particularly for clients with either offshore assets or those on the remittance basis and, if it is not, to consider using the LDF while it remains an option. If tax irregularities are already known, the only sensible option is to make a full disclosure to HMRC now. 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 020 7842 7356 or email john.cassidy@crowecw.co.uk

Personal finance & wealth management supplement the barrister 2015

About turn - inheritance tax planning turned on its head Did you think a pension was just for retirement? Then think again. Recent changes to Pension and ISA rules changes conventional thinking. Danny Cox of Hargreaves Lansdown hails a revolution in inheritance tax planning. When you first heard about pension freedom, your first thought may have been how you would spend your pension in retirement. Unlimited withdrawals (albeit mostly taxable), whenever you want them after age 55, and no requirement to buy an annuity makes pensions far more attractive. You probably didn’t immediately think about inheritance tax. And it almost certainly didn’t occur to you to try and spend your pension as little as possible. But why on earth shouldn’t you spend it? We are used to thinking of pensions as retirement income. To most people they mean one and the same thing. But that conventional thinking is taking a tumble – whole rule books are being re-written. Pension freedom has (intentionally or not) created the chance to dramatically reduce the inheritance tax (IHT) that your loved ones might have to pay.

Death and taxes Trying to ensure that your loved ones inherit as much as possible, estate planning, is typically done by reducing the amount of inheritance tax paid. Normally 40 per cent of your estate (above the nil-rate band of £325,000) is lost in IHT upon your death. Therefore the best way to reduce the amount of IHT you have to pay is to reduce the size of your taxable estate. For every £100,000 by which you can reduce your taxable estate, you can save £40,000 in death duties. There are two main ways to do this: by making gifts before your death – such as from capital, income, or both – or by investing in IHT-free investments. Charitable gifts are very tax efficient as they are IHT free and can reduce the IHT rate from 40% to 36%, if 10% of your taxable estate is left to registered charities. It also makes sense to spend, while you are alive, any assets which will be subject to IHT upon your death, while keeping back any that may be IHT free. Examples of IHT free investment assets include certain shares listed on the alternative investment market, AiM, shares in unquoted businesses and

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Enterprise investment Scheme (EIS). Before the pension freedoms were introduced on 6 April of this year, personal pension funds in payment were subject to huge amounts of tax: 55% on death before age 75 and up to 82% for deaths happening after that age. Where the investor had the choice of spending pension money instead of, say, ISA savings, at that time it made far more sense to spend the pension first, since it was subject to much heavier taxes on death.

Welcome to the new world Now everything has changed. Since April, personal pension funds are normally entirely tax free on death before age 75 up to a value of £1.25 million, known as the lifetime allowance (the lifetime allowance is dropping to £1 million from April 2016). For deaths after age 75, the beneficiaries’ are charged their marginal rate of income tax on withdrawals – which is only 20 per cent for basic rate taxpayers, half the normal rate of IHT, and of course the beneficiaries may be zero-rated and so would still pay no income or other taxes at all. These rule changes have transformed the way we look at pensions. No longer are they merely a retirement fund – they are also potentially a ready-made IHT wrapper, perfect for bequeathing money to the next generation with no (or greatly reduced) tax. This raises the question of how people in retirement should be funding their lifestyle; there are now strong arguments for spending taxable investments such as share portfolios and cash deposits first, ISAs next and holding on to pension pots for as long as possible. But even that’s not all. Other recent rule changes have affected estate planning, such as the tax benefits of ISA savings now being transferable to the surviving spouse on death. You can also now invest in AIM shares in an ISA, most of which qualify for an IHT exemption after two years. Add in the potential for an IHT-free family home as confirmed by the Conservatives in the Summer Budget and it’s clear that the world of estate planning and IHT reduction is set to transform.

How inheritance tax is changing from 6 April 2017 From deaths on or after 6 April 2017, a new main residence nil rate band will also be available in addition to the standard nil rate band. The main residence nil rate band will be the net value of the home (e.g. after any outstanding mortgage or liabilities) to a maximum of; • £100,000 for 2017/18 • £125,000 for 2018/19 • £150,000 for 2019/20 • £175,000 for 2020/21

Therefore from April 2020, there is the potential for a married couple to leave £1 million of their estate IHT-free to their direct descendants. The new main residence threshold only applies to one main residence property only and not second homes and only if it is left to a direct descendant. The value of the main residence threshold tapers away where estates are worth £2 million or more.

Be sure to know what you’re doing It’s vital not to rush into any decisions. Before you start spending and gifting, you need to look ahead to what income you are likely to need during your retirement, taking into account rising prices and the possibility of long term care. Estate planning in retirement, known as the ‘decumulation stage’, is often at odds with the saving and capital-building you have been doing during the “accumulation” stage. There is a fine balance here between minimising tax (both in life and in death) and ensuring you have enough to live on in the meantime. This is where a good financial adviser is worth their weight in gold. They will help you to map out your financial future, showing you how best to organise your assets to provide you and your spouse with financial security: both the income you need and capital for contingencies, while minimising taxes and maximising legacies for those you’ll leave behind. About the author: Danny Cox is a Chartered Financial Planner at Hargreaves Lansdown He has worked in the financial services sector since 1989 and is among an elite group across the UK to hold both the prestigious Certified Financial Planner CM and Chartered Financial Planner status.

