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Taxation & TrustsEssential Study Notes

Essential Study Notes

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Copyright © 2018 Expert Pensions Limited, All Rights Reserved

Essential Study NotesTax Year 2018/19

Modules:

1. Income Tax2. National Insurance Contributions (NIC) and Capital Gains Tax (CGT)3. Inheritance Tax (IHT)4. Residence, Domicile, UK Tax Compliance and other Taxes5. Investment Taxation6. Trusts7. Power of Attorney and Bankruptcy8. Wills and Intestacy9. Taxation of Trusts

10. Financial Planning and Trusts


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Income Tax .......................................................................................................................... 4Sources of Income............................................................................................................. 5Reliefs, Allowances, Reducers and Credits ....................................................................... 8Taxable Employee Benefits ............................................................................................. 13Calculating Income Tax and Income Tax Planning .......................................................... 16Income tax and Trusts ..................................................................................................... 19

National Insurance Contributions (NIC) and Capital Gains Tax (CGT ........................... 23NI for the Employed and their Employers ......................................................................... 24Company Directors and Multiple Employments ............................................................... 27NI for the Self-Employed and Others ............................................................................... 29Voluntary NI Contributions and Credits............................................................................ 31State Benefits .................................................................................................................. 32CGT - Exemptions, Losses and Reliefs ........................................................................... 34CGT Calculation, CGT Planning and Trusts .................................................................... 38Disposals subject to special CGT rules............................................................................ 42Principal Private Residence Relief................................................................................... 43

Inheritance Tax (IHT)......................................................................................................... 47IHT, the Transferable NRB and the Residence NRB ....................................................... 48PETs and CLTs ............................................................................................................... 53Reliefs ............................................................................................................................. 57Intestacy, Deed of Variation and Trusts ........................................................................... 59GWR, POAT and IHT Planning........................................................................................ 62

Residence, Domicile, UK Tax Compliance and Other Taxes ......................................... 64Residence and Domicile.................................................................................................. 65Domicile .......................................................................................................................... 66The Remittance Basis ..................................................................................................... 67Residency, Domicile and Income Tax.............................................................................. 69Residency, Domicile and Capital Gains Tax (CGT) ......................................................... 70

Investment Taxation ......................................................................................................... 87Cash and Fixed Interest Investments .............................................................................. 88Shares, Property and Pensions ....................................................................................... 91Individual Savings Accounts (ISAs) and Collectives ........................................................ 97Life Assurance-based Products..................................................................................... 100Indirect Property Investments, VCTs, EISs, SEISs and SITR ........................................ 106

Trusts............................................................................................................................... 110Overview of a Trust ....................................................................................................... 111More on Trustees .......................................................................................................... 114


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Types and Uses of Trusts.............................................................................................. 118How Trusts are Created ................................................................................................ 121Trust Rules.................................................................................................................... 123

Powers of Attorney and Bankruptcy ............................................................................. 127Powers of Attorney (POA) ............................................................................................. 128The Mental Health and Mental Capacity Acts ................................................................ 132The Process of Bankruptcy............................................................................................ 136The Effects of Bankruptcy on Investments, Life Assurance, Pensions and Trusts ......... 142Alternatives to Bankruptcy ............................................................................................. 144

Wills and Intestacy.......................................................................................................... 146Wills, Deeds of Variation and Disclaimer ....................................................................... 147Intestacy........................................................................................................................ 150Transferable Nil Rate Band and Residence Nil Rate Band ............................................ 153Taxation of a Deceased’s Estate ................................................................................... 155

Taxation of Trusts........................................................................................................... 156Income Tax ................................................................................................................... 157Capital Gains Tax.......................................................................................................... 163Inheritance Tax.............................................................................................................. 165Collectives and Unit Trusts ............................................................................................ 168

Financial Planning and Trusts ....................................................................................... 169Life Assurance............................................................................................................... 170Pensions ....................................................................................................................... 178Transfers on Lifetime and on Death............................................................................... 180Reviewing trusts ............................................................................................................ 183IHT Planning Arrangements .......................................................................................... 186


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Income Tax

If I had to pick one certainty in AF1 it is that you will get an income tax calculation for anindividual. There has been one in each of the past six AF1 papers, carrying an average of18 marks. The bare minimum to be included are earned (non-savings), savings anddividend income. There is bound to be at least one other issue such as a pensioncontribution, a benefit-in-kind like a company car, marriage allowance / married couple’sallowance or child benefit to add to the mix.

Within our income tax module we will work our way through each of the stages of an incometax calculation. We’ll start by examining the various sources of income an individual mayreceive and consider how they are treated for income tax purposes. We’ll then look at whatreliefs, allowances, reducers and credits are available to reduce the amount of tax anindividual pays. Most employee benefits are taxable so we’ll review how we arrive at theirtaxable value. We’ll then look at how to work out an individual’s tax bill before finallyexamining how the various types of trusts are taxed on the income they receive and pay out

TopicsSources of IncomeReliefs, Allowances, Reducers and CreditsEmployee BenefitsCalculating Income Tax and Income Tax PlanningIncome Tax and Trusts


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Sources of Income

Non-savings income

Salary, bonuses and taxable benefits (employed) Fees, trading income/profits (self-employed) – expenses wholly and exclusively for

business purposes are allowable deductions Pension income (annuity, scheme pension or drawdown) Taxable State benefits Property income

Charged to tax at 20, 40 and 45% and taxed before savings and dividend income.

It is the duty of the employer to determine whether a worker is an employee or an employer.

Overlap relief

The self-employed are taxed on the income in their accounts ending in the tax year. Theyare free to choose their own trading year, it does not have to tie in with the tax year.

Special rules apply in the first and final years of a business:

Y1: The tax for the first year is based on the profits for that tax year. If the first yearends after the end of the first tax year, say in July or August, then only part of theseprofits are taxed in the first year.

Y2: The tax for the second year is based on the profits for the accounting periodending in the tax year. If that is not a full year, it is based on the first 12 months’profits. If it is longer than a year, assessment is usually based on the profits of the 12months ending on the accounting date.

Y3 onwards: Based on profits for the accounting period ending in the tax year.

NB In the final year, overlap relief is given for any profits taxed twice in years 1 and 2.

Example

Jack, a plumber, started his business on 1st of September 2017, his accounting period endson 31st of August 2018.

His profits for y/e 31st August 2018 are £100,000.

His profits for y/e 31st August 2019 are £120,000.

For the 2017/18 tax year, he will be assessed to tax on profits earned between 1stSeptember 2017 and 5th April 2018. The profits will be apportioned on a time basis:

i.e. £100,000 x 7/12 = £58,333.

For the 2018/19 tax year he will be assessed to tax on profits earned to the year ending 31st

August 2018:

i.e. £100,000

So, £58,333 of the £100,000 has been charged to tax twice. It is this amount that can beclaimed back as overlap relief in the final year of trading.


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Employed or self-employed?

HMRC will look at the following indicators, but each case decided on individual basis,employer must determine and apply PAYE if in doubt:

Employed Self employedHigh control over worker Low controlContract of service Contract to provide / for servicesSet hours, set pay, holiday pay, overtime,supervision

Fee, commission, can refuse or sub contract

Long term, single employer Risks own money (own tools, correct work atown cost), profit from efficiency

Tax planning and the self employed

Choice of accounting date affects the timing of tax payments, change of date can enableoverlap relief from earlier years to be used, closing date / transfer to ltd company can makea difference to tax liability in final year.

Trading allowance

Trading income less than £1,000 (before expenses)o Exempt from taxo No need to be declared

Trading income greater than £1,000o Claim against income rather than deduct actual expenses

Property income

Income from property (accounts must be made up to 31st of March or 5th of April) –this includes payment from the tax-exempt element of a REIT – BUT those are paidnet of 20% tax

o If income before deducting expenses is £150k or less, accounts drawn up onsimplified cash basis (unless landlord opts out)

o Otherwise accruals basis used Ongoing expenses (but not enhancements) are allowable deductions, but relief on

mortgage interest is being gradually restricted to the basic rate since 6 April 2017.


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Example

Jill has rental income of £25,000 and finance costs of £5,000.

In the 2018/19 tax year, £2,500 (50%) can still be deducted as an expense, £2,500 (50%)will be given as a basic tax deduction of £500 (£2,500 x 20%).

Assuming she has no other income her tax liability will look like this:

£

Rental income 25,000

Expenses (2,500)

Personal allowance (11,850)

Tax due on 10,650

All falls within basic rate therefore 10,650 @ 20% = 2,130

Less basic tax deduction of £500 to give total tax due of £1,630

Property allowance

Property income less than £1,000 (before expenses)o Exempt from taxo No need to be declared

Property income greater than £1,000o Claim against income rather than deduct actual expenses

Rent-a-room relief £7,500o Consultation currently taking place

For more details on taxation of property income go to our ‘Taxation of Investments’module

Savings income

Interest from:o Cash deposits – paid grosso Gilts – paid gross unless elect otherwiseo Permanent Interest Bearing Shares (PIBS) – paid grosso Directly held local authority bonds and corporate bonds – paid neto Interest distributing OEICs and unit trusts – paid grosso Purchased life annuity (PLA) – paid neto Interest from offshore reporting funds – paid gross

Basic rate tax payers (BRTs) have a Personal Savings Allowance (PSA) of £1,000 andhigher rate tax payers (HRTs) have a PSA of £500. Taxable savings income falling withinthese allowances will be charged to tax at 0%. Additional rate taxpayers (ARTs) do notbenefit from a PSA. These allowances should be applied to any savings income prior toapplying the relevant rate of tax (20% / 40% / 45%).


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Where savings income falls within the first £5,000 of taxable income (income in excess ofreliefs and allowances) it benefits from a starting rate band of 0%. This is in addition to thePSA (which is accounted for once the starting rate band is fully used).

Where savings income is paid net, 20% tax is deducted at source. This is reclaimable bynon-taxpayers, by those whose savings income falls within the starting rate band for savingsand by those whose PSA covers the income. This satisfies the liability for a BRT, but resultsin a further 20% liability for a HRT and a further 25% liability ART of the gross interest.

Example

Jane is an additional rate tax payer. She receives a net interest payment of £1,000.

To gross this up we divide by .8. £1,000 / .8 = £1,250.

Jane’s full tax liability is therefore £1,250 @ 45% = £562.50.

£250 was taken at source (£1,250 - £1,000) so this amount can be deducted from theamount Jane owes. £562.50 - £250 = £312.50.

Dividend income

Dividends from:o shares or investment trustso equity OEICs and unit trustso offshore reporting funds and offshore closed-ended investment companieso non-exempt element of a REIT

All dividends are paid gross.

All individuals currently benefit from a £2,000 dividend allowance. Taxable dividends fallingwithin the allowance are charged to tax at 0%. Thereafter, BRTs pay 7.5%, HRTs pay at32.5% and ARTs pay at the rate of 38.1%.


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Reliefs, Allowances, Reducers and Credits

Qualifying Interest payments

Certain interest payments can be deducted from an individual’s tax bill. The deduction islimited to the higher of 25% of the individual’s adjusted total income or £50,000.

Adjusted total income = total income plus charitable donations made via payroll less anypension contributions.

Example

In 2018/19 James took out a loan to pay the IHT due on his father’s estate. Let’s assumeJames earned £60,000 and made gross pension contributions of £10,000. If he paid interestof £20,000 on the loan, how much can he deduct from his tax bill?

James’s adjusted total income is £50,000 (£60,000 - £10,000)

The cap is the higher of 25% of £50,000, i.e. £12,500, or £50,000

The entire interest payment can therefore be deducted from James’s tax bill

The cap applies to loans taken out for qualifying purposes which include:

- share purchase in the borrower’s company or loans to their company- partnership investment- purchase of plant and machinery for use in partnership- as well as payment of inheritance tax (relief restricted to a period of 1 year from

making the loan).

Extending the basic rate/higher rate tax band

Relief for gift aid payments and for pension contributions other than to an occupationalpension scheme (relief at source method) is given by extending the basic/higher rate taxbands. Payments are made into the pension/to the charity net of 20% basic rate tax. Thepension scheme/charity reclaims the 20% from HMRC.

There are conditions relating to reciprocal benefits and gift aid:

Gifts up to £100, reciprocal benefit must not exceed 25% Between £101 and £1,000 it is £25 Gifts over £1,000 it is 5% of the donation up to £2,500.

These limits are currently under review.

Higher and additional rate tax payers reclaim the additional relief due to them by having theirbasic/higher rate bands extended by the grossed-up contribution.


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Example

Henry makes a personal pension contribution of £4,000. The contribution is grossed up(£4,000 / 0.8) = £5,000 and it is this amount that is added to the basic and higher rate taxbands.

Normally, the point at which Henry would become a higher rate tax payer would be once hisincome exceeds £46,350 (£11,850 (the personal allowance) plus £34,500* (the basic ratetax threshold)).

* NB The basic rate tax threshold for 2018/19 in the UK (excl. Scotland) is £34,500. Unlesswe state otherwise, please assume we are referring to the UK (excl. Scotland) figure.

However, with the gross pension contribution of £5,000, Henry benefits from a basic rate taxthreshold of £39,500 (£34,500 + £5,000) and therefore does not need to pay tax at thehigher rate until his income exceeds £51,350 (£11,850 + £39,500).

In a similar vein, the top of Henry’s higher rate tax threshold would increase from £150,000to £155,000.

If you get a scenario where there is a pension contribution made under the relief at sourcemethod/ a charitable contribution and a chargeable gain from an investment bond, you needto extend the basic rate tax band by the amount of the gross pension contribution first. Thewider the basic rate band the greater the chance the top sliced gain will fall within it andthere will therefore be no further tax to pay.

Note that the maximum an individual may pay into a pension and get tax relief is the higherof £3,600 or 100% of their relevant UK earnings. The lifetime allowance for 2018/19 is£1.03m.

Deductions from salary

Employee’s payments into occupational pension schemes are usually deducted from paybefore calculating tax so the employee does not have to claim tax relief on them – this isknown as the net pay arrangement.

Payroll giving allows the employer to deduct the payment from salary before calculating taxunder PAYE giving the employee tax relief at their highest rate.

Allowances

Personal allowance is £11,850.

Children have their own personal allowance. Care should be taken where an investment isheld in a child’s name, but the capital was provided by the parent. In this scenario, where theincome exceeds £100 it will be taxed as though it is the income of the parent rather than thechild. (Child = under 18 and unmarried/not in CP). Rule applies to cash ISA held by 16-17-year old, but not to junior ISA/CTF. Teenager could work for family business providingpayment reasonable to use up their allowance.

An individual’s personal allowance is reduced by £1 for every £2 that their adjusted netincome exceeds £100,000.

Adjusted net income is total net income – which is total income less deductions for loss reliefand interest payments - with the gross amount of personal pension and gift aid contributionsthen deducted.


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For the current tax year, income more than £123,700 reduces the personal allowance to £0leading to an effective rate of 60% (the personal allowance trap) tax for income between£100,000 and £123,700.

Example

An individual has earnings of £116,220. He makes a personal pension contribution of £6,000(net) and a gift-aid donation of £1,440 (net). How much personal allowance is he entitled to?

£116,220 less £7,500 (grossed up pension contribution (£6,000/.8)) less £1,800 (grossed upcharity aid donation £1,440/.8)) = adjusted net income of £106,920.

Reduced personal allowance:£106,920 – £100,000 = £6,920Reduced by £1 for every £2 over £100,000: £6,920/2 = £3,460£11,850 – £3,460 = £8,390

Tax reducers

Having calculated the tax due we then deduct any tax reducers and any tax deducted atsource (so that it is not paid twice). These include the married couple’s allowance, themarriage tax allowance, and investments into VCT, EIS or SEIS (at a maximum reduction of30% of the initial investment into VCTs / EISs and 50% into SEISs).

Married couple’s allowance

Available to married couples / civil partners, where one of the couple was born before 6 April1935. Income is relieved at the rate of 10%. The full allowance is £8,695, but this is reducedto £3,360 (minimum floor) by £1 for every £2 of income over £28,900. Reduction determinedby the income of the higher income and usually paid to them unless the couple elect to sharethe reduction. (Pre-Dec 2005 determined by husband’s income.)

Example

Gaynor is eligible for the married couple’s allowance and has total income of £29,700.

She has exceeded the £28,900 limit by £800.

£800 / 2 = £400.

Her allowance reduces from £8,695 to £8,295.

The reduction on her tax bill is 10% of £8,295 rather than 10% of £8,695, i.e. £829.50.

To reduce income below £28,900 consider withdrawing PCLS (tax-free), unconditionallyswapping investments between partners so neither has income above it and/or switching toinvestments that generate capital growth/tax-free income.

Marriage allowance

Transfer up to £1,190 of personal allowance to spouse/civil partner providing recipient notliable to income tax above basic rate. Potential saving of up to £238.


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Example

Martha earns £42,350 a year, her husband Graham, £10,500. They elect to transfer £1,190of Graham’s allowance to Martha.

This has no impact on the tax Graham pays because his income is below his revisedpersonal allowance of £10,660 (£11,850 - £1,190).

Martha’s tax bill is initially £6,100 (£42,350 less £11,850 @ 20%).

From this we can then take off the personal allowance reduction of £238. £238 is 20% of theamount of allowance transferred.

Martha’s reduced tax bill is £6,100 - £238 = £5,862.

Tax credits

Child tax credit

Paid to parent of child under 16 (under 20 in approved education/training). Significant changes came into force for those with children born on or after 6 April

2017. Visit https://www.gov.uk/child-tax-credit/new-claim (Accessed 14 May 2018) formore detail.

Claimed from HMRC, can back-date 1 month (protective claim can be made ifincome falls in year because of, say, redundancy).

Reduced by 41p for every £1 income over £16,105. Couples must claim jointly and claim based on joint income. First £300 pension/investment/rental income excluded. Personal pension contributions reduce income. Having a low income, high childcare costs, several children or children with

disabilities can lead to additional credits. Income over basic rate threshold may stillget some credit.