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Personal finance & wealth management supplement the barrister 2015

Post Budget Review from a Tax Dispute Resolution Perspective By Karmjit Mader, Senior Tax Manager at BDO LLP ‘To reduce the economic deficit and achieve a surplus by 2019-20’, this was one of the key objectives outlined in the summer budget 2015. To achieve this surplus the government has said that it will undertake £37 billion of consolidation measures. This budget announced that £5 billion will be raised from measures tackling tax avoidance and tax planning, evasion and compliance, as well as imbalances in the tax system. The message is therefore clear; there is no let-up in the fight against tax defaulters or those who try to take advantage of the system. The government will continue to deploy resources to close the tax gap. Karmjit Mader, Senior Tax Manager at BDO LLP provides a summary of the key budget proposals aimed at achieving this goal.

government through HMRC no matter how small you think you are. Wealthy individuals’ non-compliance To ensure that wealthy individuals are reporting all the relevant information affecting their UK tax position, HMRC is extending its use of Customer Relationship Managers (a single point of contact for agents and customers with HMRC) to those with a net wealth of £10 million to £20 million. Previously Customer Relationship Managers were only allocated to individual’s whose net wealth was over £20 million. Tackling the hidden economy

Tackling Non-Compliance and Evasion The government recognises that in order to clamp down on non-compliance and evasion funding is required. HM Revenue & Customs (“HMRC”) is due to receive £800 million over this parliament to tackle the problem.

The government considers that there are far too many people operating in the hidden economy choosing not to make themselves known for tax purposes. HMRC is consulting on introducing new powers to obtain data from online intermediaries and electronic payment providers. This data will help identify those who are trading using these entities.

Criminal investigations HMRC has been criticised publically in the past for allegedly agreeing deals with wealthy individuals and corporates which have committed serious tax fraud rather than taking a tougher stance. To send a clear message that tax evasion no longer pays, HMRC is tripling the number of criminal investigations that it undertakes into serious and complex tax crime. HMRC has already commenced this objective by announcing the merger of the two teams dealing with serious tax fraud: Specialist Investigations (responsible for civil investigations) and Criminal Investigations. It is thought that this move would allow the two teams to share specialist knowledge and expertise and, therefore, be more successful in obtaining the maximum yield. Local compliance enquiries The government has committed to investing a significant sum over 5 years to tackle non-compliance from small and medium sized businesses, public bodies and affluent individuals. HMRC aims to collect an additional £2 billion of tax by 2020/21 from local compliance enquires alone. It is clear that there is a focus on tax defaulters at all levels. The message that no one is safe is being sent by the

It is likely that the data received will pass through HMRC’s CONNECT system, a sophisticated analysis tool cross referencing data from sources such as banks and the land registry). The system is able to prepare an integrated report of a taxpayer’s level of income and expenditure and, therefore, assess the risk of any tax loss. HMRC has already invested £80 million into this tool since 2008 and is committed to continuing the investment in this invaluable resource which identifies those cases requiring investigation. To ensure that this critical information is dealt with effectively, HMRC will increase the number of investigators. HMRC is also going to offer a ‘digital disclosure channel’ to assist those that wish to come forward voluntarily.

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Continuing the on-going fight against offshore tax evasion Over recent years the UK government has had high on its agenda the need to tackle offshore tax evasion on a global scale, which was most notably seen by the implementation of the UK-Swiss Taxation Agreement in 2012. This, many spectators commentated, was perceived to be the end of Swiss banking secrecy. Many people holding money in Switzerland chose to transfer it into other offshore jurisdictions which they thought would provide the same anonymity so that they were still safe from having to declare their income and gains to their local tax authorities. This is now not the case as the UK, along with 60 other jurisdictions, has committed to exchanging data under the Common Reporting Standard (“CRS”) by 2017. The CRS is a global standard for automatic information exchange which has been approved and developed by the OECD. It requires financial institutions (such as banks, insurance companies, trusts etc) to provide to their local tax authority financial data on persons who they act for and are resident for tax purposes in participating countries. The data is then exchanged automatically to the relevant countries. Consequently, those countries will be able to identify information regarding the financial assets of those persons who appear to have evaded their tax obligations. The Government announced in the summer budget that HMRC will be given a power in legislation to compel tax advisors, financial intermediaries and other professionals to notify their clients about: • • •

The forthcoming exchange of information with other jurisdictions under the CRS; A limited time disclosure facility from early 2016 to enable people to regularise their tax positions before the CRS information starts to arrive; Existing penalties for offshore evasion (up to 200% of the tax) and the penalty for moving funds to evade tax for those who do not come forward to make a disclosure, as well as the proposed new civil penalties for tax evaders and a new criminal offence for failing to disclose offshore taxable income and gains which are the subject of recent consultation documents.

It is thought that any new disclosure opportunity to be announced will not provide anywhere near the favourable terms offered by HMRC’s Liechtenstein Disclosure Facility opportunity which is consequently being closed at the end of 2015. This sends a clear indication that HMRC has sufficient plans to deal with offshore evasion directly. People with an offshore irregularity should come forward now and take advantage of any ‘carrot’ HMRC is offering before the ‘stick’ is introduced. Marketed tax avoidance

Serial avoiders HMRC’s attack on marketed tax avoidance arrangements was recently bolstered by a win in the High Court in a

Judicial Review that challenged the legality of Accelerated Payment Notices (‘APNs’) which force users of tax avoidance schemes to pay upfront while they are investigated. This is predicted to lead to the issuing of further controversial APNs, subject to any appeals. The budget announced further measures targeted at those who persistently enter into tax avoidance schemes which are defeated (‘serial avoiders’). A new consultation is underway on these plans which include imposing a special reporting requirement on serial avoiders, imposing a surcharge on those whose latest tax return is inaccurate as a result of further defeated schemes and restricting the use of tax reliefs for those who abuse them in addition to measures to name serial avoiders. HMRC is also consulting on its plans to introduce a ‘special measures’ regime to tackle businesses that are persistently highly aggressive with tax planning. It is clear that HMRC intends to continue making it more difficult for anyone to obtain advantages from entering into marketed tax avoidance schemes. Enforcement of debts This budget confirmed that where it is established that additional tax over £1,000 is owed, new legislation included in the Finance Bill will strengthen its powers to recover tax and tax credit debts directly from debtors’ banks and building society accounts, including funds held in cash ISAs and joint accounts. HMRC consulted on this controversial legislation prior to its inclusion in the Finance Bill. HMRC intends that there will be robust safeguards including a county court appeal process and a face-to-face visit to every debtor before they are considered for debt recovery through this measure, although not all safeguards are included in the legislation. This move highlights the Government’s commitment to raising public revenues. If HMRC considers that the debt is payable they will now come and ‘physically’ collect it. The summer budget sent out a clear message – there is nowhere to hide if you choose to evade the system. The Government will no longer allow the hard working taxpayer to subsidise those not willing to abide by the rules. The public purse is stretched – where money is owed in taxes, HMRC will collect it and are continuing to commit the resources to do just that. It is important that clients with any irregularities in their tax affairs come forward voluntarily before the new measures take effect as the consequences of HMRC finding them are serious and will become more so soon.

Karmjit Mader is a Senior Tax Manager at BDO LLP. Karmjit specialises in managing HMRC enquiries, investigations and disclosures with a private client focus and has assisted numerous clients to regularise their offshore and onshore tax position with HMRC.

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Multijurisdictional financial services insolvencies on the rise Research by Grant Thornton UK LLP and South Square reveals that lawyers are anticipating an increase in cross-border insolvency activity, driven by financial services; and uncovers a clear demand for harmonising cross-border regulatory frameworks and improving court infrastructure

By Steve Akers, Recovery and Reorganisation Partner at Grant Thornton UK LLP Felicity Toube QC, South Square Chambers

There has been considerable recent activity around the subject of cross-border insolvency. New judicial appointments are being made, new laws enacted or reviews undertaken, important judgments in recent insolvency cases such as Singularis are shaping legal principles in the common law sphere, and the media is increasing its scrutiny of activity in offshore jurisdictions. Taken together, this activity gives rise to a cross-border insolvency landscape that continues to evolve. With the number of cross-border insolvencies anticipated to rise in the near-term, now is an appropriate time to consider what sort of legal infrastructure is required to support this projected growth, and to ensure the major offshore jurisdictions are suitably prepared for the future. Whether cross-border insolvency works effectively in the future or not will depend upon jurisdictions operating efficient court systems, supported by robust legislative frameworks and workable practices for collaborating with other jurisdictions. Working with that premise in mind, we set out to better understand practitionersâ&#x20AC;&#x2122; views on how a well-functioning multijurisdictional insolvency system might operate. These views were incorporated into our report, From discord to harmony: the future of cross-border insolvency, which captures the perspectives of solicitors, barristers, and other insolvency professionals who have experience of conducting cross-border insolvencies involving offshore jurisdictions. Their views point towards a rise in multijurisdictional insolvency activity over the second half of this decade. The research identified that almost two-thirds (63%) of insolvency professionals surveyed expect that the number of insolvencies involving offshore jurisdictions will increase over the next three years. A fifth (19%) describe this anticipated rise as a â&#x20AC;&#x2DC;considerable increaseâ&#x20AC;&#x2122; on current levels of insolvency activity, see Figure 1. Only one in five (21%) anticipate (perhaps surprisingly) that insolvency activity will decrease over the same period.

Figure 1. Almost two-thirds anticipate an increase in the number of insolvencies involving cross-border jurisdictions over the next three years.

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Financial services leads the increase Among insolvency professionals who anticipate an increase in cross-border insolvency over the next three years, seven out of 10 (70%) believe that the financial services sector will drive the biggest increases, see Figure 2. This is followed by real estate and construction (54%) and hotels and leisure (34%) in second and third place respectively. Guernsey is the only location among the eight main offshore jurisdictions of focus in the research where financial services is not identified as the leading industry sector driving future insolvency activity. In Guernsey, financial services is placed second behind real estate and construction.

Figure 2. Seven in ten lawyers believe cross-border insolvency activity will be driven by financial services and real estate and construction sectors. Within financial services, the research participants anticipate future cross-border insolvency activity will cluster around three main sub-sectors: investment funds, hedge funds, and insurance. As one insolvency lawyer points out, lingering macroeconomic challenges are likely to be a major driver of future insolvency activity for financial institutions still vulnerable to macroeconomic shocks: “Although the world economy is in a slightly better place than it was a few years ago, it could all go bad if Greece falls out of the Eurozone, or England votes to leave the EU. Catastrophic events such as the Eurozone falling to bits or massive hurricanes will all have a significant impact on the insurance market, and are very difficult to predict.” Another significant driver of any future increase in insolvency in the financial services arena is likely to be a rise in interest rates. With global interest rates at historic lows, future rises may place companies under greater pressure to meet their obligations on secured assets such as property. As one Hong Kong based lawyer explains: “Interest rates will make a difference to future insolvency activity because if interest rates start rising then this may signal trouble for property investments. If the money coming into Hong Kong from China, or China itself, slows down, that could signal a major problem as well.” However, respondents also acknowledge that one consequence of increased regulation has been to help businesses weather a downturn more effectively. This is particularly true of financial institutions which have been subject to much stricter regulatory regimes since 2008. The rise of regulation, coupled with an intent to save institutions rather than let them go into an insolvency process, means that an increase in cross-border insolvency activity follows on from the quieter than expected period for financial services insolvency during the financial crisis.