Paid in arrears to account.

Working tax credit

Top up payment for working people on low income: over 16s with children / have adisability and work at least 16 hours, over 25s no children - work at least 30 hours.

Amount of credit varies depending on hours worked, single/joint applicant, income,disability, child-care (70% of eligible costs covered up to £175pw (1 child) £300 pw(2 + children) reduced for incomes over £16,105).

Paid by HMRC to employed & self-employed. Couple decides who receives joint credit. Reduced by 41p for every £1 income over £16,105. First £300 pension/investment/rental income excluded. Personal pension contributions reduce income.


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Taxable Employee Benefits

Generally speaking, where benefits are provided to employees they are treated as if theywere earnings. This means they are usually taxable.

The employee is taxed on the cash equivalent value of the benefit they have received.The cash equivalent value is usually the cost to the employer of providing the benefit unlessother, more specific, rules apply, such as in the case of beneficial loans, accommodationand company cars.

Where an employee has use of an employer’s asset, there is a tax charge on the annualvalue of the asset. The charge is 20% the asset’s market value of the asset when it was firstgiven to the employee. Any employer expenses incurred in the upkeep of the asset areadded to this figure. If the asset is rented, the charge is the higher of the rent paid or theannual value.

For an asset given to an employee outright, the tax charge is based on the market value atthe time of the gift unless the asset is brand new in which case it will be based on the cost tothe employer of providing the asset. If the employee had use of the asset before it was giftedto them, the charge will be based on the higher of the market value at the time of the gift andthe market value when the asset was first made available to the employee. Any amount thathas already been subject to tax may be deducted.

Benefits provided ‘in-house’ are taxable at the marginal cost to the employer as determinedin Pepper v Hart.

Company cars

For cars with emissions more than 95g/km, a base charge of 20% increases by 1% for everycomplete 5g/km. For example, if emissions are 102g/km we round down to the nearest5g/km which is 100g/km giving a charge of 20% plus 1%. The maximum charge is 37% ofthe car’s list price.

Diesel cars not meeting RDE2 standard are subject to a 4% excess, although the maximumcharge is still 37%.

Additional accessories are added to the list price of the car.

Discounts are ignored.

If an employee contributes to the cost of the car, the maximum that can be deducted is£5,000.

If the employee makes a regular contribution to the running costs of the car, then thisamount can be deducted from the taxable value.

If the employer pays for private fuel use then there is a standard charge of £23,400multiplied by the same CO2% as used when calculating the taxable value of the car.

Where the employee only benefits from the car for say, six months of the year, the taxcharge is proportionate.


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Example

In the 2018/19 tax year Joe was given a diesel car that did not meet the RDE2 standard. Thelist price was £25,000. CO2 emissions were 139g/km. Joe contributed £7,500 towards thecost of the car. What is the taxable value of the car?

Diesel cars with CO2 emissions of 139g/km have a relevant percentage charge of 32%, thisis the sum of:

20% = base charge

4% = diesel addition

8% = for every 5g in excess of 95g add 1%, 139 – 95 = 44, round down to 40 / 5 = 8

32% charged on £20,000 (can only deduct £5,000 of Joe’s £7,500 contribution)

£25,000 - £5,000 @ 32% = £6,400 taxable value.

The mileage rates that can be paid free of tax to employees who use their own car forbusiness mileage are 45p for the first 10,000 miles, 25p thereafter.

There are detailed rules defining business & private travel - commuting to a normal place ofwork is defined as private travel, although travelling to a temporary workplace will normallyqualify as business travel.

Beneficial loans

The taxable value of beneficial loans in excess of £10,000 is based on the differencebetween the interest rate paid by the employee and the official rate (2.5% 2018/19).

Example

If an employee is offered a cheap loan of £15,000 at 0.75% then the taxable benefit is:

£15,000 x (2.5% – 0.75%) = £15,000 x 1.75% = £262.50.

Employee accommodation

Where an employee lives in rent-free or low-rent, accommodation provided by their employerthere will be a tax charge unless they are classified as having an exempt occupation.

An exempt occupation is one where the accommodation is deemed necessary for them toperform their duties, helps them perform their duties better or where there is a threat to theirsecurity.

Where a tax charge applies, it will be assessed on the benefit the employee receives byliving in their employer’s accommodation. This will usually be the annual rent.

Where the accommodation is owned by the employer and cost more than £75,000, there isan additional charge based on the excess of the cost of the property – plus the cost of anyimprovements – over £75,000. The charge is 2.5% of the excess (i.e. the official rate).


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Example

The charge on a property worth £125,000 would be £1,250. We arrive at this figure byworking out the excess over £75,000. So, £125,000 - £75,000 equals £50,000 and thenmultiplying this by 2.5%.

Other taxable benefits

Cash and non-cash vouchers that can be exchanged for goods and services and credittokens, including company credit cards, are also taxable benefits.

Where an employer takes on an employee’s liability to meet costs, such as school fees, rentor professional fees the benefit is usually taxable in full.

Where an employer provides private medical insurance for an employee, this is also ataxable benefit.

Benefits wholly or largely exempt from tax

• Group Income Protection• Provision of meals (but not luncheon vouchers)• Long Service awards - £50/pa – min 20 years• Mobile phone – 1 per employee• Employer Sponsored Training• Suggestion Schemes - £25 or less, larger awards up to £5,000 subject to conditions• Relocation and removal expenses – up to £8,000• Home-working – up to £4 per week without evidence• Workplace nurseries• Liability insurance• Trivial benefits – under £50• Pension advice - £500


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Calculating Income Tax and Income Tax Planning

To perform a full income tax calculation you need to:

1. Establish type of income: ADD earnings + pensions + rental income + any otherincome that isn’t savings or investment income = ‘Non-savings income’

2. TO deposit interest + any other savings income3. AND to dividends4. AND life policy chargeable gains5. DEDUCT reliefs or deductions which apply to any of the above income types (in the

same order)6. DEDUCT the personal allowance (watch out for restrictions on higher earners)7. EXTEND basic and higher rate bands for relievable payments (like non-occupational

pension contributions, gift aid)8. Then apply tax at the appropriate rates and don’t forget the starting rate band for

savings income/ the personal savings allowance/the dividend allowance (rememberto use the tax table provided)

9. DEDUCT tax reducers (EIS/SEIS/VCT/MCA/marriage tax allowance)10. AND any tax already deducted at source. This gives you the tax due for the

individual.

Not only is there a basic order in which you should deal with the calculation, but, for those ofyou who have progressed to AF1, the CII generally set out these calculations in exactly thesame way:

£ £ £ £Non-savings Savings Dividends Total

Employment income xx,xxxCompany pension xx,xxxBank interest xxxInvestment trust x,xxxTotals xx,xxx xxx x,xxx xx,xxx

See how the income is broken down into separate columns depending on whether it isearned (non-savings), savings or investment income? That makes it very clear for you tosee what needs to be taxed at what rate.

As you progress from R03 to AF1, clear explanations need to be given when detailing howthe taxable figures are arrived at. This is because the CII use ‘follow-through’ marks in theirwritten exams. This means that if you make a silly mistake in your calculation, likeincorrectly adding together two numbers, but go on to use the answer in the correct way, youwould only lose one mark for the silly mistake.


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Income tax planning

Ensure client has enough money left to meet personal and business needs.

Tax efficient investments must also be a good match for the client in terms of risk, potentialreturns and costs.

Client should be aware of additional risks costs involved. Flexibility should be considered.

General rule: use allowances, reliefs and reduce income charged to tax at higher rates.

There are several income tax planning approaches that could be used to reduce tax,although most depend on the individual’s being married/in a civil partnership or owning theirown business. They include:

- non-taxpayers invest capital for income to maximise tax allowances, avoidinvestments where underlying funds are taxed and tax is not reclaimable (e.g.onshore bond)

- starting rate tax payers – make full use of 0% £5,000 starting rate tax band- higher/additional rate tax payers unconditionally transfer savings to spouse/partner or

into joint names to maximise use of both parties PSAs/DAs/starting rate/basic ratetax bands

- switch to investments that yield capital growth to minimise income/maximise use ofCGT annual exempt amount

- switch to investments on which income is tax-free (ISAs) or covered by the PSA/DA- defer tax by using offshore single premium bond – benefit from gross roll up- close deposit accounts/encash bonds/offshore non-reporting funds before/after 6

April to control year income is taxed in- make charitable donations that qualify as gift aid donations (because these are

deducted in working out adjusted net income)- make additional pension contributions (for same reason as above)- if feasible, meet ‘income’ requirements from 5% withdrawals from bond because

these are not added to taxable income in the year they are taken- where own business/self-employed could:

o reduce director’s remuneration if that’s an option, choose to take bonus ordividend before/after end of tax year if expect tax rate of one year to be morebeneficial than the other

o pay salary to spouse/partner (pay between £116 & £162 a week to qualify forstate benefit at 0% NIC, salary deducted from business profit)

o pay pension to employed spouse/partner (no tax /NIC on benefit foremployee, contribution deducted from business profit)

o Re: both the above amounts must be reasonable for the work carried out ormay not be deductible

o change to partnership – will not work if business consists of supplyingpersonal services (IR35 rules will apply) If IR35 rules apply, cannot save tax by paying dividends/employing a

partner. Need to pay sufficient salary to avoid being taxed on a‘deemed payment’. Company pension contributions allowable if pass‘wholly and exclusively’ test. Income from MSCs also employmentincome (cannot avoid IR35 this way).

o change to ltd company – IR35 will not apply. Self/partner become shareholderand receive dividends (not subject to NIC). DA available. Risky strategy ifprofits mostly generated by working partner who draws low salary. NB Dividends paid from after-tax profits, corporation tax 19%. Do not

count as earnings for pension purposes.


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Where strategy involves married couple/civil partners transfers must be absolute andunconditional. Former owner cannot, for example, continue to receive an income from anasset given to their partner. Should consider possibility of divorce. If couple are notmarried/in a civil partnership transfer could lead to CGT/IHT liabilities

Example

Lillian earns £130,000 a year.

If she makes no charitable donations/pension contributions she will lose her entire personalallowance and, assuming she has no other income, her income tax liability will be £45,100:

£34,500 @ 20% = £6,900

£95,500 @ 40% = £38,200.

Let’s say she decides to make a pension contribution to regain her personal allowance. Sheneeds to reduce her net adjustable income to £100,000, i.e. by £30,000. This can beachieved by making a pension contribution of £24,000 (this would be the net amount,£24,000 / .8 = gross contribution of £30,000).

With net adjustable income of £100,000, Lillian is entitled to the full personal allowance. Herincome tax liability would therefore be £34,360:

£130,000 - £11,850 = £118,150 taxable income.

£64,500 (Lillian’s basic rate tax band would be extended by £30,000) @ 20% = £12,900

£53,650 @ 40% = £21,460.

£34,360 is a significant reduction on £45,100 and it is brought about in two ways – firstly thereinstatement of the personal allowance, and secondly the fact that her basic rate thresholdis extended by the gross amount of the pension contribution.

High income child benefit charge

The high-income child benefit charge can also be reduced/eliminated by using the abovestrategies. It is relevant where at least one partner has adjusted net income (total incomeless pension/charity donations) of £50,000 or more and is charged on the partner with thehighest income. It works by reducing the annual child benefit payment by 1% for each £100of excess adjusted net income over £50,000. Individuals never pay more in tax than the fullamount of child benefit available.

Example

Someone with two children will be entitled in 2018/19 to receive child benefit of (£20.70 +£13.70) x 52 = £1,788.80. If they earn £54,000, the tax charge will be £17.88 for every £100over £50,000, i.e. £4,000/100 x £17.88 = £715.20.


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Income Tax and Trusts

Bare/absolute trust

Trustee

None.

Beneficiary

Taxed at beneficiary’s rates. Their personal allowance, personal savings allowanceand dividend allowance can be used to offset any tax.

Settlor

Parental settlement rules apply (where trust income exceeds £100 and settlor isparent it is taxed on the parent.)

Trusts for the vulnerable

Broadly speaking, a trustee’s tax liability under a trust for a vulnerable person is limited tothe tax liability that would have been suffered by the beneficiary were the trust not inexistence.

Interest in possession trust

Trustee

Charged at basic rate, i.e. 7.5% dividend income, 20% all other income. No allowances. No liability to higher rate tax. No relief for expenses of managing the trust, though these are deductible in arriving

at the beneficiary’s income. Complete R185 and pass to beneficiary.

Trustee expenses

Trustees not entitled to tax relief on expenses for managing trust. Trust expenses are deductible in arriving at beneficiaries’ income. Higher/additional rate tax due by beneficiary is paid on income received after

deduction of expenses.


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Example of trustee expenses for IiP trust:

Taken from Gov.uk (2018):https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/685659/SA950-2018.pdf

(Accessed 14 May 2018).

(Note that although the example says 2017/18, there have been no changes for 2018/19).

© Image above, Gov.UK

Beneficiary

Taxed at beneficiary’s rates with tax already paid by the trustees deducted from theirliability/ reclaimable as appropriate.

PA, PSA, DA can be used to offset any tax due. If trust income paid directly to beneficiaries rather than via the trust, taxed as per

bare trusts.

Settlor

Parental settlement rules apply. If settlor interested trust (settlor/their spouse is a beneficiary) trust income taxed on

the settlor.


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Discretionary trust

Trustee

Trustees have a standard rate band (£1,000 spread across all settlor’s discretionarytrusts, minimum £200 per trust).

Income falling within standard rate band charged at basic rate, i.e. 7.5% dividendincome, 20% all other income.

Thereafter, 38.1% for dividends or 45% all other income. Trustees’ expenses are allowable in calculating income chargeable. Expenses are set first against dividend income, then savings and then other income. Expenses are grossed up at the rate appropriate to the income they are set against

(i.e. 7.5% dividend income, 20% otherwise).

Example of trustee expenses for discretionary trust

Taken from Taxation.co.uk (2018):

https://www.taxation.co.uk/Articles/2017/10/10/337066/tax-treatment-discretionary-trusts

(Accessed 14 May 2018).

(Note that although the example says 2017/18, there have been no changes for 2018/19).

© Image above, Taxation.co.uk


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Beneficiary

Income paid out as trust income and carries 45% tax credit. Non-taxpayer can reclaim the 45% tax paid. BRT can reclaim 25% tax and HRT 5%.

An ART has nothing more to pay but cannot reclaim anything. Any reclaim is made by completing form R40. Because dividend income is only taxable at 38.1%, but income distributed becomes

trust income at 45%, the trustees must pay the additional tax to cover the 45% taxcredit. Beneficiaries can only claim credit for tax paid by the trustees.

If the trustees decide to accumulate income rather than pay it out, the tax paid onthat income is carried forward in a ‘tax pool’. If that income is then distributed in lateryears the brought forward tax is available to ‘frank’ the 45% tax credit and thereforereduces any additional liability the trustees may have on distributions of dividendincome where the 45% tax credit exceeds the 38.1% tax the trustees must pay onthat income.

Settlor

Parental settlement and settlor interested trust rules apply.


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National Insurance Contributions (NIC) and Capital GainsTax (CGT

National Insurance (NI) is the third most popular topic in AF1, although it doesn’t alwaysappear as a calculation question. It can appear as a recommendation question applying tothe particular case study scenario given – for example recommending how someone couldimprove their NI contribution record, usually in order to qualify for the single-tier Statepension.

After income tax calculations, the next high certainty is a CGT calculation. Again, one ofthese has appeared in most recent exam papers, although sometimes the calculation isn’t astraightforward liability calculation, there have also been questions asking you to calculatethe % of a property gain that qualifies for PPR, so you need to think around the subject a bit.

TopicsNI for the Employed and their EmployersNI for the Self-Employed and OthersCGT - Exemptions, Losses and ReliefsCGT Calculation, CGT Planning and TrustsDisposals subject to special CGT Rules


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NI for the Employed and their Employers

NI for Employees and Employers

National Insurance contributions (NICs) are payable on earned income. The amount andwho pays them is determined by employment status, age, earnings and residence status.

They are administered through NICO – the National Insurance Contributions Office, a part ofHMRC. The chancellor will announce changes to rates in the budget but they take effectfrom the start of the tax year.

35 qualifying years required for single-tier State pension. State pension age (SPA)increasing - 65 men and women by Nov 2018, 66 by April 2020, 67 between 2026 and 2028,68 between 2037 and 2039. Reviews every 5 years linking SPA to longevity.

Contribution based benefits: State pension, contribution-based Job Seeker’s allowance(Class 1 only), bereavement benefits, contribution-based employment and supportallowance and maternity allowance.

Class 1

Payable on every type of earned income (including things like maternity pay, sick payand bonuses), lumps sums on joining/leaving an employer, payments to meet anemployee’s personal debts and payments in kind/assets that can easily be convertedinto cash.

Taxable employee benefits are usually liable for employer NI only (Class 1A, 13.8%).The first £55 a week of certain childcare benefits (closes to new entrants October2018) and trivial benefits costing £50 or less are free of NICs.

Two types – primary contributions paid by employees and secondary contributionspaid by employers. Employer contributions are deductible from taxable profits as anexpense.

Employee contributions paid at 12% between weekly primary contribution thresholdof £162 and upper earnings threshold of £892, thereafter the charge is 2%.

Employer contributions generally paid at 13.8% in excess of the secondarycontribution threshold of £162.

Employees potentially liable from age 16 to State Pension Age (SPA), but no upperage limit for employers.

Collected through PAYE (and therefore based on pay period). Taking dividends instead of salary / employer contributing to company pension

schemes by salary sacrifice are not liable to NI

Example

Alan, age 34, earns £800 a week. His weekly primary class 1 NIC liability is therefore:

£0 to £162 (the primary contribution threshold) @ 0% = £0.