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Making cross-border insolvencies more effective: the case for improvement Ensuring effective procedures are in place for cross-border insolvency should feature highly on the priority list for foreign courts, particularly those dealing with high volumes of financial services insolvencies. Given that cross-border insolvencies are predicted to increase over the medium-term, it is important that courts in major offshore centres are well-positioned to respond to any upturn in activity. In practice this means those courts would benefit from reviewing current protocols and procedures and implementing changes necessary to help to address negative perceptions about their ability to handle higher volumes of cross-border insolvencies in future, particularly complex cross-border insolvencies involving financial institutions. Making cross-border insolvencies more effective also features highly on the agenda for insolvency professionals who undertake proceedings in offshore jurisdictions: two-thirds (67%) of respondents say that the legal process and court infrastructure is the most important factor by which they evaluate the effectiveness of a jurisdiction as a location to undertake insolvency proceedings. When asked to select their top three most important factors, the proportion citing legal process and court infrastructure rises from 67% to 84%. Other factors of high importance include the availability of a range of cross-border assistance provisions (cited by 63% among their top three most important factors) and the enforceability of foreign court orders and judgments (cited by 40%). The perception that there is scope for improvement is reflected in the lower scores given by respondents when asked to rank the offshore jurisdictions in which they have experience undertaking insolvency proceedings.

Figure 3. Average effectiveness scores for offshore jurisdictions are relatively low with all attributes rated less than seven out of 10.

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The low perception rating for offshore jurisdictions suggest that more could be done to make cross-border insolvencies work effectively in future. Perhaps the biggest concern arising from the research are the scores for the provision of rescue mechanisms and the ability to put foreign companies into liquidation – two attributes cited among the top five most important overall when assessing what makes a jurisdiction attractive – which are rated, on average across all jurisdictions, at just 5.36 and 5.67 out of 10 respectively. Harmonising approaches to cross-border insolvency for financial services and beyond What more can be done to harmonise approaches to cross-border insolvency to make these complex undertakings work more effectively in the future? An overwhelming majority of insolvency professionals believe the answer lies in greater collaboration: 85% of respondents agree that the courts in different jurisdictions should collaborate more to make multijurisdictional insolvencies a fairer, more efficient process. According to one Cayman Islands-based lawyer interviewed, trust between jurisdictions is an essential component of fostering greater collaboration: “There has to be more trust between jurisdictions and opportunities for judges to discuss cross-border issues to build that trust”. When asked for their recommendations for how greater trust and collaboration could be achieved, research participants cite ideas consisting of a combination of formal and informal strategies: 1. Enacting UNCITRAL model law to ensure a formally-adopted regulatory foundation for greater collaboration and consistency or 2. A voluntary code between common law jurisdictions setting out the intent of those jurisdictions to collaborate more effectively in matters of cross-border insolvency. 3. Fostering a greater mind-set of reciprocity between jurisdictions by giving judiciary the means to share information in relation to cross-border insolvencies. 4. INSOL-promoted colloquia for judges and other interested parties to discuss and agree protocols for information sharing and collaboration. With multijurisdictional insolvencies involving offshore centres, particularly those involving financial services, set to increase, greater cooperation will help to establish greater trust and confidence that the procedures and protocols in offshore jurisdictions are fit for the future and are applied more consistently across offshore centres. As one insolvency lawyer neatly summarises: “Bringing a jurisdiction’s insolvency laws into harmony should make it a more attractive place to do business and therefore act as an incentive for the jurisdiction to sign-up.”

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Road test: Pension v ISA By Dave Downie, Technical Manager at Standard Life

The new pension freedoms introduced in April mean pensions and ISAs have become more easily comparable as long term savings vehicles. Once you reach age 55 there are no longer any restrictions on what can be taken from a DC pension - just like an ISA. In the July budget the Chancellor announced a review of tax relief on pensions so we may see even more changes to come, but, for now let’s put the ‘all new’ 2015 pension and the recently modified ISA, head to head to see which will come out top in a 0 - £60k performance shoot-out and which one is the best-in-class family friendly model.

Pensions and ISA compared According to HMRC, 52%* of savers in stocks and shares ISAs are aged 55 or over. So access will not be a concern for a large number of existing savers. Pensions and ISAs enjoy the same tax privileges on their underlying investments. Both investments pay no additional tax on any investment growth and income. ISA savings can be dipped into at any time; there’s no need to wait until reaching age 55. So an ISA has its place if saving towards life events that are likely to occur before this age, or simply as a ‘rainy day’ fund. However, that freedom could be an unwelcome temptation for less disciplined retirement savers. But what about those who don’t need access or are over 55? Which of these investments will offer the most spendable income or provide the greatest inheritance for their families? One area where pensions and ISAs differ is on the tax breaks given when payments are made, and when funds are accessed.

ISA Pension (20%/20%) Pension (40%/40%) Pension (40%/20%)

Money in •

•

Pensions contributions benefit from tax relief. Contributions are normally paid net of basic rate tax, with the pension provider adding basic rate tax to the fund. Any higher or additional relief is claimed through self-assessment. So a £10,000 pension contribution will require a payment of £8,000. A higher rate tax payer would be able to claim a further £2,000 tax relief via their tax return and this will reduce the tax they pay on their other income. So the net cost to an investor paying higher rate tax is £6,000. There’s no tax relief for payments into an ISA.

Money Out •

• • • • •

Up to 25% of the pension fund can be taken completely tax free. The balance is taxed at the saver’s highest marginal rate of income tax. All withdrawals from an ISA remain tax free. The 0 - 60 performance shootout Assuming investments grow at the same rate for both pension and ISA, what would give the best net return? Husband and wife both invest £15,000 into an ISA. For the same net cost they could invest £18,750 into their pension as a basic rate taxpayer (20%) or £25,000 as a higher rate taxpayer (40%).

With the same 4% return after charges on both the ISA and pension; how long would it take for their combined investment to grow to £60,000? Of course, it’s not just a case of looking for the first past the post, but, which one gives the best return after tax has been deducted. The table below shows the position for some of the most common scenarios of tax rates on the way in and way out.

Fund hits £60K

£60K in the pocket after tax

17.5 years 12 years 5 years 5 years

17.5 years 16 years 14 years 9 years

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For a more complete performance picture the table below looks at what could you get back from an investment of £15,000 out of post-tax earnings, this time left to grow at 2.5% pa over an investment period of 10 years. It covers each of the conceivable combinations of tax rates on the way in and the way out.