£800 - £162 = £638. This is all taxed at the employee rate of 12%. £638 @ 12% = £76.56.

His total weekly liability is therefore £0 + £76.56 = £76.56.


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Example

Alan gets a pay rise and is now earning £900 a week. His earnings therefore exceed theupper earnings limit of £892 so he will now pay:

£0 to £162 @ 0% = £0.

£892 - £162 @ 12% = £87.60.

£900 - £892 @ 2% = £0.16.

His total weekly liability is therefore now £0 + £87.60 + £0.16 = £87.76

Example

Let’s take a look at Alan’s employer’s NICs based on the two different sets of earnings. Notethat the secondary contribution threshold is the same as the primary contribution threshold,i.e. £162.

Firstly if weekly earnings are £800:

£0 to £162 @ 0% = £0.

£800 - £162 @ 13.8% = £88.04

His employer’s weekly liability is therefore £0 + £88.04 = £88.04.

After Alan’s pay rise (£900):

£0 to £162 @ 0% = £0.

£900 - £162 @ 13.8% = £101.84

His employer’s weekly liability is therefore £0 + £101.84 = £101.84.

Note that the employer does not benefit from a reduced rate once earnings exceed theupper earnings threshold. His employer’s weekly liability is therefore £101.84.

Example

Consider how the employer’s NICs would differ if Alan were either under 21 or an apprenticeaged under 25:

- If his earnings were £800 there would be no employer contributions to pay because a0% rate applies up to £892 a week (known as the upper secondary threshold (UST)/apprentice upper secondary threshold (AUST).

If his earnings were £900, then there would be employer contributions at the usual rate of13.8% on earnings in excess of £892.

Employee contributions are paid as normal.


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Employer allowance

Most employers are entitled to an employment allowance of £3,000 a year and this isdeducted from their total secondary contributions. Businesses and charities can claim theallowance, as can individuals who employ a care or support worker. It is not available tocompanies where the director is the sole employee.

From April 2020, the allowance will be restricted to employers with an employer NIC billbelow £100,000 in the previous tax year.

Married women

Pre-6 April 1977 married women could pay reduced NIC (5.85% instead of 13.8%), someelections are still in force but are revoked on divorce/annulment/remarriage/ 2 consecutivetax years with no earnings above the LEL and no self-employed earnings/where normalcontributions are paid in error. Paying a reduced rate leads to reduced benefits.

Overseas employment

Members of EEA only pay towards social security benefits in one State – usually where theywork rather than were they live. Employer contributions will be paid in the same State.

Outside the EEA, NICO will collect NICs from employees who work regularly in the UK oncethey have been resident for 52 weeks. NICO will continue to collect NICs for 52 weeks forthose leaving the UK to work abroad for a UK employer.

Special categories of employment

Some workers are treated as employees for NIC purposes, even though for income taxpurposes they may not be including:

Domestic workers and office cleaners Agency workers Lecturers/instructors Ministers of religion Film/TV workers Labour-only subcontractors

Collection

Class 1 NICs are collected via PAYE with income tax. They are shown on P60.

Class 1A are due 22 July after end of tax year (19th if not paid electronically). Reported onP11D(b) which has to be submitted by 6 July after end of tax year.

Penalties for late payment Class 1:

No penalty for first offence unless more than 6 months late Then 1% of late amount increasing as number of late penalties increase 5% penalty where payments more than 6 months late, a further 5% after 12 months


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Penalties for late payment Class 1A

5% if full payment not made within 30 days of being due 5% more than 6 months late 5% where more than 12 months late

Late payments charged interest daily.

Repayment

There is no automatic right to repayment where excess contributions are paid. Although theyare usually repaid, if contributions to another class should have been paid, HMRC willreallocate rather than repay.

Company Directors and Multiple Employments

As a general rule, you should always work out someone’s NI contribution on a weekly basisbefore multiplying it up to get the annual figure. Rounding means if you try and calculate onan annual basis your final answer isn’t quite right because NI is meant to be calculatedweekly.

There is ONE exception to this golden rule, and that is if the person is a company director.Because of the unpredictable pattern of director’s payments, their NI contributions arealways calculated annually.

Example

Nadine receives a director’s fee of £60,000. Her employee’s NIC are calculated not on thenormal weekly basis or monthly basis but using the annual limits as follows:

£0 to £8,424 @ 0% = £0

£46,350 - £8,424 @ 12% = £4,551.12

£60,000 - £46,350 @ 2% = £273

Her total Class 1 NICs on the fee are therefore £0 + £4,551.12 + £273 = £4,824.12

Remember: if directors draw funds as dividends rather than a salary/fee there is no NIC topay.


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Associated employments

Earnings from linked employers will be aggregated for NI purposes.

Example

Simon works for a company which is a parent company with three subsidiaries. Simoncannot avoid NIC by arranging for each of the subsidiaries to pay him just under the primarycontribution threshold. In this instance, the earnings will be added together, and he will payNICs on the total amount in excess of the primary contribution threshold.

However, if Simon worked for three different companies who were in no way associated witheach other and each paid him under the primary contribution threshold then he would haveno NIC to pay as these earnings would not be aggregated.

Multiple employments

Maximum Class 1 NI contribution payable by an individual with more than one employment =£46,350 - £8,424 = £37,926 x 12% = £4,551.12 but no maximum at 2% rate which ispayable on combined earnings over £37,926 after taking off PCT for each.

Example

Jenny is a director of two unconnected companies. She earns £28,000 at both. Her totalearnings are therefore above the upper earnings level of £46,350, so she can apply fordeferment in respect of one set of earnings.

If she does so her NICs payable during 2018/19 will be:

£28,000 - £8,424 = £19,576 @ 12% = £2,349.12 plus

£28,000 - £8,424 = £19,576 @ 2% = £391.52.

Giving a total of £2,740.64.

At the end of the tax year Jenny’s earnings will be reviewed and she will have to pay thedifference between the annual maximum of £4,551.12 plus 2% of the combined earningsover £37,926 after taking off the PCT for each and the £2,740.64 she actually paid.

NICs at 2% (((£28,000 - £8,424) + (£28,000 - £8,424) - £37,926) x 2%) = £24.52

£4,551.12 + £24,52 - £2,740.64 = £1,835

If she had not applied for deferment she would have paid:

£28,000 - £8,424 = £19,576 @ 12% = £2,349.12 plus

£28,000 - £8,424 = £19,576 @ 12% = £2,349.12

Giving a total of £4,698.24 which is in excess of the annual maximum.


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NI for the Self-Employed and Others

NI and the Self-Employed

Class 2

Flat rate weekly amount (£2.95) paid by self-employed aged 16 to SPA whoseearnings exceed £6,205 pa (small profits threshold).

Class 2 NICs are calculated as part of the self-assessment process and paid in alump sum on the 31 January following the end of the tax year (i.e. at the same timeas the balancing payment)

NB credits are not given where earnings are below the threshold so may want tocontribute anyway to maintain contribution record (and because Class 2 are a lotcheaper than Class 3 voluntary which we look at in our next topic)

It is Class 2 contributions that build up entitlement to the single-tier state pension

Class 4

Paid by the self-employed aged 16 to SPA on a percentage of profits after adjustingfor capital allowances and trading losses brought forward. Higher NI rate of 9%based on band profits of £8,424 to £46,350 with 2% payable on all profits over£46,350. Paid with and at same time as income tax liability.

Does not contribute to state benefits

Overall the self-employed pay lower NI than the employer but receive fewer benefits. Theyrepresent a very small portion of NI contributions – 3% for Class 2 and 4 combined.

Example

Charlotte is self-employed, aged 40, and has taxable profits of £62,000 pa.

Her Class 2 and Class 4 NICs are therefore:

Class 2: £2.95 x 52 = £153.40

Class 4:(£46,350 - £8,424) = £37,926 @ 9% = £3,413.34(£62,000 - £46,350) = £15,650 @ 2% = £313.00

Total £3,879.74

Make use of the tax table you’re given in the exam – it saves you having to remember all thedifferent rates, limits and thresholds.


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Employed or self-employed?

If an individual states they are self-employed and HMRC later find them to be employed, theemployer may be required to pay backdated employee and employer NICs.

HMRC has a set of ‘flags’ that indicate employment as opposed to self-employment:

A person is likely to be deemed to be employed if they have to complete the jobsthey are asked to do; if they can be told what to do, where to do it, when to do it byand how to do it; if they work for a specific number of hours each pay period in returnfor a regular wage and if other benefits associated with employment such asovertime or bonuses are available. (Contract of service)

A person is more likely to be deemed self-employed if they can sub-contract, if theyhave to supply their own tools, have their own money at risk, can chose what work totake on, where it has to take place, when it needs to be done by and how it should bedone. Working for a number of different firms and having to make right any errors attheir own cost are also indicators of self-employment. (Contract for services)

Employed and self employed

Special rules apply where an individual has both employed and self-employed earnings toprevent excessive NI payments.

The annual maxima are:

Class 1 plus class 2: £4,551.12

Class 2 plus class 4: £3,566.74

Class 1 plus class 2 plus class 4: Class 4 limited to maximum class 4 less main rate class 1paid

Special categories of self-employed earners

Special rules apply or share fisherman, who pay a higher rate of class 2 making themeligible for jobseeker’s allowance, sub-postmasters who have Class 1 NIC deducted fromtheir salary but are liable to pay Class 2 and Class 4 on any trading profit. Some are treatedas employees for income tax but self-employed for NIC paying a special Class 4 rate on theirearnings, e.g. examiners.

NB Class 2 NIC no longer expected to be abolished in the current Parliament.


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Voluntary NI Contributions and Credits

Voluntary contributions

Class 3

Flat rate weekly amount for UK residents who have paid insufficient Class 1 or 2contributions during a tax year and wish to ensure they maintain/accrue entitlementto state benefits, particularly the single-tier State pension. If arrived in UK during taxyear, must have previously been liable for NI or UK resident for 26 weeks.

Cannot be paid in the same tax year in which you reach your state pension age orafter state pension age.

Can pay contributions going back six tax years but this will be at current rate (ratherthan the rate that applied at that time).

NI credits

Basically, this is a list you’re going to have to learn. You will be credited as if you had beenpaying sufficient National Insurance contributions in each of the following situations (fromhttps://www.gov.uk/national-insurance-credits/eligibility - Accessed 14 May 2018):

when unemployed, or unable to work because of ill health and claiming certain benefits if you are on an approved training course when you are doing jury service if you are getting Statutory Adoption Pay, Statutory Maternity Pay, Additional Statutory

Paternity Pay, Statutory Sick Pay, Maternity Allowance or Working Tax Credit if you have been wrongly put in prison if you are a man approaching age 65 (however, since 6 April 2010 these credits are

being phased out in line with the increase in women's State Pension age) if you are caring for a child or for someone who is sick or disabled if you are aged 16 or over and provided care for a child under 12, that you are related to

and you lived in the UK for the period(s) of care if your spouse or civil partner is a member of Her Majesty's forces and you are

accompanying them on an assignment outside the UK.

Credits are not given to the self-employed earning under the Class 2 threshold. In thesecircumstances, they might want to pay voluntarily pay Class 2 (as it will be cheaper thanClass 3 and will still maintain their record.)


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State Benefits

LEL = lower earnings threshold (£116pw or £6,032 pa) – the point at which entitlement to thesingle-tier State pension arises.

Here is a list of the main State benefits, together with a summary of whether they arecontribution-based or not, taxable or not, and significant points you should be aware of.

Application TaxableChild benefit Universal, though

subject to highincome charge

No

Child tax credits Means-tested NoMaternity allowance Contribution-based NoStatutory Maternity /Paternity/ Adoption Pay

Contribution-based Yes

Income support Means-tested NoJob seeker’s allowance Contribution-based YesWorking tax credits Means-tested NoAttendance allowance Not means-tested NoCarer’s allowance Means-tested YesDLA/PIP Eligibility criteria NoEmployment & SupportAllowance

Contribution-based YesMeans-tested No

Incapacity benefits Contribution-based After 28 weeksStatutory Sick Pay Contribution-based YesSingle-tier state pension

35 years’ cont/credit for fullpension, min 10 years anyentitlement at all

Contribution-based Yes

State pension credit

Savings element no longeravailable for majority ofthose reaching SPA on orafter 6 April 16

Means-tested No

State pension:

Forecast can be obtained online / use form BR19 to find out how many qualifyingyears have been recorded and whether voluntary contributions should be made.

Can be deferred – gain 1% for every 9 weeks of deferral (5.8% a year), no lump sum.Attractive if still work and pay tax at higher rates.

Can be paid outside of UK but increases only paid to those living in EEA / countrieswith a reciprocal arrangement with UK (not Australia, New Zealand, South Africa orCanada)


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Universal credit:

To replace income support, income-based JSA, income related ESA, housingbenefit, child tax credit & working tax credit.

Paid monthly to claimants bank/building society account. Claimed online,administered by DWP.

5 elements on top of standard allowance: child/disabled child, childcare, carer, limitedcapability for work and housing.

Subject to benefit cap. Claimant commitment required from both those in and out of work. Deductions made based on earnings/relevant income. Taper rate 65% earned income net of income tax and NIC. Some earnings

disregarded (amount depends on personal circumstances). Unearned income all included and reduced £ for £. Capital in excess of £16,000, no credit. Below that figure capital that is not disregarded treated as if yield monthly income of

£4.35 for each £250 in excess of £6,000.o Capital disregarded include home, business assets, personal possessions,

personal injury/compensation payments, certain annuity payments andpension rights and the value of life insurance policy.

Self-employed deemed to earn minimum income floor (NMW over 35 hours lessnotional tax and NIC).

Long term care costs:

Means-testing capital disregard surrender value life insurance/annuity (incinvestment bond), personal possessions (unless bought to reduce capital/charge),own home if occupied by partner/former partner (unless estranged/divorced), loneparent (who is their estranged/divorced partner), relative 60+, child under 18 ofresident or incapacitated.

Care Act 2014o lifetime cap on care costs £72,000 (not including hotel costs which will be

capped at £12,000 a year).o £118,000 upper limit (currently £23,250), lower £17,000 (currently £14,250) –

sliding scale contribution between the two.o Due April 2020.


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CGT - Exemptions, Losses and Reliefs

General

CGT is payable on profits made on the transfer of ownership/disposal of a chargeable assetin excess of the annual exempt amount (£11,700 in current tax year).

Gains falling within the basic rate tax band are charged to CGT at 10% (18% for residentialproperty gains that aren’t covered by the principal private residence exemption/carriedinterest).

Gains falling above the basic rate tax band are charged to CGT at 20% (28% for residentialproperty gains that aren’t covered by the principal private residence exemption/carriedinterest).

The gain is added to an individual’s taxable income to establish which band it falls into.

If you don’t use your annual exempt amount you lose it. It can’t be carried forward or sharedwith a spouse.

The annual exempt amount should be used in the way that minimises the tax due.

Example

Joan, a higher rate tax payer, made a gain on a buy to let property and a gain on a portfolioof shares.

The annual exempt amount should be set against gain on the buy to let property becausethe tax on this will be charged at 28%, whereas the tax on shares will be charged at 20%.

Some assets are exempt including:

• Private residence• Private motor cars• Directly held Gilts / Qualifying Corporate Bonds• Pension funds• ISAs• Woodlands• National Savings Certificates• EIS (if held for 3 years) / VCT• Gains on gambling• Wasting assets

The main types of disposal include selling, giving away and destroying an asset or the rightto an asset.

Where a sale is made on a commercial basis, the sales proceeds are used for CGT.

If a disposal takes place ‘not at arm’s length’ (i.e. not on a commercial basis), the marketvalue rather than the sale proceeds is used.


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CGT arises on the date a contract for sale becomes binding – even if the money is receivedat a later date. This is known as deferred consideration.

Where there is an ascertainable value, i.e. a fixed amount will be paid at a latertime, that amount is charged to CGT when the sale becomes binding. HMRC willrefund if the sale does not go ahead or may agree to instalment payments if themoney is not expected within 18 months.

Where there is an unascertainable value, i.e. part of the sale price is not known atthe sale date, the market value is used to establish the CGT due with a furthercalculation made when the final payment takes place. If this leads to a loss, the losscan be treated as having been made at the time of the original sale.

The acquisition cost is usually the price at which the asset was bought.

If the asset was inherited, the acquisition cost is deemed to be the value at the date of theformer owner’s death. (CGT is not due on death).

If both income tax and CGT are owed on an asset (perhaps on the sale of a tradedendowment policy), the income tax due can be deducted from the sale proceeds reducingthe gain and, ultimately, the CGT payable.

Where it is not clear whether tax due is income or capital gains, HMRC has a set ofindicators to establish whether the person is trading (income tax) or not (CGT). Theseinclude the nature of the asset, how long it is held for, whether similar transactions haveoccurred, the quantity of the asset purchased, improvements made to the asset, whether theasset is sold in a way that suggests trading, reason for the sale and whether loans are usedto buy the asset which are then repaid from profit.

Transfers between spouses or civil partners are treated on a no gain/no loss basis; thereceiving spouse takes on the gifting spouse’s original acquisition cost rather than the valueat the time of the transfer.

Inter-spouse transfers are only treated this way if the spouses are living together at somepoint during the tax year.

Disposals between spouses after the tax year of separation but before divorce are taxable –the market value would be used rather than the proceeds as the transaction would betreated as not being at arms’ length.

Jointly held assets are taxed in accordance to how they are owned. HMRC assume a 50:50split unless informed otherwise.

Where an asset is of 'negligible value', the owner may claim a disposal for CGT purposeswithout actually disposing of the asset. This will usually result in a loss that can then beoffset against other gains. The deadline for claiming relief for assets becoming negligible in2018/19 is 5 April 2021.

In addition to the acquisition cost being deductible from the proceeds, any incidental costs ofpurchase and sale are also deductible – for example, legal costs, stockbroker fees, estateagent fees, auctioneer fees.

A deduction will also be given for any expenditure on an asset where the purpose of theexpenditure was to enhance its value.

Expenses which are usually claimed against income, such as repairs, are not allowed.


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Where an asset was bought prior to the 31st of March 1982 then the acquisition cost will bethe market value at that date and any purchase or enhancement costs before that datecannot be taken into account.

Losses

Must be set against gains in the same tax year even if it means the annual exemptamount is effectively lost

Losses in excess of gains can be carried forward indefinitely, but only need to beused to the extent that the annual exempt amount is fully used

Losses have to be claimed within four years of the end of the tax year in which theyarose

Example

Linda sells two valuable antiques, one of which makes a gain, the other a loss:

Vase: Sale proceeds £50,000, selling costs £5,000, acquisition costs £25,000

- gives a gain of £50,000 - £5,000 - £25,000 = £20,000

Art: Sale proceeds £60,000, selling costs £6,000, acquisition costs £90,000

- gives a loss of £60,000 - £6,000 - £90,000 = (£36,000)

Linda must offset her current year loss of £36,000 against her current year gain of £20,000.This gives her a net loss of £16,000 and she is not, therefore, able to benefit from her CGTannual exempt amount in the current tax year. The net loss of £16,000 can, however, becarried forward to the next tax year.

Had the loss occurred in the previous tax year Linda would only have needed to use enoughof it to reduce her gain for this tax year down to the CGT annual exempt amount, i.e.£20,000 - £11,700 = £8,300, which would mean carrying forward a larger loss to thefollowing tax year of £27,700, i.e. £36,000 - £8,300.


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Reliefs

Entrepreneurs’ relief (ER). Can be claimed on disposal of all or part of a businessafter 5 April 2008. Gains made after 6 April 2011 can be relieved up to £10 millionduring a person’s lifetime. Before then there were lower limits, so if someone hadalready claimed some ER this would need to be deducted from the new £10 millionlimit. Gains that qualify for ER are set against the BRT first, before any non-qualifying gains. The asset disposed of must have been owned for at least a yearbefore disposal in order to qualify (two years from 6 April 2019).

o NB From Oct 2018, if disposing of shares in a trading company where theindividual has a 5% shareholding and is an employee/director, the individualmust also be entitled to 5% of distributable profits and net assets of thecompany

o From 6 April 2019, relief will be available even if the 5% shareholding limit isno longer met on account of the company issuing new shares (i.e. it’s beendiluted)

Investors’ relief (IR) is available to external investors who are not employees/officersof the company whose shares they acquire. 10% rate applies and the limit is £10m(this is in addition to the £10m ER limit). Shares must be newly issued, issued after16.3.16, held for at least 3 years from 6.4.16 and held continually for 3 years untildisposal

Holdover relief – this applies to chargeable lifetime transfers for IHT providing thesettlor does not have an interest in the trust. If claimed, no CGT is payableimmediately but the donee’s acquisition cost is reduced by the amount of the held-over gain which increases the size of the gain when the donee eventually disposes ofthe asset and CGT becomes payable. Has to be claimed jointly by donor and donee.Also, available for gifts of business assets.

Business rollover relief – available where business assets are sold and the proceedsreinvested in other assets for the business. Must be a trading business and assetsused for trading purposes. New assets must have been purchased one year beforeor up to three years after disposal of old assets in order to qualify. Relief only defersgain until the sale of the new assets.

Incorporation relief is available when an unincorporated business is incorporated inexchange for new shares in the company. Any gain is deducted from the issue priceof the shares.

EIS reinvestment – CGT due on a disposal can be deferred if the gain is reinvestedinto EIS shares. Reinvestment must be made within 12 months before or up to threeyears after disposal. The gain is only deferred until the EIS shares are disposed of(unless the proceeds are reinvested into EIS) or the investor dies. Investor gets 30%income tax relief (as a tax reducer) and CGT relief at 10% or 20% as appropriate(18% or 28% if the original gain was residential property not exempt under PPR).

SEIS reinvestment – CGT due on a disposal can be exempted totally if the proceedsare reinvested into SEIS. This is restricted to a limit of 50% of the reinvested gain upto a maximum of £100,000 in the current tax year.


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CGT Calculation, CGT Planning and Trusts

There is a basic order in which you should deal with a capital gains tax calculation:

1. Disposal proceeds2. LESS acquisition costs + cost of enhancements + costs of sale = Chargeable gain3. DEDUCT losses arising in the same tax year4. DEDUCT any losses brought forward from previous years but only to the extent that

the annual exempt amount is fully used5. DEDUCT the annual exempt amount to give you the taxable gain6. Calculate taxable income for the year in order to find out how much of the gain sits in

the BRT (and is therefore taxable at 10%) and how much in HRT/ART (and istherefore taxable at 20%). - NOTE The previous higher rates of 18% and 28% stillapply to sales of residential property, i.e. second homes, B2L and carried interest.

7. Gains which qualify for entrepreneurs’ relief are always taxed at 10% regardless ofother income

CGT is payable on 31st of January following the end of the tax year to which the gain relates.

Example

Clem is 63 and earns £15,000 pa. He sold a holiday home for £165,000 (costs of sale£1,000, estate agent fees £2,500, legal costs £500). Acquisition cost £55,000, re-thatching£10,500 and conservatory £10,000. Clem also sold a classic car and some shares at a loss(disposal proceeds £16,800, acquisition cost £19,500), all in the same tax year.

How much CGT is payable?

Classic car exempt£

Holiday home disposal proceeds 165,000Less costs of sale 4,000

161,000

Less purchase cost £55,000Enhancement costs £10,000

(65,000)Net gain 96,000

Shares disposal proceeds 16,800Less cost (19,500)Net loss (2,700)

Employment income 15,000Less personal allowance (11,850)

3,150

Total chargeable gain (96,000 – 2,700) 93,300Less annual exemption (11,700)Chargeable gain 81,600


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Capital gains tax payable at basic rate:34,500 – 3,150 = 31,350 @ 18% 5,643

Balance payable at higher rate:81,600 – 31,350 = 50,250 @ 28% 14,070

Total payable 19,713

NB While enhancements are allowable, repairs (i.e. re-thatching) are not (they can usuallybe claimed against income tax).

If you’re taking AF1 then you should note that unlike with the income tax calculation thereisn’t a hard and fast ‘CII’ way of writing out the answer but hopefully you’ve been able tofollow this as it is clear and logical, and scores maximum marks for showing all the steps inthe calculation. Don’t forget about rounding your answer up to two decimal places andshowing all of your workings to make sure you maximise on ‘follow-through’ marks.

CGT planning

To minimise the CGT due an individual might be able to:

Use annual exempt amount to realise tax-free profits of up to £11,700 Realise losses to reduce CGT payable Plan the disposal date of their assets to ensure they use the CGT annual exempt

amount each year / when they’ll pay tax at a lower rate Split asset (if possible) to sell before and after end of tax year to benefit from 2 x AEA Ensure they keep a record of all costs involved in buying and selling an asset so

these can be deducted from the gain Report and use losses from both the current and previous tax years Use exemptions (ISAs) and reliefs (EIS deferral, SEIS 50% exempt) where available Invest in income producing assets where these would produce a more tax favourable

outcome Transfer assets (losses or gains) between spouses where one pays tax at a higher

rate than another – must be outright & unconditional, disposal should not be madeimmediately after transfer or HMRC may disregard it

CGT and Trusts

Bare/absolute trust

Gift into trust is a disposal – holdover relief available if business asset. Beneficiary taxable at their own rates on disposals by trustees. They can use their annual exempt amount and any taxable gains will be taxed at the

appropriate rate given their other income, i.e. 10% for those whose taxable income isunder the higher rate tax threshold (18% where the gains relate to non-exemptresidential property), 20% for those whose income is above that threshold (28%where the gains relate to non-exempt residential property).

Beneficiary must include the gains on their self-assessment form and pay tax due.


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Vulnerable beneficiaries

Trustees are charged the amount of CGT that would be due if gains were assessedon the beneficiary.


Gift into trust is a disposal – CGT may be payable by the settlor although holdoverrelief is available on all assets unless it is a settlor-interested trust (business assetsonly if trust established pre-22nd March 2006). Trustees then acquire the asset at theSettlor’s base cost.

Settlor pays tax for settlor-interested trust, they can claim this back from the trustees.

Otherwise, trustees pay tax on any disposals during the life of the trust at 20% afterthe trust exemption (half the annual exempt amount, if more than one trust it isshared between them, minimum = 1/5 of half annual exempt amount), unless thegain comes from the realisation of residential property that is not the principal privateresidence of a beneficiary. If this is the case, the rate of CGT is 28%.

Holdover relief is available on any assets leaving the trust, the election should bemade jointly between the trustees and the beneficiaries. If this is not claimed thetrustees are taxed at 20% after the annual exempt amount has been used.

Where the life tenant of a pre-22 March 2006 dies, the assets are revalued at themarket value at the date of death. There is no CGT charge on the trustees for anyincrease in value between the asset entering the trust and the death of the life tenant(unless holdover relief was claimed by the settlor in which case the held over gainsare chargeable with tax payable by the trustees).

o The same rules apply to immediate post death interest trusts, trusts forbereaved minors, the death before 18 of a beneficiary under an ’18 -25’ trustand trusts for the vulnerable and disabled trusts.

o For all trusts created on or after 22 March, there is generally no uplift on thedeath of a life tenant.

Discretionary trusts

Gift into trust is a disposal – CGT may be payable by the Settlor although holdoverrelief is available on all assets unless it is a settlor-interested trust. Trustees thenacquire the asset at the Settlor’s base cost.

Settlor pays tax for settlor-interested trust, they can claim this back from the trustees.

Otherwise, trustees pay tax on any disposals during the life of the trust at 20% afterthe trust exemption (half the annual exempt amount, if more than one trust it isshared between them, minimum = 1/5 of half annual exempt amount), unless thegain comes from the realisation of residential property that is not the principal privateresidence of a beneficiary. If this is the case, the rate of CGT is 28%.

Holdover relief is available on any assets leaving the trust, the election should bemade jointly between the trustees and the beneficiaries. If this is not claimed thetrustees are taxed at 20% after the annual exempt amount has been used.


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Offshore trusts

A UK domicile who has put assets into an offshore trust is liable to CGT on trust gains if theyhave an interest in the trust and are a UK resident in the year in which the gain arises.

UK resident beneficiaries are liable to CGT on distributions of gains from offshore trusts.


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Disposals subject to special CGT Rules

Wasting assets

Wasting assets (tangible movable property with an expected life of less than 50 years) areexempt from CGT unless they are plant and machinery used in a business where capitalallowances have been claimed.

Chattels

A chattel is a piece of movable personal property – this most commonly appears in an examquestion as an antique or piece of jewellery.

Chattels are free from CGT if the disposal proceeds are less than £6,000.

If the disposal proceeds exceed £6,000 (but are less than £15,000) then the balance over£6,000 is multiplied by 5/3rds to give the maximum chargeable gain.

Example

If I sell an antique grandfather clock for £10,000, the maximum chargeable gain is (£10,000-£6,000) x 5/3 = £6,667.

However, if the actual gain between what I paid for the clock and what I sold the clock for isless, it is the lower of the two figures that is taxable.

HMRC give the following example on their website:

You sell an antique mirror for £7,500 that originally cost you £1,500. There were incidentalcosts of sale totalling £250.

The disposal proceeds exceed £6,000.

Calculate the amount by which the disposal proceeds exceed £6,000 (£7,500 minus £6,000)= £1,500

Multiply this by 5/3 (£1,500 x 5/3) = £2,500

That is the maximum chargeable gain. Then work out the actual gain. Your calculation willbe:

Disposal proceeds £7,500 minus expenses of £250 and original cost of £1,500 gives anactual gain £5,750. Compare this with the maximum chargeable gain and use the lowerfigure, which is £2,500.

If the disposal consideration is more than £15,000, the gain is calculated in the usual way.


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Principal Private Residence Relief

Basically, this is a list you’re going to have to learn. Someone’s principal private residence(PPR) is exempt from CGT on sale and there are special rules about periods of absencewhich can be ignored and periods of absence that mean part of the sale proceeds aretaxable.

You can ignore:

1. Up to a year between buying the property and actually living in it (may be extended to2 years in exceptional circumstances)

2. Any period before 1st April 19823. Any period up to 3 years provided it was preceded by and followed by periods of

residence AND no other property qualified as PPR (think of this as the PPRsandwich*)

4. The last 18 months (9 months from 2020/21) of ownership provided the property hadqualified as PPR at some point (unless the sale is in respect of someone going intocare OR contracts were exchanged before 6 April 2014 with completion before 6April 2015 when the last 36 months of ownership can be ignored)

5. Periods of up to 4 years in total if absence was due to employment elsewhere in theUK - PPR sandwich rules*

6. Any period whilst working abroad – PPR sandwich rules*7. Any period living in job related accommodation with an intention to return to the PPR

In order to calculate the amount of a gain that is exempt due to PPR the formula is:

Period of occupation

Total gain x Total period of ownership

Example

Clara buys a flat in Bridlington for £100,000 on 1 May 2008.

She moves in on 1 November 2008.

She lives there until 1 May 2012 when she starts a new job in Wales where she lives-in.

She then moves to Spain and works as a Nanny. Again, this is a live-in position.

She returns to the UK on 1 May 2015 and lives in the flat until 31 October 2016.

On 1 November 2016, she buys another property with her new husband and elects to havethis treated as her principal private residence. She sells her Bridlington flat on the 1November 2018 for £200,000. How much of this gain is chargeable?


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Exempt months Chargeable months Total months1 May 08 – 31 Oct 08(ignore, see first bulletabove)

6 6

1 Nov 08 – 30 Apr 12(ignore, in residence)

42 42

1 May 12 – 30 Apr 15(ignore, see bullets 5 & 6above)

36 36

1 May 15 – 31 Oct 16(ignore, in residence)

18 18

1 Nov 16 – 30 Apr 17(chargeable, not coveredby any otherexemptions)

6 6

1 May 17 – 31 Oct 18(ignore, last 18 monthsof ownership)

18 18

120 6 126

Out of a total 126 months of ownership, only 6 are chargeable.

The gain would therefore be:

£200,000 - £100,000 = gain of £100,000.

Of which only 6/126 is chargeable.

£100,000 x 6/126 = £4,761.90.

Only one property can be regarded as the principal private residence but the individual maydecide which one.

Where a couple are not married or in registered civil partnership they are regarded asindividuals and each claim a principal private residence for CGT purposes.

Up to half a hectare of land can usually be included with a house and still claim principalprivate residence relief for CGT purposes. It is possible for more land to be included wherethe size and stature of the house makes it appropriate. This is up to individual consideration.

Where a main property is used for business purposes then a proportion of the property(depending on how much is used for business purposes) will not benefit from principalprivate residence relief.


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Letting relief

If all or part of the home has been let out, Letting Relief may be available instead of PPR.The maximum amount of Letting Relief due is the lower of:

£40,000

The amount of PPR relief due

The gain made on the let part of the property

Example

70% of a house is used as a home and the other 30% is rented out. The gain on sale is£60,000. The owner is entitled to PPR of £42,000 on the part used as their home (70% ofthe £60,000 gain). The remaining gain on the part of the home that was rented out is£18,000. The maximum Letting Relief due is £18,000 because this is the lower of:

£40,000

£42,000 (the PPR due)

£18,000 (the gain on the part of the property that's been let)

There's no CGT to pay - the gain of £60,000 is covered by the £42,000 Private ResidenceRelief and the £18,000 Letting Relief.

From 6 April 2020, letting relief will only apply where the owner shares occupancy with thetenant.

Share identification rules

Where a shareholder has acquired a portfolio of shares in the same company over a periodof time there is a specific order in which they are deemed to be disposed of when some ofthem are sold:

Acquisitions on the same day Acquisitions within the following 30 days Acquisitions in the share pool – this aggregates all acquisitions except those made

on the same day or the following 30 days

Example

If an individual acquired 5,000 shares in May 2002 for £2 each and another 2,000 in August2009 for £3 each and sells 3,500 of them in June 2018, these shares will be matched withthe total of 7,000 shares in the share pool and an average share price will be used:

5,000 x £2 + 2,000 x £3

7,000 = average share price of £2.29


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Types of shares:

- Bonus (scrip) issues – treated as if acquired on same day as original shareholding withno extra acquisition cost

- Rights issues – existing shareholders subscribe for more shares. New shares plus anyacquisition cost added to share pool.

- Scrip (stock) dividends – dividend paid in shares rather than cash. Treated as newacquisitions.

- Employee share schemes - shares acquired through approved share option schemesusually produce larger gains as they have a lower base cost than gains on unapprovedschemes. An election can be made so that these larger gains can be taken later thanany smaller gains on unapproved schemes where an employee acquires shares underboth approved and unapproved schemes on the same day.

Part disposal rules

Where an individual only disposes of part of an asset you need to use the apportionmentformula for part disposals which is:

A x original cost

A + B

Where A = proceeds of part disposed of and B = market value of part retained.

Example

In July 2018 Jack bought a quarter of a field from Emma for £4,000, the remainder beingworth £20,000. Emma had originally paid just £500 for the field.

The deemed cost of the part disposed of is therefore:

£4,000 x £500 = £83.33.

£4,000 + £20,000

The gain is therefore £4,000 - £83.33 = £3,916.67.

The balance of the cost for any subsequent disposal is £500 - £83.33 = £416.67.


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Inheritance Tax (IHT)

Inheritance Tax (IHT) is the joint third most popular topic in AF1 in terms of questions, mostcommonly appearing as a calculation question, but equally there are lots of IHT relatedtopics ideal for questions – gifts with reservation (GWR), pre-owned asset tax (POAT), quicksuccession relief (QSR), deeds of variation, potentially exempt transfers (PETs), chargeablelifetime transfers (CLTs), transfers of unused spousal nil-rate band (NRB), the possibilities(and acronyms!) are endless.