% tax rate in/out 45/45 45/40 45/20 40/45 40/40 40/20 20/45 20/40 20/20

Pension return £23,129 £24,438 £29,675 £21,201 £22,401 £27,202 £15,901 £16,801 £20,401

ISA return £19,201 £19,201 £19,201 £19,201 £19,201 £19,201 £19,201 £19,201 £19,201

Pension gain £3,928 £5,237 £10,474 £2,000 £3,200 £8,001 £1,200

ISA gain £3,300 £2,400 -

Crunching the numbers will give you the hard facts on which gives the best net return, but that’s not the whole story. The family friendly option For some it may be just as important to also consider what can be passed on to family members on death. The new ISA inheritability rules provide a surviving spouse or civil partner with an increased ISA allowance equal to the value of the deceased’s ISA at the time of their death. This allows the survivor to benefit from continued tax free investment returns on their spouse’s investments. But it doesn’t keep the ISA out of the spouse’s IHT net. The fund could still suffer a 40% IHT charge on the second death if total assets exceed the IHT nil rate band. Pensions on the other hand are typically free of IHT. And there are new rules on how pension wealth can be inherited. Restrictions have been lifted on who can inherit a drawdown pension. From April it will be possible to nominate anyone to receive a pension pot and for them to carry on taking an income from it. This applies even if they are below the normal pension age of 55, allowing children or grandchildren to have immediate access. By keeping the money within the pension, they benefit from the same tax free investment returns as an inherited ISA. But unlike the ISA, it isn’t limited to spouses and civil partners but can apply to anyone you want to benefit from your pension. And it also means the funds don’t make their way into the beneficiary’s estate for IHT. In addition the rates of tax on inherited drawdown funds have fallen too. • •

Should you die before age 75, any income drawdown by your beneficiaries will be tax free. If you die after age 75 drawdown income will be taxed at your beneficiary’s marginal income tax rate.

These rates will apply regardless of whether the fund is taken as an income or a lump sum. Although for the 2015/16 tax year only, taking the whole fund as a lump sum on death post 75 will be taxed at 45% before reverting to the beneficiary’s marginal rate in April 2016.

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Death pre age 75

ISA

Pension

No income tax or CGT. Forms part of the estate on death

Lump sums tax free. Outside estate for IHT.

• Spousal IHT exemption available for spouse or civil partner. • Potential 40% IHT for all other beneficiaries. Death post age 75

No tax payable by beneficiary on income withdrawals. Outside estate for IHT.

No income tax or CGT. Forms part of the estate on death.

Lump sum taxable at beneficiary’s marginal income tax rate.

• Spousal IHT exemption available for spouse or civil partner. • Potential 40% IHT for all other beneficiaries.

Outside estate for IHT. Income withdrawals taxable at beneficiary’s marginal income tax rate*. Outside estate for IHT.

*45% for lump sums in 2015/16 only Part-ex your ISA The pension proves to have the better performance in most scenarios and greater flexibility on passing on wealth to family members. So with the April’s pension freedoms taking access out of the equation for the over 55’s, it begs the question.... should you trade in your existing ISA savings for a pension contribution? Of course, this requires sufficient earnings and enough headroom within the pension annual and lifetime allowances. It’s certainly something worth considering over the years leading up to retirement. The result could be an increased fund with more tax efficient wealth transfer options. The finishing line It’s a fact that pensions will, like for like, outperform ISAs in the majority of scenarios. This is down to the combination of tax relief on contributions and the ability to take a quarter of the fund tax free. As a result there are very few situations where the ISA will have the upper hand. The only common scenarios would be where: • •

Access is needed prior to age 55, and Anyone receiving tax relief at 20% on contributions, but, by accessing their pension in one go end up paying tax at 40% on a large slice of their pension fund.

If you receive tax relief at 40% on your pension contributions you will always be in a better position saving in a pension regardless of how much tax you pay on the way out. Factor in the new pension death benefit rules and the case for pension becomes even stronger. Crunching the numbers suggests moving existing savings into pensions in the run up to retirement should always be considered. *https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/423430/Table_9.8_2012-13_for_publication. pdf Laws and tax rules may change in the future, and the information here is based on Standard Life’s understanding in August 2015. Personal circumstances also have an impact on tax treatment. As with any investment the value can go up or down and may be worth less than you put in.

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Pension wealth down the generations By Julie Hutchison, Consumer Finance Expert, Standard Life The way you can pass on pension wealth to your loved ones changed radically on 6th April 2015. In the past, a pension was often a fixed income for life. Now, with more flexibility both during your lifetime and for your loved ones later, a pension gives you options to save, spend and pass on your wealth tax efficiently.

Your beneficiary does not need to wait until age 55 to access their inherited pot – they can access it as and when they want to.

The potential tax-free, or lower tax, result for beneficiaries means those with significant pension savings will not want to ignore this. Action may be required if you wish to make maximum use of the new rules and this article sets out what’s changed, the tax position in different situations, and practical points to consider.

Where someone dies before age 75, their remaining pension pot can now be passed on to beneficiaries to access this pot tax free, as and when they wish. Previously, this pot may have been taxed at 55%, so reducing this to zero is a significant boost.

Inherited pension pots: tax free or lower tax

Where someone dies after age 75, normal income tax rates of between 0% and 45% apply to cash taken out from the inherited pension, depending on the beneficiary’s income.

Your pension inheritance If you have a modern pension such as a SIPP (a self-invested personal pension), you should find you are already well placed to make use of the new rules. You’ll be able to nominate anyone to inherit your remaining pension fund as a drawdown account. This basically means flexible income, so the beneficiary can dip into the pension pot they inherit as and when they want, if the pension company is ready to cope with the new pension freedoms.

Beneficiaries should keep an eye on tax If a beneficiary takes the whole pot of money as a lump sum, tax at 45% may automatically apply. The key is for beneficiaries to reflect carefully before deciding how much, and when, to draw down. Similar considerations apply here as for the original pension owner. You can

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take a gradual income, keeping an eye on the starting point for 40% tax, if that’s a consideration for you. And you’ll probably pay more tax if you take larger lump sums in a short period of time.

It’s worth being armed with full information before making any decisions here, and do speak to an expert to get all the information you need about your own particular pensions.

Practical steps Inheritance tax Inheritance tax isn’t usually charged on money held in a modern pension. But as soon as you take money out, that cash is inside your estate which means it’s inside the net for inheritance tax, if your estate pays this tax. This applies to the original pension owner and beneficiaries too. For wealthier families, this makes it all the more important to think carefully about whether withdrawals from a pension are actually needed. It might make more sense, for example, to spend some of an ISA (which is inside your estate for IHT purposes) and to leave a modern pension untouched for a little longer, if inheritance tax is a key consideration for you.

Passing on the baton ‘Next generation’ beneficiaries can also name their own beneficiary who will take over the drawdown fund following their death. It does, however, rely on a pension company being able to offer ‘nominee drawdown accounts’. In this way, a pension could pass from a grandparent, to an adult child, to a grandchild, until it is fully spent. The inherited pension fund continues to enjoy the potential for tax efficient growth while the funds stay invested within the pension. And each time a pension fund is passed on after someone dies, the tax rate will be reset by the age at death of the last drawdown account holder.

Not all pensions are the same If you have one of the older styles of pension, it may not have the facility for you or your beneficiaries to access drawdown, so you may need to upgrade to a more modern pension which does if you want the flexibility described earlier. Do keep in mind that valuable guarantees sometimes apply to older pensions. And there may be inheritance tax consequences if you transfer a pension while in serious ill health. Defined benefits pensions are also outside the scope of the new pension inheritance rules – these are the kinds of pension which pay a pre-defined income which relates to years of service and salary in a former job. A spouse or civil partner may receive a reduced amount of ongoing pension income after you’re gone. It can be possible for the original owner to transfer out of this kind of pension into a more flexible one, but that is a specialist area requiring advice as giving up a guaranteed income is not something to rush into.

Keep in mind that your will doesn’t normally control who inherits your pension. Your pension company usually makes the final decision, with reference to a Beneficiary Nomination form you complete indicating your preference. It’s vital to make sure your Beneficiary Nomination is up-todate so it can be taken into account. It’s possible to do this online for some pensions. Alternatively you can request a form from your pension company.

A multi-generation case study To illustrate the potential for a pension to pass on and on again, here is a case study showing how this could work and how the tax rates can differ over time in difference situations. David and Ruth are married with an adult son Adam. David has a SIPP worth £500,000. He names Ruth as his pension beneficiary. When David dies at the age of 73, Ruth then has access to the inherited pension pot. She can choose to take withdrawals, or not – it’s up to Ruth. Ruth then names son Adam as her pension beneficiary. When she dies at the age of 80 the unspent pension pot becomes available for Adam to access. As Ruth was over the age of 75 when she died, Adam will pay income tax on what he takes out of the pension pot. Adam is a basic rate taxpayer and takes a regular income from the pension pot of a level still within his 20% income tax band. If Adam withdrew the whole remaining pot in one go he could well pay tax at 40% or 45% on it. The new landscape for pensions is a game changer in terms of how pension wealth is passed on. With a little forward planning you and your loved ones can make good use of the new rules with one eye on the tax position. This article is not financial advice. A pension is an investment. Its value can go up and down and it may be worth less than you paid in. Laws and tax rules can change in the future. This reflects our understanding at August 2015.

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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Auto- Enrolment staging dates loom ever closer…… By Matthew Mitten, director, Enrolsme (www.enrolsme.com) workplace pension scheme in place is unlikely to appear high on their priority list. It will be down to providers like Enrolsme to really support and guide their clients through the auto-enrolment process. However, I would urge all barristers’ chambers to start their planning now, and this should include: DEFINITION OF EARNINGS An employer needs to understand the ‘definition of earnings’; which earnings will be included in the pensionable salary and - more importantly - which are not. You could try researching yourself, visiting The Pensions Regulator website or referring to a specialist workplace pension website, such as Enrolsme, who can help you work out the definitions. SELECTING THE RIGHT PENSION PROVIDER We encourage businesses to start thinking about their auto-enrolment journey as soon as possible, which includes provider selection - delaying could mean they have little or no choice when it comes to selecting the pension provider. Increasing numbers of small and medium sized businesses, those employing up to 30 members of staff, are getting closer to their auto-enrolment staging date, where they will be required to put workers - who meet certain criteria - into a workplace pension scheme. This includes many barristers’ chambers. Large numbers of - applicable - employers across the UK will have received letters from The Pensions Regulator (TPR) telling them of their auto-enrolment duties. And, to further promote the campaign, the regulator has also recently launched a marketing campaign - targeted at those organisations that will be affected over the next few years. In March 2015, we conducted a survey with 200 small businesses who don’t offer a workplace pension, and 200 employees. The research highlighted that nearly one third (31%) of employers still don’t know what auto- enrolment is, increasing to 37% in companies with 5-10 staff. Given the fact that around 1.8 million businesses are yet to comply, I still find the lack of awareness a real concern. In any small business, barristers’ chambers included, time will no doubt be precious. Business owner-managers rarely have the capacity to read journals or attend events - or do anything that detracts them from the day job. Putting a

ENGAGE YOUR STAFF Decide how you want to communicate to your employers. Our research also showed that there is a real opportunity for small businesses to turn the cost of compliance into an opportunity to engage and reward their employees. Over 90% of employees were in favour of auto-enrolment. SEEK THE RIGHT SUPPORT But, what can’t be ignored is the fact that workplace pensions are complex. Researching pensions isn’t an easy task - how does the average small business owner know what ‘definition of earnings’ is? Or which of the pension providers are best to use for their scheme? Many are likely to feel out of their depth. It is therefore important they seek the right levels of support for setting up the scheme. One word of warning, not all payroll providers are as up-tospeed with auto-enrolment as you might expect. In the first instance, you need to check what the pension provider can do for your business. KNOW WHERE YOU STAND NOW They should look to get their pension provider selected and on board as soon as possible, that way they will ensure they are ahead of the masses that auto-enrol (mainly in 2016 and 2017).