Topics

IHT, the Transferable NRB and the Residence NRBPETs and CLTsReliefsIntestacy, Deed of Variation and TrustsGWR, POAT and IHT planning


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IHT, the Transferable NRB and the Residence NRB

An individual’s estate consists of their assets on death and some gifts made in the 7 yearsprior to death. IHT is payable on the cumulative value of an individual’s estate.

Reasonable funeral costs, debts (e.g. loans, income tax /CGT owed) and excludedproperty can be deducted from the estate.

- Excluded property includes property outside the UK (non-UK domiciles only),reversionary interests in trusts (unless acquired for money or money’s worth), and giltsand unit trust/OEIC holdings (non-UK domiciles only).

IHT is charged at the following rates:

0% on estate under nil rate band (NRB) of £325,000 20% on chargeable lifetime transfers (gifts into certain trusts) 40% on estate over NRB (36% where 10% of net estate left to charity)

Example

Dylan died in August 2018, leaving an estate valued at £700,000.

The IHT due is £700,000 - £325,000 (NRB) = £375,000 @ 40% = £150,000.

Had Dylan left £50,000 to charity then the IHT due would be £117,000.

Net estate = £700,000 - £325,000 = £375,000.

10% of £375,000 = £37,500.

Dylan’s gift to charity is in excess of this therefore 36% rate applies.

£700,000 - £50,000 (gift) - £325,000 = £325,000 @ 36% = £117,000.

IHT is payable on the worldwide assets of those domiciled and deemed domicile (15 / 20 taxyears resident in UK) and on the UK assets of non doms.

When calculating the value of an item for IHT purposes, the loss to the estate principal isused.

Losses to the estate include failing to exercise a right, such as not collecting a debt ormaking gifts.

Repayment of loans or commercial transactions that take place at arm’s length are notdeemed to be losses to an estate.

If a transaction takes place at undervalue (not at arm’s length) the figure to use for IHTpurposes will be the loss to the estate rather than the price paid for the asset.


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Examples

Sarah gives away a necklace to her sister worth £20,000. The reduction to her estate is£20,000.

If she had sold the necklace to her sister for £5,000, the loss to the estate would be deemedto be £15,000 (HMRC would not view this as a commercial transaction).

A pair of valuable vases is worth £100,000. Each vase is worth £20,000 on its own. If onlyone is given away, the loss to the estate is £80,000.

The Legal Personal Representative is responsible for payment of tax of the estate within 6months after the end of the month in which death occurs.

The Grant of Representation to administer the estate cannot be obtained until accounts havebeen delivered and IHT paid.

However, since 3rd March 2003, some banks and building societies can arrange to payHMRC by transfer from the accounts of the deceased.

Other taxes:

- Income tax is owed on any income received up to date of death, usual allowancesand reliefs can be claimed by personal representatives (personal allowance availablein full even if die early in tax year, may be owed a refund).

- Income received after date of death, no personal allowances, all charged at basicrate (7.5% dividends, 20% all other income)

- Capital gains tax due at higher rates on disposals made by personal representativeson any post-death gain, annual exempt amount available for year of death andfollowing 2 tax years, transferring assets to beneficiary is not a disposal, propertydisposal where property used by beneficiary of estate as main residence before andafter death exempt if beneficiary entitled to min 75% of proceeds of disposal,personal reps can claim for capital losses made in year of death up to date of deathto be carried back against gains in three preceding tax years (later years used first)(may be refund)

Some assets are exempt from IHT:

Transfers exempt during lifetime only

Annual exemption £3,000 per tax year. If previous year’s exemption notused can be used in current tax year providing currenttax year’s exemption fully used first.

Small gifts £250 per recipient per tax year – cannot be combinedwith the annual exemption.

Marriage / civil partnership £5,000 to children£2,500 to grandchildren, between spouses£1,000 to anyone else.

Normal expenditure out of income No limit to the amount (which has to be regular but notnecessarily the same amount) providing it does notreduce the donor’s standard of living. Money must comefrom income, therefore excludes capital content ofpurchased life annuity and withdrawals from aninvestment bond.


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Transfers exempt during lifetime and/or on death

Spousal exemption Limited to £325,000 for a non-UK domiciledspouse unless they elect to be treated as UKdomiciled for IHT purposes. Election can bemade during lifetime (irrevocable while remainUK resident though if outside UK more than 4consecutive tax years ceases to apply) or ondeath. Can apply from any date within previous 7years (so covers previous gifts) though earliestdate 6 April 2013. Election made after deathmust be made within 2 years (unless HMRC saysotherwise). Made by personal reps.

Education and maintenance Maintenance payments to spouse unlimited.Until the tax year the child turns 18 / leaves fulltime education.

UK charities Must be registered with Charities Commission.UK political parties With 2 elected MPs / 1 MP and 150,000 votes.Gifts for national benefit National Trust, museums, libraries, housing

associations.Death as a result of active service Entire estate free of IHT where death is caused

by being on active service (even if death occursmany years in the future). Includes armedservices, emergency services and humanitarianaid workers.

NOTE: The amounts of the main exemptions are given in the tax tables.


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Transfer of nil rate band

As you know, transfers between spouses on death are exempt from IHT. As most couplesleave everything to each other on first death this used to mean the first spouse’s NRB waseffectively wasted. To address this HMRC allow the % of the first spouse’s NRB that isunused to be inherited by the surviving spouse, regardless of whether they subsequentlyremarry. The amount carried forward is a % so that it can be applied to the NRB in forcewhen the surviving spouse dies, rather than remain a monetary amount or % of the NRBwhen the first spouse died.

The unused NRB % must be claimed by the legal personal representatives (LPR) of thesurviving spouse within two years of the end of the month of death. There is a maximumlimit of 100% of the prevailing NRB at the time the surviving spouse dies, which basicallymeans that no-one can claim more than 2 x NRB against the value of their estate on death.This situation could occur when someone was married (and widowed) more than once andinherited a % NRB from each spouse that could total more than 100%.

Example

Keith dies in 1996, leaving his wife Marie one quarter of the then nil rate band of £200,000(this is therefore unused due to the spousal exemption). The balance (three quarters) wassplit between their two children (and was therefore used).

Marie died in June 2018.

Marie’s personal representatives therefore have the following nil rate bands to set againsther estate:

£325,000 for Marie’s own nil rate band.

One quarter of Keith’s nil rate band applied at the rate of the nil rate band at the timeof Marie’s death, i.e. ¼ of £325,000 = £81,250.

In total, Marie’s estate benefits from a nil rate band of £325,000 + £81,250 = £406,250.

** Take care not to use ¾ of the nil rate band at the time of Keith’s death and to remember itis the unused portion that is brought forward, i.e. ¼. **

In general law, where two people die in the same accident, the older is deemed to die first.For IHT purposes, they are deemed to die together.


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Residence nil rate band

6 April 2017 saw the introduction of the residence nil rate band. The CII are always keen totest new measures so it’s important you get your head around this. The good news is it’s nottoo tricky.

The band is worth £125,000 in 2018/19 (rising to £175,000 by 2020/21, increasing thereafterby CPI). It is available where an individual’s main residence is left to a direct descendent(e.g. child, grandchild, spouse/partner of child/grandchild). It is also available where anindividual downsized/ceased to own their home after 7 July 2015 and left assets of anequivalent value to a direct descendant.

The residence nil rate band is transferable if unused in full on first death of a spouse or civilpartner where the second death occurs after 6 April 2017. It is irrelevant when the first deathoccurred.Estates with a net value over £2m will see the residence nil rate band reduced by £1 forevery £2 over £2m threshold.

Example:

Bill died on 1 January 2015 leaving behind his widow Helen. His share of the family homepassed directly to Helen. Helen inherited the rest of Bill’s estate.When Helen died on 1 September 2018, she left their combined estates to their daughterEmma.At Helen’s death the combined estate was valued at £1,000,000 and included the familyhome worth £300,000.The following nil rate bands can therefore be used:100% of Bill’s nil rate band £325,000100% of Bill’s residence nil rate band £125,000100% of Helen’s nil rate band £325,000100% of Helen’s residence nil rate band £125,000Total estate exempt from IHT £900,000IHT therefore due on £1,000,000 - £900,000 = £100,000 @ 40% = £40,000.


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PETs and CLTs

Potentially Exempt Transfers (PETs)

Lifetime transfers made from one person to another, or to a bare trust or a disabledtrust.

No need to inform HMRC (though worth making a note of the gift as evidence). Becomes fully exempt if donor survives seven years. Chargeable if donor dies within seven years of making the gift and value of PET

exceeds available NRB. Value of PET is usually the value at the date of the gift.

o If the value has dropped and the recipient still owns it, the market value at thedate of the donor’s death can be used. If the recipient no longer owns it, themarket value at the date they disposed of the asset will be used. If the gift is awasting asset, its current market value is used

Taper relief is available (rates in the tax tables).o 0 – 3 years 100% of bill payable, 3 – 4 years 80%, 4 – 5 years 60%, 5 – 6

years 40%, 6 – 7 years 20%. NB Taper applies to the tax payable – if there is no tax to pay, there can be no

taper… Recipient pays any tax due (if they refuse HMRC will ask the personal

representatives to pay it)

Example

Jenna gifted £350,000 to her daughter on the event of her marriage and died between 4 and5 years of making the gift. Assuming Jenna had made no other gifts, how much IHT ispayable on Jenna’s death?

Value of PET £350,000 less £6,000 (2 x annual allowances (one for current tax year, one forprevious tax year)) less £5,000 (gift on marriage) = £339,000.

£339,000 – NRB of £325,000 = £14,000 @ 40% = £5,600.

Because Jenna died between 4 and 5 years making the gift only 60% of the tax is payable:£5,600 @ 60% = £3,360.

Gifting a PET can lead to CGT liability (between spouse/civil partner = no gain/no loss ifliving together).


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Life assurance

7 year decreasing term assurance to protect recipient of PET / CLT (gift inter vivosspecialist policy to achieve this).

7 year LTA to protect estate from loss of NRB while PET/CLT active, written undertrust for beneficiaries of estate and LPRs as trustees.

Any outstanding liability on estate SL/JL2D policy written under trust for amount ofliability.

Premiums payable on such life policies can use annual exempt amount/normalexpenditure exemption.

Chargeable lifetime transfers (CLT):

Lifetime transfers made to trusts (other than bare or disabled) Immediately chargeable to IHT at the lifetime rate of 20% if the value of the transfer

takes the donor’s cumulative total transfers over the past seven years over the valueof the NRB.

If donor dies within seven years the value of the CLT comes back in to the estate andis taxed at the death rate (40%) with credit given for tax paid during their lifetime (ifany) plus taper relief (in exactly the same way as for PETs), although no refund willbe given where tax has been overpaid.

Example

Leah transferred £375,000 into a discretionary trust. She died three and a half years later.How much tax was payable at the time of the gift and on Leah’s death? Assume the NRBwas £325,000 in both instances and that Leah had made no previous gifts.

Tax at date of gift

£375,000 - £6,000 (2 x annual exemptions, current and previous tax year) = £369,000.

£369,000 - £325,000 = £44,000.

£44,000 at lifetime rate of 20% = £8,800.

Tax on death

£369,000 - £325,000 = £44,000.

£44,000 at death rate of 40% = £17,600.

Leah died 3 ½ years after the gift so only 80% of IHT is payable. £17,600 @ 80% = £14,080.

Deduct tax paid during lifetime £14,080 - £8,800 = £5,280.

Tax is usually chargeable at 20%, although if the tax is to be paid by the donor rather thanthe recipient, then the gift needs to be grossed up – or, alternatively, charged to tax at 25%.

Lifetime tax is normally due 6 months after the end of the month in which the CLT is made.

However, if it is made between the 5th of April and the 1st of October, then it is due by the30th of April in the following year.


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Where the donor dies within 7 years of making a gift where the failed PET or CLT is inexcess of the available nil rate band any extra due payable by recipient within 6 months afterthe end of the month in which death occurs

Combining CLTs and PETs

Things get a little more complex when there’s both a PET and a CLT to consider. The keything to remember is that we compare like with like.

So, when looking to see whether there’s lifetime tax to pay on a CLT we look back 7 yearsto see if there have been any other CLTs. We ignore any PETs.

However, on death, failed PETs (those within 7 years of death) become chargeable and canno longer be ignored.

Example

Bill gives his sister, Jenny, £200,000. Slightly later in in the same tax year he places£200,000 into a discretionary trust. Bill dies 4 ½ years later.

Let’s look at the £200,000 first. As an outright gift, this is a PET.

From the PET, we can deduct 2 annual exemptions, leaving a value for IHT purposesof £194,000. Because this is a PET, no tax is payable during life time.

On death, the PET becomes chargeable, but is still within the NRB so there is not taxto pay.

Let’s now look at the CLT.

At the date of the CLT we look back 7 years to see if there are any other previousCLTs eating up the NRB. In this case, there are not – we ignore the PET because itis not a CLT.

As the full NRB is available, the CLT is fully covered and no tax is due during lifetime.

The situation changes slightly on death. This is because the PET has becomechargeable and pushes the CLT over the available nil rate band.

The amount of the CLT is excess of the nil rate band is £69,000.

This is chargeable at 40% giving a bill of £27,600.

Because Bill died between 4 and 5 years of making the gift, only 60% of the bill ispayable, giving a final tax bill of £16,560.

There is no lifetime tax to deduct because the full NRB was available during lifetimeon account of the only other previous gift being a PET and therefore not brought intothe cumulation at that time.


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The 14-year rule

You may have come across the term the 14-year rule in relation to CLTs.

If the donor dies within 7 years of making a CLT, tax at the death rate (40%) will applyretrospectively to that transfer.

The tax is recalculated using the value of the gift and the previous 7 years cumulation at thedate of the transfer.

This may bring earlier transfers back into play.

Therefore, CLTs made within 7 years of death can be impacted by earlier CLTs made up to7 years previously and any PETs that have failed and become chargeable transfers withinthat same time frame.

In theory, this means that transfers made in the 14 years prior to death can come back intoplay on death.

Example

Ross made the following gifts: CLT 1 - £200k 12 years ago. CLT 2 - £250k 6.5 years ago(NRB £325k). Ross has died today.

At the time of the CLT 2 gift, lifetime IHT was payable at 20%. This is because thecumulative value of CLT2 was more than the Nil rate band

Ignoring exemptions, cumulative value was £200k + £250k = £450k Less NRB of £325k =£125k @ 20% = £25,000 - Payable by Trustees

On death, even though it was made 12 years ago, CLT 1 comes back into play, as this willhave been in the cumulation when CLT 2 was made.

£200k (CLT 1) + £250k (CLT 2) = £450k.

Take from this NRB at death £450k - £325k = £125k.

£125k now taxable at 40% (death rate) = £50k

Taper relief applies at 80% as 6-7 years before death.

Relief therefore = £50k x 80% = £40k

So IHT due on CLT 2 on death = £50k - £40k = £10k

However, £25k already paid – No further IHT to pay – NO refund.


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Reliefs

Business relief (BR)

Relief for transfers of business property that has been owned for, used in orearmarked for future use in the business at least two years prior to transfer. Onlyapplies to certain types of business (not those who deal mainly in shares, land orproperty generally).

Not applicable if business property subject to a binding contract for sale at the time ofthe transfer.

100% BR for unincorporated businesses (sole traders/partnerships) or shareholdingsin unquoted/AIM companies.

50% BR for controlling shareholdings in fully listed companies, or land, buildings,plant or machinery used in a business controlled by the person doing the transfer.

Not available on property subject to a binding contract for sale (buy and sellagreement), assets not used in business for last 2 years, cash (unless it is being heldfor a specific business purpose).

Mortgage secured on business property should be transferred to main residence ifpossible.

Agricultural relief (AR)

Available for land, crops and buildings but not animals or equipment. It wassuggested to me once that the way to remember this is if you picked the farm up andturned it upside down, everything that fell off wouldn’t get AR! The equipment willoften qualify for BR instead.

Relief on agricultural value of land, not development value not buildings on their own. No agricultural relief on the excess open market value of a farmhouse over its

agricultural value 100% AR for owner-occupied farms and farm tenancies. 50% AR for landlord with interests in let farmland which extends to 100% AR if the

tenancy is more than 12 months long (and started after 31 August 1995). Property must have been owned by transferor for agricultural purposes for at least

two years, or seven years if let out during that period. Not applicable for property subject to a binding contract for sale at the time of the

transfer. If AR and BR both apply, AR is given first.

Post mortem relief

If shares sold within 12 months of death or property sold within 4 years of death is sold forless than the valuation on death the IHT can be calculated on the disposal proceeds. Appliesto all shares / property sold not just those sold at a loss.

Woodlands relief

Only to timber (land would probably qualify for AR). Only for transfers on death and only defers IHT until disposal of timber although the

nature of the business would mean the whole lot would probably get BR anyway.


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Quick succession relief

Available if you inherit something and then die within five years. Part of the value of yourestate is deemed to consist of an inheritance on which IHT has only recently been paid, sothe premise is that it would be wrong to charge IHT twice on effectively the same money.The relief only applies to the tax on the net increase in the estate of the second person.

Formula is:

Tax paid on first transfer x net transferGross transfer X relevant percentage

The relevant percentage being the amount of time in years between inheritance andsubsequent death. These rates appear in the tax tables:

Period betweeninheritance and death

% reliefon IHT

Less than a year 100%1-2 years 80%2-3 years 60%3-4 years 40%4-5 years 20%

Example

Sam died in May 2016 and left all of her estate, valued at £400,000, to her friend Ernie. TheInheritance Tax paid on Sam’s estate was £30,000. Ernie died in April 2018, leaving anestate worth £600,000. Neither had any direct descendants.

Value of Ernie’s estate: £600,000

less Nil Rate Band for 2018/19: (£325,000)

£275,000

IHT payable: £275,000 @ 40% = £110,000

However, because Ernie died within 2 years of Sam’s death, Quick Succession Reliefapplies.

The credit will be calculated as follows:

£30,000 x (£400,000 – £30,000) = £ 27,750

£400,000

QSR Taper (Between 1 and 2 years of first death): @ 80% = £ 22,200

Inheritance Tax due on Ernie’s estate: = £110,000

less Quick Succession Relief: (£ 22,200)

£87,800.


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Intestacy, Deed of Variation and TrustsIntestacy

The Inheritance and Trustees Powers Bill 2014 received Royal Assent on 14 May 2014 andchanged the intestacy rules (previously spouses/civil partners only took a life interest in theincome from half of the residue of the estate). From 1st October 2014, the rules dictate that ifan individual dies intestate, their estate is distributed to the relatives of the deceased,based on the surviving relatives.

The distribution is as follows:

1. Spouse or Civil Partner

Spouse or Civil partner are entitled to everything absolutely.

2. Spouse or Civil Partner and Children

Spouse or Civil Partner takes personal chattels, the first £250,000 of the estate and 50% ofthe remaining estate absolutely.

The children will take the remaining 50% of the estate absolutely. If any children are belowthe age of 18, the estate will be held in trust on their behalf until they reach 18 or marrybefore then.

3. No Spouse or Civil Partner

Any children take the whole value of the estate, absolutely.

However, if there are no children, then:

Grandchildren take the place of parents; but if none: Parents; but if none: Brothers and sisters - Full blood first, then half blood - (their children take their place

if deceased); if none: Grandparents in equal shares; if none: Uncles and aunts - Full blood first, then half blood - (their children take their place if

deceased).

4. No relatives

If there are no relatives, the crown takes the whole of the estate.

http://www.legislation.gov.uk/ukpga/2014/16/contents/enacted/data.htm[Accessed 14 May 2018].


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A deed of variation is an IHT planning tool that allows alteration of an inheritance within twoyears of death. A deed of variation can be used to skip a generation and pass aninheritance directly to grandchildren so that it doesn’t worsen an existing IHT issue.

The key features are:

Only the beneficiary who will inherit less because of the variation needs to agree to it(i.e. beneficiaries whose inheritance remains unaffected don’t need to agree).

If the variation is intended to take effect for IHT purposes there must be a writtenstatement to that effect.

There doesn’t need to have been a will; an inheritance by virtue of intestacy can stillbe varied.

The variation must be made within two years of death, in writing and signed by theaffected beneficiary(ies). If it means more IHT is payable then the executors oradministrators must also sign and agree to the variation.

Normally a deed is executed which must state how the estate was originallydistributed and how it is being varied and who will now benefit from this variation.

An estate can only be varied once.

IHT and Trusts

Bare trust

Any transfer of value to a bare trust is a PET. The value of the trust is included in the beneficiary’s estate for IHT purposes. The beneficiary is liable for any IHT payable on a failed PET.


PRE-22 MARCH 2006o Creation of the trust during the settlor’s lifetime was a PET.o No tax charge if the settlor survived for seven years, but if not, the

trustees were liable for IHT if in excess of available NRBo The trust assets are generally regarded as belonging to the beneficiaries

with an interest in possession and therefore divided amongst themequally.

o The value therefore forms part of their estates for IHT purposes.

POST-22 MARCH 2006o Creation of the trust is a chargeable lifetime transfer.o IHT treatment is now exactly the same as per discretionary trusts.o The trust is subject to periodic and exit charges UNLESS it is either a

disabled person’s trust, or an IIP created on death by will or intestacy.


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Discretionary trust

The creation of a discretionary trust is a chargeable lifetime transfer, chargeable at20% on the extent that the transfer takes the settlor’s cumulative total over the NRB.

There may be further tax to pay if the settlor dies within seven years of creating thetrust, although taper relief will be available to reduce the IHT if the transfer uses upall of the available NRB.

Because no beneficiary has a right to income or capital from a discretionary trust,there is nothing to include in the value of their estate on death.

An IHT periodic charge is made on the tenth anniversary of the creation of a discretionarytrust.

This is 30% of the lifetime rate of 20%, i.e. 30% x 20% (or 6%) of the excess value of thetrust over the current NRB.

This is payable by the trustees.

Example

10 years after the trust was established, the value of the assets was £400,000. The NRB atthis time is £325,000.

£400,000 - £325,000 = gives us a figure of £75,000 in excess of the NRB.

This is then taxed at 30% of the lifetime rate:

£75,000 x 30% x 20% = £4,500.

An IHT exit charge is payable every time a capital distribution or appointment is made to abeneficiary.

It is generally based on the number of quarters the last periodic charge.

The distribution is multiplied by the number of quarters over 40 and the effective rate at theprevious 10-year periodic charge.

Example

Our fund has now grown to £450,000 and a distribution of £300,000 is made after 11 yearsand 8 months.

Number of whole quarter years since periodic charge = 6

The effective rate at the time of the periodic charge was 1.125%. We work this out bydividing the value of the fund at that time by the tax charged at that time and expressing it asa percentage. ((£4,500 / £400,000) x 100)

Therefore:

£300,000 x (6/40) x 1.125% = £506.25 tax payable

NB. This is a simplified version of the calculation which can be very complex. Care shouldbe taken to keep assets within a discretionary trust to below the available NRB toavoid/minimise 10 yearly/exit charge.


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GWR, POAT and IHT Planning

Gifts with reservation (GWR)

A gift with reservation arises when someone gives an asset to someone else, hoping toescape an IHT liability, but can’t resist continuing to use the asset as if it were still theirs.

The most common scenario is someone with a property/holiday or second home they gift totheir children but carry on staying there without paying market rent. This effectively rendersthe gift useless for IHT purposes as HMRC feel in reality they haven’t gifted or given upanything.

A GWR disappears the minute the donor starts paying a market rent (or stops using theproperty themselves) and the gift becomes a PET instead. Paying something, but less thanthe market rate, only reduces the GWR proportionately.

On death, the GWR is added back into the value of the donor’s estate. If the gift became aPET at some point and the donor dies within seven years, the value could be added back into their estate again BUT any tax paid on the original gift is credited against the IHT due ondeath. Exempt gifts cannot be GWR because they are exempt.

Pre-owned asset tax (POAT)

The bit that seems to really stump candidates is that POAT is an INCOME TAX charge NOTan IHT charge. POAT basically converts the benefit someone gets from having free or low-cost enjoyment of an asset they formerly owned (or provided the money to buy) into a cashequivalent value which is added to their other income for the year and liable to INCOMETAX.

For land, the cash equivalent is the market rent. For chattels and intangible stuff, it is theofficial income tax interest rate (currently 2.5%) of the capital value of the asset. Land orchattels must be re-valued every five years. No tax is payable if the cash equivalent is lessthan £5,000 in a tax year.

If full market rent/value is paid for use of the asset there is no POAT. If a contributiontowards the full market rent/value is paid, this amount is deducted from the cash equivalentvalue and therefore reduces the INCOME TAX charge payable.

POAT can be avoided if the individual elects for the asset to be a GWR instead (andtherefore liable to IHT). This can be done by completing form IHT500 and submitting it by31st January following the tax year in which the income tax liability arises.


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IHT Planning

Effective IHT planning starts with making a valid will and ensuring that it is kept up to date(review every 2 years / after change in client circumstances/legislation).

Establish Lasting Power of Attorney (LPA) to allow finances to be managed / decisions aboutpersonal welfare be made (decisions agreed in advance) on their behalf if incapacitated.Ideally spouse/partner should not be sole attorney. Attorney has limited powers to make giftsother than to charities or for customary occasions therefore cannot do much in the way ofIHT planning without consent of Court of Protection.

The next steps involve using exemptions and reliefs, giving away assets if the individual canafford to do so and using trusts where they cannot or where they are not sure who they wantto benefit from the assets at the present time.

Bequeath assets that qualify for tax reliefs to beneficiaries who would otherwise be chargedtax. Bequeath chargeable assets to exempt beneficiaries.

Transferable nil rate band negates need for many spouses/civil partners to use their NRB onfirst death. May be worth doing if the asset to be transferred is expected to grow faster thannil rate band, where 2nd marriages are involved or where someone would otherwise inheritmore than one NRB which would be wasted.

If an asset is transferred, it must be outright and unconditional. Donor should ensuresurviving spouse/partner still has enough to live on.

When a gift is made, CGT may be payable. When comparing IHT and CGT remember IHT ischarged on the whole of a CLT, but the NRB may mean there is no tax bill. CGT is chargedon gains, less the annual exempt amount.


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Residence, Domicile, UK Tax Compliance and Other Taxes

Residence and domicile will affect all the main taxes – income, capital and inheritance, aswell as special National Insurance rules that relate solely to non-UK residents or people whotake up UK residency. The tests that helps HMRC to determine if someone is UK residentfor tax purposes or not have changed recently, which makes them a hot topic.

In this module, we’ll examine the right and the wrong way to go about paying tax. We’ll lookat taxes that are payable on certain transactions, including Stamp Duty Land Tax, StampDuty, Stamp Duty Reserve Tax and Value Added Tax, and the taxation paid by companies(Corporation Tax).

TopicsResidence and DomicileOverseas Tax PlanningPaying TaxTax Mitigation, Evasion and AvoidanceOther Taxes


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Residence and Domicile

Residence and Domicile

Residence is the term used to describe the tax status of an individual in a given tax year(compared to domicile which is the country they regard as their permanent home.)

There are basically three tests that HMRC will carry out on an individual to determine if theyare UK residence or not. These are:

Three tests that mean a person is automatically non-resident (automatic overseastests)

Three tests that mean a person is automatically UK resident (automatic UK tests) If none of the automatic tests apply then the sufficient UK ties test is used instead.

Any day that an individual is physically present in the UK at midnight counts as a day ofpresence. Days in transit between two places outside the UK do not count, nor do daysspent in the UK for exceptional circumstances beyond the individual’s control.

Automatic overseas tests (automatically not UK resident)

1) Individual in the UK for fewer than 16 days in current tax year.2) Not UK resident in any of the three preceding tax years and fewer than 46 days in the

current tax year.3) Working overseas full-time, spending fewer than 91 days in the UK of which fewer

than 31 days were spent working in the UK for 3 hours or more in current tax year.

Automatic UK tests (automatically UK resident)

1) If you spend 183 days or more during current tax year in the UK2) If you have a home in the UK for at least 91 days during the current tax year and live

there for at least 30 days during the current tax year. If you have an overseas homeduring that 91-day period, you must be present there for fewer than 30 days in thecurrent tax year. (In this test only, it is not necessary to be present at midnight for theday to be counted.)

3) Someone who works full-time in the UK.

Split year treatment

This applies where a person leaves the UK for full-time work overseas (and ceases to havea UK home) or comes to the UK for full-time work or meets the only UK home test.

It can also apply to a spouse/partner who joins an individual who has left the UK for full-timework overseas.


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Sufficient UK ties test

1) Having a spouse, civil partner or minor children resident in the UK2) Having accommodation in the UK which you use during the tax year3) Working for 40 or more days during a tax year in the UK (doing substantive work)4) Spending more than 90 days in the UK during either of the previous two tax years5) Spending more time in the UK than any other single country.

An individual will need to compare the number of days they are in the UK with the number ofUK ties they have, and whether they are an arriver or a leaver to determine UK residence.

An arriver is someone who has not been resident in the UK in any of the 3 previous taxyears.

A leaver is someone who has been UK resident in 1 or more of the 3 previous tax years.

Arrivers Days in UK in tax year LeaversNot resident 16 – 45 Resident if 4 tiesResident if 4 ties 46 – 90 Resident if 3 tiesResident if 3 ties 91 – 120 Resident if 2 tiesResident if 2 ties 121 – 182 Resident if 1 tiesResident 183 or more Resident

It is easier for an arriver to remain non-UK resident than for a leaver to become non-UKresident.

Deeming rule

The deeming rule means that after the first 30 qualifying days, any further qualifying days ina tax year will be deemed to be days when the individual was present in the UK. A qualifyingday is one where the individual has been present in the UK, but not at midnight. The ruleapplies to individuals who have 3 or more UK ties.

DomicileDomicile refers to your natural home – the country to which you would return after goingabroad.

Domicile of origin

England and Wales take father’s domicile (mothers for illegitimate children/children bornafter death of their father) until 16.

Scotland, child under 16 domiciled in country with which they are most closely connected atpresent.

Prior to 1974 a woman would take her new husband’s domicile on marriage. Nowadays awife’s domicile is independent of that of her husband.


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Domicile of choice

Can be acquired by moving to a new country with the objective of permanently staying there.HMRC will take the following actions into account when assessing whether a new domicile iseffective:

Physically live in the country of choice Express an intention to remain in that country Buying a house in the new country and disposing of all property in the country of

origin Establishing a business or getting a job in the new country Involvement in the local community Getting on the electoral roll Acquiring citizenship or nationality Making a locally valid will and burial arrangements there Having friends, family and business interests there Severing ties with friends, family and business interests in the country of origin.

However, an individual will continue to be treated as UK domicile for at least 3 years afteracquiring a domicile of choice.

Deemed domicile

Long term UK residents will be treated as deemed domicile for all tax purposes ifthey have been UK resident for 15 out of the last 20 tax years.

If born in UK, have UK domicile of origin and become tax resident in UK after ahaving acquired a domicile of choice outside of UK, will be deemed domicile. ForIHT, only applies if UK resident in at least one of last two tax years

Once deemed domicile under 15/20 rule will remain deemed domicile for income taxand CGT until 6 tax years after leaving UK

For IHT it’s 4 consecutive tax years

The Remittance Basis

An individual might claim the remittance basis if they are domiciled somewhere other thanthe UK, have income or gains arising outside the UK and choose to send some or all of themto the UK because they are resident in the UK.

By claiming the remittance basis, they only pay tax on income or gains remitted to the UK(and not on their worldwide income and gains).

However, claiming the remittance basis means loss of both the personal allowance and theannual exempt allowance.

Personal effects, assets costing less than £1,000, assets brought into the UK for repair,assets in the UK for less than 275 days, works of art brought into the UK for public display,certain assets bought before 12 March 2008 and income and gains remitted to the UK forinvestment in a qualifying company (unlisted/listed on AIM, including property lettingcompanies, investment made within 45 days of remittance) are ignored.


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The remittance basis charge

HMRC impose a charge of £30,000 on individuals who have been resident in the UK for atleast seven out of the previous nine tax years and who make use of the remittance basis.

Individuals who have been resident in the UK for at least 12 out of the previous 14 tax yearsare charged £60,000.

The remittance basis charge is essentially a tax charge on the foreign income and capitalgains that are not brought into the UK.

This charge is an annual charge applicable for every tax year the individual makes use of theremittance basis. It is paid via self-assessment.

The charge does not apply to those under 18, where unremitted income and gains are lessthan £2,000 nor where worldwide gains are taxed on an arising basis (see below).

The alternative

Individuals who choose not to claim the remittance basis pay tax on worldwide income andgains on an arising basis instead, but they keep the personal allowance and annual exemptamount. They may also be able to claim double taxation relief where tax is also payable intheir home country.

Some maths is needed to work out which option is most favourable for that individual.

Example

Jacques, a Canadian, has lived and worked in the UK for the past 11 years. How will hisincome and gains be treated for tax purposes?

he will be taxed in the UK on worldwide income and gains unless he elects for the remittance basis as he has been UK resident for at least seven out of the past nine tax years he will have to pay an annual tax charge of £30,000 if he elects for the remittance basis if his unremitted foreign income and gains are less than £2,000 there would be no

charge he will still be taxed in the UK on his UK income and gains if taxed on a remittance basis he loses his personal allowance and annual CGT

exemption the election is made annually the annual charge will increase to £60,000 in the next tax year because he has then been UK resident for at least 12 out of the previous 14 tax

years


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Residency, Domicile and Income Tax

Personal allowance

The following non-residents can claim a personal allowance:

UK citizens EEA nationals Those who are/were employed in service of Crown/any missionary society Those employed in service of any territory under HM protection Residents of IOM / CI Previous residents of UK who are overseas for sake of their health/health of a family

member who resides with them Those whose late spouse/civil partner were in service of crown

NB If claim remittance basis no personal allowance is available unless unremitted overseasincome for the tax year less than £2,000.

UK resident and UK domiciled

Income tax charged on all earned and investment income whether brought into UK ornot.

100% income from foreign pension now taxable.

UK resident, not UK domiciled

Income arising in UK fully taxable. Employment income fully taxable if duties performed in UK/employer UK

resident/both. The following can be taxed on remittance basis:

- investment income arising outside UK/Ireland- earned income from foreign employer and duties performed overseas- earned income from employment performed overseas regardless of employer’s

residence, but only for the tax year that the employee becomes UK resident andthe next 2 tax years

- most pensions arising abroad- income from self-employment carried on outside UK/Ireland

Non-UK resident, UK domiciled

Not paid on earned income for duties performed overseas, overseas investmentincome or gilts

Paid on earnings for duties in UK taxable, unless only incidental to overseas duties. Paid by self-employed on profits of trade/profession carried on in UK UK investment income generally taxable but total liability limited to amount of income

tax that would be due if investment income were excluded and no personalallowances given

Paid on UK State pension/other pension income taxable unless arises from overseasemployment, and on income from UK property


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Non-UK resident and non-UK domiciled

Income tax on UK investment income Employment duties performed in the UK/trades carried on in the UK Property income arising in UK

Residency, Domicile and Capital Gains Tax (CGT)

UK resident and UK domiciled

Liable on worldwide gains. If become deemed domicile under 15/20 rule

o If previously paid remittance charge for any year before April 2017o Can rebase any / all overseas assets to market value on 5 April 2017o Meaning gains accruing before 5 April 2017 would not be charged to CGT

UK resident, not UK domiciled

Liable on UK gains. Liable on foreign gains if remittance basis used, charge may be payable If remittance basis not used on foreign gains, liable on worldwide gains.