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ENROLSME CASE STUDY BRICK COURT CHAMBERS Brick Court Chambers Brick Court Chambers is one of the leading sets of barristers’ chambers in the UK, with a strong reputation in commercial, EU/competition and public law. The chambers has 85 members who practise full-time, including 38 QCs. Members of the Chambers are independent and self-employed, with a wide diversity of skills and practices, but the Brick Court ethos is about providing a very high quality service. Currently, the chambers employs 30 support staff. Complying with automatic enrolment Brick Court Chambers has been aware of its staging date for about a year, through correspondence from The Pensions Regulator, but also through a general awareness of automatic enrolment. Keith Rae is Director of Finance and Operations at Brick Court and came into the business as it was beginning to make the decisions on how to progress with automatic enrolment. He comments: “The firm has spoken to various benefits advisory businesses - all of which were quoting over £3,000 to support Brick Court in staging. The whole process seemed both costly and complicated, and although we aren’t due to stage until 2017, we were still keen to progress with what was needed - we didn’t want any problems later down the line, and recognised the need to plan in advance.” Enrolsme As members of Westminster Business Council, Brick Court receives regular e-marketing around business advice and support. Keith picked up an email about an automatic enrolment workshop with Enrolsme - an online automatic enrolment solution, designed for small businesses. He comments: “I read through the email and offer in great detail and came away thinking it would be great to get Brick Court involved with Enrolsme. The offer was one we couldn’t refuse - Westminster Business Council members were being offered an introductory, reduced price to use the Enrolsme service. I then looked at the product online and it really seemed to fit the bill for what we needed.” Workshop “The workshop was very comprehensive and thorough, and really helped me to understand what we needed to do from an automatic enrolment perspective,” commented Keith. “The team at Enrolsme helped us through uploading the payroll data elements, which is the hardest part. The whole process was so quick and simple - far easier than we had been previously led to believe. The fact that Enrolsme is online means the number of decisions you need to make are reduced - which can only be a good thing! I felt that so much was learnt on that day and I wanted to capitalise on that. So, we may consider bringing our staging date forward, and effectively ‘grabbing the bull by its horns’. I see no harm in having this all in place early - at the end of the day; it will be for the benefit of our staff.” Testimonials Keith Rae commented: “Enrolsme has identified the needs of small businesses when it comes to automatic enrolment, and as such is servicing them excellently. It has simplified something which could be very complex, and - as a result - made automatic enrolment straightforward. I would not hesitate to recommend Enrolsme to other small businesses that need to automatically enrol their staff into a workplace pension in the coming months and years.” Matthew Mitten, Director of Enrolsme, added: “The Westminster Business Council workshop worked well, and we were able to help a handful of companies successfully stage with ease. We look forward to helping more companies over the next few years.”

Enrolsme is a complete online automatic enrolment solution. Through the system, businesses can be set up with a qualifying and compliant scheme in a matter of hours. Foster Denovo Enrolsme Ltd is an appointed representative of Foster Denovo Ltd. Enrolsme is a non-advised process and other options are available which may be better suited to a small business. They may be more complex and they are not offered under this solution. Small businesses who want to explore these options may wish to contact a financial adviser.

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Financial planning: the world’s best kept secret Jason Butler, Chartered Wealth Manager with City-based wealth managers Bloomsbury Occasionally a well-kept secret can be a pleasant surprise. Sometimes it is not even a secret but simply something that is easy to miss when you are looking for something else or, even worse, when you are not really sure what it is that you are seeking. Those who have discovered the value of proper, lifelong, financial planning are among the lucky few. The issue is that a large number of people don’t know what ‘financial planning’ is or understand how valuable it could be to them. The equation between the value that a client receives and the fees that they pay needs to make sense. Yet because the benefits of good advice are often received in the far-off future, it is sometimes easy to miss, or dismiss, the value received along the way. Market noise, emotions and periods of what may seem like inactivity on an adviser’s part can also impact on the perception of value. Almost everyone worries about money to some degree; people worry when they don’t have it and when they do they worry about how best to look after it; either way there is a huge personal responsibility surrounding money. Worries often centre around what the future may hold and the decisions and choices that may be required, yet few realise that financial planning is the key to sorting it all out. In the bad old days, people went to a financial ‘adviser’ for help and in all likelihood got sold a bag of commission-laden products under the pretext of ‘advice’. Fortunately, today a small group of high quality local boutique financial planning firms has emerged around the UK, providing truly great financial planning. Rather than trying to define what financial planning is it may be useful to think about it in terms of some common concerns. Lifestyle worries • What does the future hold? • Will we be able to maintain our current standard of living when we retire/now that we are retired? • When will I/we be able to stop paid work? • Will we need to downsize the house to survive? Money worries • How much is enough? • Will we run out of money? • Can we manage financially if one or both of us needs long-term care? Financial and life challenges • What happens to my partner if I die?

• • •

Will my partner and family be financially secure? What happens if the markets deliver really poor returns? How can we help out the children and grandchildren?

Good financial planning helps to resolve these kinds of questions. It helps people to feel confident that they have the financial flexibility to survive whatever life and the markets may throw at them. It is also comforting for them to know that they have a trusted financial professional on hand who intimately understands their family’s circumstances and goals and who will monitor their finances over time and help them to make the tough decisions that they will inevitably face along the way. That’s the true value of financial planning. Cashflow models, sensibly structured portfolios, tax efficiency and contingency planning are simply the tools that experienced planners use to help them to build and maintain the working plan. In exchange for the financial planning service, clients pay an annual fee. It is often easy to appreciate the value received in the first year and easy to forget or appreciate the value on an ongoing basis. The financial planning relationship can be broken down into three key phases of value. Value phase 1: Sorting out the mess and building the plan New clients often arrive with a proverbial suitcase of bits and pieces collected over the years, such as a number of pension plans, with profits bonds, endowment policies, life insurance policies and a portfolio managed by a stockbroker, bank or financial adviser. They invariably have concerns about what the future holds and have a strong desire to put their finances in order. Some do not have a clear vision of what they want their future to look like, whilst others lack the confidence that their suitcase full of financial products will get them there. That’s a stressful place to be. The first and most vital step is to help clients to set out their vision for the future, both in terms of their lifestyle goals and the money needed to fund them. Understanding how important it is that each of them is achieved is critical. Next comes the analytical work, which may involve using cashflow modelling tools to gauge the magnitude of the gap between the client’s vision and the financial reality (or to plan a range of possible scenarios). In some cases, the two may be close. In others the gap may be wide. For some this may mean tough choices: saving more, retiring later, downsizing the house or leaving less for the children. For

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others, it might mean the chance of actually spending more, gifting money early or pursuing philanthropic interests. Empowering clients to make sensible choices is the objective of the planning process.

facilitating decisions that need to be made and having the fortitude to execute under pressure is where great financial planners come into their own.

The resulting ‘plan for the future’ becomes a true collaboration between client and planner. The overall strategy is agreed and recommendations are made to reposition the client’s affairs, potentially across a broad range of areas including asset location, investments, tax, wills and contingency planning. Once their affairs are properly structured, the client is then back in control of their future and their finances. The actual implementation can be complex, detailed and time-consuming for the financial planning team, as dealing with financial product companies can be a tortuous process! The value received is easy to see and even sometimes quantifiable, such as the measurable benefits of restructuring to reduce inheritance tax liabilities, other taxes or reducing investment costs.

Value phase 3: Long life, death and immortality!

Value phase 2: Plan progress and progressing the plan Financial planning is not a ‘set-and-forget’ process; far from it, in fact. Regular review meetings help to provide clients with an insight into how things are going relative to the plan. They are also an opportunity for the client to raise issues or discuss changes to their circumstances and for the financial planner to raise concerns about the progress of the plan and if there are any decisions that need to be made or actions taken. Reviewing past progress is important, but looking forward is more so. What the future holds and how the plan needs to progress is the principal objective. Some issues and consequent decisions faced may relate to events in the client’s life, or may be more technical issues that sit in the financial planner’s bailiwick. The latter may relate to things like new investment products, refinements to the long-term portfolio strategy (remember that the true value when it comes to investing lies not just in the initial structuring of a robust portfolio but also the adviser’s role as a foil to avoid the truly dangerous combination of investor emotions and bad, yet often tempting, investment ideas) or changes in pension or tax rules. On some occasions, there will be little new to report but that does not mean that no value was received: the financial planner is continually out there reviewing, analysing and interpreting a wide range of different issues and challenges on the client’s behalf. Clients have better things to be doing with their time! Over the many years that a client maintains a professional relationship with a financial planning firm, some may be quite uneventful but they can always be confident that they remain on track and that their adviser has his or her eyes and ears open to issues that may affect them or are of concern and need to be flagged. There will be times when events are momentous, either in the client’s life (divorce, ill-health, an unexpected inheritance or the birth of triplets) or in the planner’s world (the markets falling precipitously, as they will do from time to time, or the Chancellor’s new ‘simplified’ pension regime, for example). Understanding the issues faced, finding a solution that makes sense,

There are also some more subtle areas of the value of a long-term relationship with a trusted financial planner. For many people, living longer is a dual-edged sword. On the upside, we can all now expect to live materially longer than our grandparents’ generation. In fact it has been estimated by the Office for National Statistics that 8% of men and 14% of women age 65 today will live to be 100. On the downside, we also know that with longevity come attendant health problems, not least the rise in dementia. It is a very distressing and worrying time when someone falls ill and many life and financial decisions often need to be made at this difficult time. A financial planner who has arranged for powers of attorney to be prepared long before they are needed, and who is very familiar with the family and their financial circumstances, is well-placed to provide advice and support and to facilitate the financial consequences of the new change in circumstance in these stressful times. Many clients, often one of a couple who takes more interest in the finances than the other, worry about what will happen to their partner on their death. Having a trusted financial planner and an up-to-date plan allows them to be confident that, in the event of their death, their partner will be well cared for financially and that their affairs are in order. Obtaining probate is also a far easier process when everything is organised. Most people would like to feel that they will, in some way, leave behind a lasting legacy. For some, that can mean spending time and money supporting their philanthropic interests and for others it may mean passing on wealth from one generation to the next. The new 2015 pension legislation has created an opportunity to pass on wealth to future generations in a tax-effective manner, for example. Again, financial planners can play an important role in helping clients to make decisions surrounding such issues. In conclusion At an annual financial planning review it is easy to overlook the scope and value of a relationship that is far deeper and more important than worrying about the last 12 months’ market noise that has resulted in a portfolio going up and down daily or the fact that neither the portfolio nor the plan has changed much. Meeting personal goals, feeling confident in the future and having the time to enjoy the opportunities that money provides an individual, their family and their wider community, are what really matter. Delivering ‘peace of mind’ may sound a bit trite, but that is the goal, consequence and value of great financial planning.

Jason Butler is a Chartered Wealth Manager with City-based wealth managers Bloomsbury. Tel: 020 7965 4800 email: truewealth@bloomsburywealth.co.uk

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Personal finance & wealth management supplement the barrister 2015

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