Non-UK resident, UK domiciled

Aside from residential property, not liable unless temporary non-resident:

Anyone who leaves the UK must be non-UK resident for at least five years(five tax years if they left 2012/13 or earlier) before they are no longer liablefor CGT on assets sold.

This isn’t as clear cut as it sounds – if you are UK resident for four or moreout of the seven tax years immediately before you leave the UK (includingpart years), then become non-resident for a period of less than five years andown the assets that get disposed of before you leave the UK, then you arestill chargeable to CGT on disposal.

If the disposal occurs in the same tax year the individual leaves the UK thenCGT is payable straight away.

If the disposal occurs in a tax year after the individual has left the UK thenCGT becomes payable in the tax year that the individual resumes UKresidence.

Gains that accrue to non-UK residents on non-residential property will be subject to CGTfrom 6 April 2019.

Non-UK resident and non-UK domiciled

Aside from residential property, not liable unless temporary non-resident (see above).


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Residency, Domicile and Inheritance Tax

UK resident and UK domiciled/deemed domicile (15/20 years)

Liable on worldwide assets.

UK resident, not UK domiciled/deemed domicile (15/20 years)

Liable on UK assets, double taxation relief may be available.

Non-UK resident, UK domiciled/deemed domicile (15/20 years)

Liable on worldwide assets.

Non-UK resident and non-UK domiciled/deemed domicile (15/20 years)

Liable on UK assets, double taxation relief may be available.

IHT spousal exemption for non-domiciled spouse

As the spouse of a UK-domiciled person, an individual can elect to be treated as UKdomiciled for IHT purposes.

This would grant a full spousal exemption A retrospective election, up to two years after the date of death can be made and

back-dated up to seven years – but not before 6 April 2013 The election cannot be revoked but ceases to have effect where the person has not

been resident in the UK for 4 successive tax years If no election was made only the first £325,000 of UK assets would be exempt from

UK IHT


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Overseas Tax Planning

Self-Assessment

Each individual is responsible for determining their own residence and domicile status andcalculating their UK tax liability accordingly.

They must complete the non-residence supplementary pages of HMRC’s tax return if theybelieve themselves to be a non-UK resident, eligible for the split year treatment or non-domiciled in the UK and have income or gains arising abroad.

Failure to complete these supplementary pages will lead to an individual being classed asboth UK resident and domicile for the tax year.

Double taxation relief

Available to individuals who have income and gains arising in one country, but are residentin another.

Where this happens, the double taxation treaty between the two countries concerned isexamined and the individual will be taxed accordingly.

Residents of a country which has a double taxation treaty with the UK may be able to claimexemption from UK tax on UK pensions (except UK government pensions), royalties,dividends and interest (although they may be liable for them in their own country before theyqualify for relief in the UK.)

Some residents may qualify for exemption from UK tax on earnings from UK employment(providing they are not in the UK for more than 183 days and their employer is non-residentin the UK) or self-employment (providing they do not operate from a fixed base in the UK).

UK residents may qualify for relief against UK tax on overseas income or gains that aretaxable in both the UK and the country of origin.

IHT is also covered by a number of double taxation treaties.

Overseas Trusts

An overseas trust can be subject to UK income tax if there is a UK-resident trustee. If thereis not, the settlor may be liable if they or a connected party can benefit. Beneficiaries can betaxed where capital is distributed from accumulated income.

An overseas trust is not subject to UK CGT unless it is a settlor-interested trust.Beneficiaries can be taxed when capital is distributed.

Transfers to overseas trusts by UK domiciled settlors are disposals for CGT purposes andtransfers of value for IHT purposes.


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Overseas Tax Planning

Emigrating

o Where there is a choice, check whether UK / overseas has lowest tax liabilityand pay there

o Consider whether UK investments should be kept or replaced with overseasones (if expect to be overseas for more than 5 years dispose of losses butkeep gains)

o Check holdover relief / CGT reinvestment relief won’t be clawed backo Check impact of double taxation agreementso Rental income paid net unless apply for gross (because falls within personal

allowance)o British citizens entitled to income tax personal allowances and CGT annual

exempt amounto Advise HMRC of tax status on P85o Income arsing in UK potentially still subject to UK tax therefore move deposit

accounts offshoreo Maximum tax payable on investment income (excluding rental) is tax

deducted at source assuming no personal allowance available (if entitled to apersonal allowance this is set against untaxed interest)

o Subject to IHT on worldwide assets if retain domicile, deemed domicile for 3calendar years after leaving UK, even if acquire domicile of choice elsewhere

o QROPS used by non-resident with UK pension or someone planning to leaveUK. Transfer to QROPS with no tax charge.

o QNUPS used to avoid IHT by UK resident and non-residents who are UKdomicile. No tax relief on contributions, employer contributions may be caughtby disguised remuneration provision. Wider assets (include residentialproperty) and no IHT on death. Cannot transfer UK pension into QNUPS.Used by those who expect to retire overseas.

Immigrating

o Liable to UK tax on worldwide income from day of arrival (full personalallowances available)

o Close overseas accounts before arriving to avoid taxo UK dom - realise gains before arriving in UK if temporarily non-resident for

more than 5 years and tax lower overseas / defer loss so can use in UKo Non-UK dom – liable to CGT on gains arising in UK, outside UK on

remittance basiso Can invest in ISAo Offshore bond useful if do not wish to pay remittance basis charge, may be

able to take 5% deferred withdrawals, may avoid UK and overseas tax ifencash when not UK resident.


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Paying TaxTax is paid either via self-assessment or pay as you earn (PAYE). We’ll look at each in turn.

Self-assessment

Applies to the self-employed, most company directors, those with property or investmentincome, those subject to child benefit income tax charge and those with chargeable gains.

Single tax return covers all income and chargeable gains. Tax payer can calculate taxthemselves or ask HMRC to.

Payments

Income tax, child benefit income tax charge and Class 4 NIC paid in 3 instalments:

1. 1st payment on account – January 31st of current tax year – ½ previous tax year’sliability

2. 2nd payment on account – the following July 31st – ½ previous tax year’s liability

3. Balancing payment – the difference between the amount paid on account and theamount owed – January 31st following end of tax year

Class 2 NICs, CGT and student loan repayments are paid at the same time as the balancingpayment.

Example

In the tax year 2017/18, self-employed plumber Finlay paid tax and Class 4 NICs of £10,000.In 2018/19, his liability rose to £13,000.

What payments will Finlay will have to make in relation to his 2018/19 earnings and howmuch will need to be paid on January 31st 2020 in total?

1st payment on account January 31st 2019 50% previous year’s (2017/18) taxliability of £10,000 = £5,000

2nd payment on account July 31st 2019 50% previous year’s (2017/18) taxliability of £10,000 = £5,000

Balancing payment January 31st 2020 Difference between amount owed for2018/19 (£13,000) and amount paid onaccount (£10,000) = £3,000.

Plus January 31st 2020 £153.40 (Class 2 NICs)Plus January 31st 2020 1st payment on account for 2019/20

50% of previous year’s (2018/19) taxliability of £13,000 = £6,500.

Payments on account not required if income tax payable outside PAYE in previous tax yearwas less than £1,000, nor if more than 80% of previous year’s income was taxed underPAYE.


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A taxpayer can ask to have payments on account reduced if they believe that not doing sowill result in an overpayment of tax, perhaps because of lower income/higherdeductions/higher proportion of tax deducted at source/under PAYE.

Where relief is claimed for previous tax years, it is calculated as if it were being given for theearlier tax year and given as a repayment for the tax year in question. It does not impactpayments of account (these are based on full tax liability before deducting relief carriedback.)

Interest

Interest is paid on overpaid tax, charged on late payments from date due and wherereduction in payments on account unjustifiably claimed.

Penalties

5% on tax unpaid 30 days after balancing payment due Further 5% after further 5 months Further 5% after further 6 months £100 return not submitted by 31 January following end of tax year Return more than 3 months late, £10 daily penalty up to 90 days (even if no tax due) Return more than 6 months late, penalty higher of £300 / 5% tax outstanding Similar penalty where return more than 12 months late, higher if not submitting is

deliberate Penalties also for failing to keep records and documents needed to complete a tax

return, for deliberate/careless errors in tax returns and for failing to notify HMRC of aliability to tax by 5 October following end of tax year.

Amendments and compliance checks

At processing HMRC check for obvious errors. Taxpayer can amend return at any time in 12months following 31st of January following end of tax year. Compliance checks may berandom or targeted and must usually be started within 12 months of HMRC receiving taxreturn (later if HMRC believe there’s been fraud/negligence by the tax payer or if the taxpayer has not provided enough information.)


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Pay as you earn

Employer deducts income tax and employee/director NIC under PAYE. Any sum paid to anemployee as a result of their employment is within PAYE scope.

Generally, this operates when an employee is entitled to receive payment but for directors itis the earliest of the date the payment is made, the date the director becomes entitled to bepaid, the date the amount is credited in the company’s books or the date when the paymentis fixed or agreed.

HMRC gives employer PAYE code for each employee so correct amount is deducted. Codeincludes a letter, indicating type of personal allowance entitled to, and a number indicatingthe amount of tax-free income they are entitled to (K code means none – because taxableemployee benefits /other deductions exceed the personal allowance).

Real time information (RTI) payroll software is used to automatically report pay anddeductions to HMRC.

Employers must deduct the correct amount of tax and employee NICs from employee’s payusing PAYE code, report this to HMRC each time employees are paid and pay to HMRC thetax and NIC due (full payment submission).

Employee receives a payslip showing gross wages, tax and NIC deductions, otherdeductions and resultant net pay. Benefits in kind that are payrolled are treated as cash andnot reported on P11D (living accommodation / beneficial loans cannot be payrolled.)

Tax months begins on 6th of month, ends 5th following month. By 22nd following end of eachtax month (19th if not paying electronically), employer must pay HMRC all tax/NIC/SLCpayments due less permitted deductions (tax refunds, recoverable statutory pay (not SSP)).Small businesses can pay quarterly.

Penalties

3-day grace period then penalties on monthly basis for late submissions No penalty for 1st late submission in tax year Then between £100 and £400 depending on number of employees Additional 5% when 3 months late Penalty for inaccurate full payment submissions Penalty where monthly/quarterly payments of PAYE late:

o None for first late payment (unless over 6 months late)o Then 1% of late amounto Rate increases for subsequent late paymentso 5% where payments more than 6 months lateo Further 5% where more than 12 months lateo Interest charged on daily basis


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Important deadlines

1st payment on account 31 JanuaryTax return issued 6 AprilEmployees given P60 (Total pay,deductions, refunds)

31 May

Employees given P11D (taxableexpenses/non-payrolled benefits),Employer completes P11D(b) (NICs due onabove plus confirmation P11D completed)

6 July

2nd payment on account 31 JulyFiling date for paper returns(HMRC will calculate tax due)

31 October / 3 month after issue if returnissued after 31 July

Balancing payment under £3,000 collectedvia PAYE

30 December online31 October paper

Filing date for online returns 31 January / 3 months after issue if laterBalancing payment 31 January


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Tax Mitigation, Evasion and Avoidance

Tax mitigation

Is acceptable.

Is about selecting the best (legal) way to arrange your finances to pay the lowest amount oftax. Making the most of HMRC’s allowances and reliefs.

Gifts of pre-eminent objects: relief given when donate pre-eminent objects to nation, 30% ofvalue of object, can be reduced from income tax / CGT (must state which at outset), can bespread over 5 years (cannot be varied once set up) but if don’t have appropriate liability inone year then relief lost for that year. Corporate donors get deduction for 1 year at 20% ofvalue.

Tax evasion

Is illegal.

It is the practice of deliberately not paying tax owed, e.g. schemes that rely on HMRC notfinding out what has happened / secrecy agreements, not reporting items, giving HMRCfalse information on a tax return. It is a criminal offence – could be imprisoned, fined, have topay back tax plus interest and penalties.

Overseas income must be declared as it is taxable. There are higher penalties relating tofailing to disclose overseas income plus aggravated penalties where taxpayers hide theirwealth in secretive jurisdictions.

HMRC targets groups with campaigns to encourage undeclared tax to be declared in returnfor smaller fines than would otherwise be payable. An affluent compliance team targets highearners who appear to be paying less tax than they should.

** New ** 2018/19 – Criminal Finances Act 2017 – criminal offence if company/partnershipfails to prevent facilitation of tax evasion. Applies where criminal tax evasion has occurredwhich has been committed by an employee/agent/anyone acting on behalf of thecompany/partnership and the company/partnership failed to stop it. Unlimited financialpenalties. Self-reporting may minimise penalty. 2 potential defences – claim it has putreasonable prevention methods in place, claim it would be unreasonable to have suchprocedures in place.

Tax avoidance

Is less clear-cut.

It involves schemes designed to avoid tax through, for example, legislative loopholes. Theyusually involve a series of transactions.

** NEW ** 2018/19 – penalties for enablers of defeated avoidance arrangements – ifavoidance arrangement is defeated in court / at a tribunal, GAAR’s advisory panel opinion issought before penalty can be charged, maximum penalty is fee paid to enabler firm / adviser.


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Disclosure of Tax Avoidance Schemes (DOTAS)Under Finance Act 2004, UK firms that market tax avoidance schemes must register themwith HMRC, those that use them must give the number on their tax returns. Providers mustgive HMRC 1/4ly list of those using them.

If the number is one that has been defeated in court, HMRC issues a follower notice andexpects to see any tax avoided as a result of the individual being in the scheme to be paid. Ifit is not paid, HMRC can charge a penalty of up to half the amount of tax owed.

Promoters must provide HMRC with quarterly list of clients using scheme. Being registeredis no indication of a successful scheme.

Initially the rules were aimed at schemes seeking to pay employees and directors outside ofPAYE or in a way that reduces tax artificially. Now the rules cover income tax, corporationtax, CGT, SDLT, annual tax on enveloped dwellings (ATED) and IHT. VAT is subject to aseparate regime.

Taxpayers using overseas schemes must disclose to HMRC, as must large businesses whodevise their own schemes.

Penalties for failure to notify HMRC include a daily penalty of up to £5,000.

Finance Act 2014 reinforces DOTAS rules: HMRC can force taxpayers to settle disputes(issue follower notices) where scheme has been defeated at court. If they do not settle,penalty 50% disputed tax. Accelerated payment notice (APN) can be issued requiringpayment of tax up front (within 90 days of receipt) where a scheme has not yet been tocourt.

Disguised remunerations provision tackle third party arrangements that seek to avoid/deferincome tax, NICs or restrictions on pension tax relief (including employer-financed retirementbenefits).

Drawbacks tax avoidance schemes: spotlight of HMRC on individual’s whole tax affairs,costs to defend scheme and negotiate with HMRC, scheme may be ineffective, retrospectivelegislation, uncertainty.

General anti-abuse rule (GAAR)Aims to counteract tax advantages arising from abusive arrangements.

Applies to income tax, corporation tax, CGT, IHT, petroleum revenue tax, SDLT, annual taxon enveloped dwellings and NICs.

Only apples if answer yes to 4 questions: Is there a tax arrangement? Does the taxadvantage relate to one of the taxes covered by GAAR? Is the tax advantage the mainpurpose of the arrangement? Is the arrangement abusive?

Designated HMRC senior officer follows set procedure enabling taxpayers to explain whyGAAR does not apply. Independent GAAR Advisory Panel provides a view – before taxcharge applies Panel must determine its use is reasonable and why.

The independent Advisory Panel gives opinions on specific cases and approves HMRC’sGAAR guidance. It provides guidance to both HMRC and taxpayers. Any tax advantages willbe counteracted by ‘just and reasonable adjustments.’ Tax-geared penalty of 60% applies tocases tackled by GAAR.


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Other Taxes

Stamp Duty Land Tax (SDLT) – England and Northern Ireland

Paid by purchaser via self-assessment (solicitor usually completes forms) within 30 days (14days from 1 March 19) of effective date of transaction (usually completion, date of paymentor possession if sooner).

Not paid on fixtures and fittings (these can be deducted from the purchase price if they arerealistically valued.)

SDLT is payable when two owners exchange houses based on the market value of theproperties they each acquire whether cash has been exchanged or not.

SDLT is not payable when ownership of a house passes from one ex-spouse/civil partner tothe other ex-spouse/civil partner in connection with divorce/judicial separation.

Residential (excluding first time buyers) Non-residentialSlice % Slice %Up to £125k 0 (3) * Up to £150k 0Above £125k up to £250k 2 (5) Above £150k up to £250k 2Above £250k up to £925k 5 (8) Above £250k 5Above £925k up to £1.5m 10 (13)Above £1.5m 12 (15)

* Figures in brackets reflect extra 3% when an additional residential property, e.g. buy to let,holiday home, is purchased. Higher rate does not apply if property costs £40,000 or less, norif the main residence is being replaced (if it hasn’t been sold at time of purchase, higher rateapplies, but a refund will be given if sold within 36 months). Annexes classed as separateproperty if worth at least 1/3rd of total purchase price, in which case SDLT charged at samerate as the rest of the property.

ExampleJen, sells one flat and buys another for £260,000.

SDLT =

£125,000 @ 0% = £0£250,000 - £125,000 = £125,000 @ 2% = £2,500£260,000 - £250,000 = £10,000 @ 5% = £500

£3,000

ExampleLater in the same year, Jen buys a holiday home for £150,000. She now has two propertiesand is therefore subject to the 3% surcharge.

SDLT =£125,000 @ 3% = £3,750£150,000 - £125,000 = £25,000 @ 5% = £1,250

£5,000


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First time buyers

SDLT relief is available for first time buyers in England and Northern Ireland. SDLT ispayable at 0% on the first £300,000 where the overall value of the property is less than£500,000. If the property is worth more than £500,000, the usual rates apply.

ExampleLou is a first time buyer. She buys a property for £400,000.

SDLT =

£300,000 @ 0% = £0£400,000 - £300,000 = £100,000 @ 5% = £5,000

£5,000

The relief has been extended so that all qualifying shared ownership property purchases canbenefit.

Other issues

SDLT on residential leasehold property is 1% on present value rent over term of lease wherevalue exceeds £125,000. 1% is on excess over threshold.

SDLT on non-residential leasehold property is 1% on present value of rent over term oflease where value is between £150,001 and £5m, 2% thereafter.

Multiply annual rent by number of years of lease and apply discount factor to calculatepresent value.

Anti-avoidance charge 15% purchase price if company/collective investment scheme buyresidential property over £500,000 unless they are a genuine property business (in whichcase lower residential bands apply).

Land and Buildings Transaction Tax (LBTT) - Scotland

LBTT applies to land transactions in Scotland instead of SDLT. It works in broadly the sameway and is administered by Revenue Scotland.

* LBTT threshold for first time buyers expected to be £175,000 from June 2018** Figures in brackets reflect extra 3% when an additional residential property, e.g. buy to let,holiday home, is purchased.

Residential Non-residentialSlice % Slice %Up to £145k* 0 (3)** Up to £150k 0Above £145k up to £250k 2 (5) Above £150k up to £350k 3Above £250k up to £325k 5 (8) Above £350k 4.5Above £325k up to £750k 10 (13)Above £750k 12 (15)


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Land Transaction Tax (LTT) - Wales

LTT applies to land transactions in Wales instead of SDLT. It works in broadly the same wayand is administered by the Welsh Revenue Authority.

* Figures in brackets reflect extra 3% when an additional residential property, e.g. buy to let,holiday home, is purchased.

Stamp duty (SD) and stamp duty reserve tax (SDRT)

SD payable at 0.5% by purchaser when buy paper-based shares, round up to next £5.

SDRT payable at 0.5% by purchaser when buy electronic shares, round up to next 1p.

Transactions of less than £1,000 are exempt as are companies listed on AIM, NEXExchange and Exchange Traded Funds.

Stockbroker usually pays tax, amount paid shown as a deduction on the contract note. Canbe deducted as an acquisition cost for CGT purposes.

Value Added Tax (VAT)

VAT is chargeable on taxable goods and services (taxable supplies) made in the UK, whenacquisitions are made from businesses in the EU and when goods are imported to the UKfrom outside EU.

Services are deemed to be supplied in country where the customer receives them, so UKVAT is chargeable on overseas services delivered to a UK resident.

VAT is administered by HMRC.

The rates are: 0% (zero) and 20% (standard rate). There is a reduced rate of 5% on someitems. Some supplies are exempt from VAT (exempt supplies).

VAT system

VAT-registered traders must charge output VAT on taxable supplies. Input VAT (paid ontaxable supplies purchased) can be offset against this. The excess of output VAT is paid toHMRC and the excess of input VAT can be reclaimed with the exception of car purchases(unless car solely for business use) and business entertainment expenses (unless overseascustomer being entertained).

Residential Non-residentialSlice % Slice %Up to £180k 0 (3)* Up to £150k 0Above £180k up to £250k 3.5 (6.5) Above £150k up to £250k 1Above £250k up to £400k 5 (8) Above £250k up to £1m 5%Above £400k up to £750k 7.5 (10.5) Above £1m 6%Above £750k up to £1.5m 10 (13)Above £1.5m 12 (15)


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If a trader makes exempt supplies or both exempt and taxable supplies, the amount of inputVAT they can reclaim may be limited.

Registration

Where the value of taxable supplies in the last 12 months is more than £85,000 a tradermust tell HMRC within 30 days of the end of the month where the limit was exceeded. Theywill then be registered on the 1st day of the 2nd month after exceeding the limit.

ExampleJane’s taxable supplies exceeded £85,000 on 30 September 2018.

She should therefore inform HMRC within 30 days of that date and be registered from the1st November 2018.

If the value of taxable supplies in the next 30 days is expected to be more than £85,000, thetrader must notify HMRC before the end of the 30-day period. Registration will be effectivefrom the beginning of the 30-day period.

ExampleEdward is not yet registered for VAT, but on 1st of January 2019 realises that his sales forthat month will exceed £85,000. Edward must inform HMRC before 30 January 2019 and willbe registered for VAT from 1 January 2019.

Failure to notify HMRC in either of the above scenarios can lead to penalties. Voluntaryregistration is permitted for traders with taxable supplies under £85,000.

Taxable, exempt and zero-rated supplies

Taxable All supplies are taxable unless exempt. Standard rate charged at20%, can reclaim input VAT on standard rate purchases.

Exempt Output tax not charged on exempt supplies (insurance, finance,health, education, burial / cremation services, leases and sales ofcommercial property over 3 years old).Input tax cannot be reclaimed (or is restricted.)Firms that make both exempt and taxable supplies are known aspartially exempt businesses.Small businesses may be able to reclaim input VAT for exemptsupplies if they do not exceed £7,500 a year and represent nomore than ½ total input VAT.Landlords can elect to charge output VAT on specifiedcommercial land / buildings (tax election). All supplies connectedwith that land will then have VAT charged at standard rate.

Zero No charge on supplies, but can reclaim input VAT on standardrate purchases.Includes most food & some drinks (but not caterers, restaurantsor takeaways which are standard rate), domestic supplies ofwater & sewerage, hard copy books and newspapers (electronicversions standard rate), new residential buildings, buildings forcharities, renovated house (empty for 10 years), contractorservices for new residential buildings / buildings for charities,public transport, medication, aids for the disabled, children’sclothes/footwear, exports to non-EU-countries.


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Special schemes

Flat rate Small businesses can account for VAT as a percentage of theirtaxable turnover.Percentage determined by trade sector.Annual taxable turnover no more than £150,000 (exc. VAT).Can continue until turnover exceeds £230,000 (Inc. VAT).VAT charged at normal rates, VAT invoices still issued.Not suited where company regularly gets VAT refunds.

Cash accounting Taxable supplies £1.35m or less can join.VAT paid on cash basis (once customer paid) rather than invoicebasis. Helps cashflow.No need to apply to use scheme or advise HMRC ofstarting/ceasing to use it.Can continue until VAT taxable turnover exceeds £1.6m.

Second-hand goods VAT on difference between price paid and price sold.Retail schemes Allow retailers to simplify VAT calculation by not having to

account for it on individual sales.

VAT in the EU

VAT is not charged where a UK company makes a sale to a company in the EU. When a UKcompany buys from an EU company they account for the VAT in their tax return, not whenthey import the goods. Tax on imports from outside EU paid at time of import.VAT must be charged on sales to private individuals in other EU countries.

Collection of VAT

VAT returns must usually be submitted and tax owed paid quarterly (every 3 months).Regular reclaimers and some large companies submit monthly.

Returns should be submitted online by 7th of month after the month following the VAT period.Payment due by same date, three additional working days are given where made by directdebit.

Example

VAT period ending on 31st January 2019, the return must be submitted by 7 March 2019.

Where taxable supplies are £1.35m or less can complete annual return, make 9 monthly / 3quarterly payments on account with a final adjustment on year end return.

Surcharges and penalties apply for late or incorrect returns and late payments.


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Corporation tax (CT)

Paid by companies on both income and gains (trading profits, investment income (but notdividends) and chargeable gains) made in an accounting period at flat rate of 19% for FY2018 (1 April 2018 – 31 March 2019).

UK resident companies are liable to UK CT, as are companies incorporated overseas whosecentral management and control is situated and exercised in UK.

If accounting period straddles two different financial years and the rates change, profits areapportioned on a time basis between the years.

For CT purposes, an accounting period cannot be longer than 12 months, if accounts aremade up for longer, the accounting period will be split.

Example

XYZ plc makes up its accounts for the 16-month period ending 31 January 2019.

There will be a 12-month accounting period to 30 September 2018 and a 4-monthaccounting period to 31 January 2019.

Gains and losses

While gains are charged to CT, they are calculated according to CGT rules. Gains madeprior to Jan 2018 can be reduced by an indexation (RPI) allowance. Gains are added toincome to arrive at taxable total profits.

Capital losses cannot be set against trading profits / investment income, but they can be setagainst gains in the same accounting period or carried forward and set against future gains.

Taxable total profits

To arrive at taxable total profits, we need to add back in expenses that were not wholly andexclusively incurred for the purpose of the business (e.g. entertaining expenses) anddepreciation on plant and machinery/buildings (though a deduction can be made for capitalallowances). Qualifying charitable donations can be taken off.

Self-assessment

CT is paid via self-assessment with the return due 12 months after the end of the accountingperiod.

CT is due and payable 9 months and 1 day after the end of the accounting period unless thecompany has profits over £1.5m where it is payable in quarterly instalments. This limit isreduced proportionately where there are related 51% group companies, e.g. for a companywith 3 51% group companies, the profit limit will be reduced to £375,000 (£1.5m /4).


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Trading losses

Trading losses can be offset against total taxable profits of the same accounting period andthen against the total taxable profits of the previous accounting period (providing thecompany was carrying on the same trade at that time). Remaining losses are carried forwardto the first profits of same trade.

Loss relief must be claimed within 2 years of the end of the loss-making period.

If profits exceed £5m, loss restricted to 50% of excess profits, claim made within 2 years ofperiod in which loss relieved

Close companies

A company controlled by 5 or fewer shareholders or by its directors regardless of number (allknown as participators).

Associates (relatives, business partners, trustees of family settlement) of a participator aregrouped together with the participator to form a single person.

There is a tax charge on loans made by a close company to its participators.

Interest paid on loans to buy shares in a close company or on a loan that is used by a closecompany for business purposes is an allowable deduction for income tax. The amount ofinterest that qualifies for tax relief is the higher of £50,000 or 25% of adjusted total income.


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Investment Taxation

The tax treatment of an investment depends on the nature of the assets that underlie theinvestment itself and any tax wrapper than the investment sits in. We can look at taxationfrom both the perspective of the product provider (e.g. how is the fund taxed) and theinvestor themselves (e.g. what tax, if any, does the investor have to pay.)

TopicsCash and Fixed Interest InvestmentsShares, Property and PensionsIndividual Savings Accounts (ISAs) and CollectivesLife Assurance-Based ProductsIndirect Property Investment, VCTs, EISs, SEISs and SITR


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Cash and Fixed Interest Investments

Cash

Income from directly held cash (and fixed interest investments) is classed as savingsincome.

If savings income falls wholly within first £5,000 of taxable income, it is taxed at the startingrate for savings income of 0%.

Basic rate tax payers benefit from a Personal Savings Allowance (PSA) of £1,000. Higherrate tax payers get a £500 PSA. Savings income falling within the PSA is also charged to taxat 0%. If a tax payer has any income falling into the higher rate they will only be eligible forthe £500 allowance, even if the savings income falls within the basic rate.

If a tax payer has any income falling into the additional rate they will not be eligible for theallowance at all, even if the savings income itself falls within the basic or higher rate.

Thereafter, if savings income is taxable and paid gross (e.g. deposit accounts, gilts (unlesselected to pay net), PIBs) tax rates are:

Basic rate 20%Higher rate 40%Additional rate 45%

If taxable and paid net (e.g. directly held local authority bonds, directly held corporatebonds), need to gross up (divide by .8 or multiply by 1.25) then the additional amount due asa percentage of the gross payment is:

Basic rate No further tax dueHigher rate 20%Additional rate 25%

There is no CGT to pay on encashment of directly-held cash and fixed interest investments.However, their value at saver’s date of death will be included in their estate for IHTpurposes.

Demutualisation

Where a building society demutualises and members receive a cash payment for giving upmembership rights this is a disposal for CGT. Usually the disposal will fall within the annualexempt amount. If no membership rights were held, no tax is chargeable. Where membersreceive free shares, no tax is chargeable. The acquisition cost of the shares to be used ifthey are later disposed of is therefore nil.


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NS & I

Investment account Age 16+ / opened on behalf of a child under 16.Interest paid gross, taxable as savings income.Withdrawals at any time with no notice/penalty.Min £20, max £1m (£2m joint).

Direct saver Higher rate of interest.Interest paid gross, taxable as savings income.Age 16+Withdrawals at any time with no notice but can only bemade by telephone/online and must be paid intobank/building society account.Min balance £1, max £2m (£4m joint).

Certificates Fixed term up to 5 years.Interest tax free.Index-linked version.Not currently available.

Income bonds Variable interest paid monthly.Interest paid gross, taxable as savings income.Withdrawals at any time with no notice/restrictions.Min £500, max £1m (£2m joint).

Guaranteed income andgrowth bonds

Fixed interest for fixed term of 1 or 3 years (monthly forincome, reinvested for growth).Min £500, max £1m (£2m joint).

Direct ISA Meets CAT standards.Variable interest credited annually, tax-free.Operated by phone/online (funds can be added by standingorder).Min opening deposit £1, minimum further deposits £1.


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Fixed Interest Investments

Gilts

Gilt-edged securities are loans to the government. Pay fixed rate of interest gross twice-yearly (unless elect to receive net 20%), taxable as savings income. Held to maturity ortraded on stock exchange. Gains exempt from CGT, losses not allowable. Accrued interestin sale proceeds liable to income tax if total nominal holding exceeds £5,000.

Corporate bonds

Loans to companies. Interest paid net 20%, taxable as savings income. Held to maturity ortraded on stock exchange. Gains exempt from CGT if classed as qualifying corporate bonds.Losses allowable if loses qualifying status and has become negligible value / redemptiondate passed and loan unrecoverable.

Deeply discounted securities are liable to income tax on the redemption value less thediscounted issue price. Acquisition costs can be deducted, losses can be relieved againstother income. Exempt from CGT.

Local authority bonds

Short term, fixed-rate loans to local government authorities. Interest paid net 20% and taxedas savings income. Held to maturity or some can be traded on stock exchange. Classed asqualifying corporate bonds, therefore gains exempt from CGT, losses not allowable.

Permanent interest-bearing shares (PIBS)

High-yielding, un-dated, fixed interest investments issued by building societies and listed onthe stock market. Interest taxable and paid gross twice yearly. No CGT on disposal. Ondemutualisation become perpetual subordinated bonds (PSBs).

Taxation of fixed interest investments summary

Investment Type Income Tax CGT

Gilts Paid gross, unless elect tohave paid net, taxable

Exempt

Local authoritybonds

Paid net, taxable Exempt

Corporate bonds Paid net, taxable ExemptDeep discountedbonds

Liable for income tax on theredemption value lessdiscounted issue price

Exempt

PIBs Paid gross, taxable Exempt


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Shares, Property and Pensions

Shares

Income from equities (shares) is classed as dividend income.

Dividend income is paid gross.

The first £2,000 of dividend income is charged to tax at 0% under the dividend allowance.

Note that all individuals are entitled to this allowance, regardless of their tax status.

Thereafter, the tax rates are:

Basic rate 7.5%Higher rate 32.5%Additional rate 38.1%

Unless held in an ISA wrapper, CGT is payable at the rate of 10% where the gain exceedsthe annual exempt amount and falls into the basic rate tax band and at 20% thereafter onthe encashment of shares.

The costs of buying and selling shares, including stockbroker’s commission, the differencebetween the buying and selling prices, stamp duty / stamp duty reserve tax can be deductedfrom the disposal proceeds, losses are allowable.

The value of shares at the saver’s date of death will be included in their estate for IHTpurposes.

Stock dividends (where new shares are given in lieu of a cash dividend) are taxed in thesame way as cash dividends. The acquisition price for CGT is the amount of the cashdividend or the market value of the new shares (if that is substantially different).

Overseas dividends are usually paid after deduction of a withholding tax. Double taxationagreements set out the rate of that tax which can be set against the investor’s UK tax liability(though any excess cannot be repaid).

Shares in an investment trust are taxed in the same way as other shares.


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Property

(NB For further information on the taxation of property income, including an example of taxrelief on mortgage finance costs and the property allowance, you can revisit our income taxmodule)

Rental income is usually treated as investment rather than earned/trading income.

Only if a landlord provides substantial services (e.g. housekeeping) to the tenant can rentalincome be treated as trading income.

Where rental income is treated as trading income, it counts as relevant earnings for pensioncontributions and losses can be offset against other earned income. Being part of a businessalso means that CGT rollover (against the cost of a new business asset bought 1 yearbefore / 3 years after disposal), holdover (if property a gift that has been used for furnishedholiday letting / letting amounting to a trade donor pays no CGT, donee takes donor’s basecost) and entrepreneurs’ relief (first £10m qualifying gains at 10%) may be available, as maybusiness relief for IHT purposes.

Income from all an individual’s UK properties is pooled, allowable expenses deducted, andthe resultant profit taxed in the year it arises.

Losses are automatically carried forward to set against future rental income only.

Overseas property income is pooled together and taxed in the same way.

Both are payable via self-assessment. Accounts should be drawn up to the end of the taxyear or 31st March.

Allowable deductions

Allowable expenses include repairs and maintenance but not alterations or improvements.Legal and professional fees, insurance costs and utility bills paid by the landlord areallowable too.

Since 2017/18 tax relief for mortgage interest rate at the higher and additional rates is beingphased out. From 2020/21, it will only be available at the basic rate.

For non-residential properties, capital allowances can be deducted. A plant and machineryallowance is available for expenditure of a capital nature on equipment installed in a letproperty or used in maintaining it. The first £200,000 qualifies for the 100% annualinvestment allowance in the year of purchase (£1m from 1 January 2019 to 31 December2020). Any excess qualifies for a writing-down allowance of 18%, with the remainder carriedforward on a reducing balance basis.

For residential properties, capital allowances are not available. Rather replacement furniturerelief provides for the cost of replacing and disposing of old furniture, although proceedsreceived from the sale of old furniture must first be deducted.


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Premiums on short leases

Where a lease is granted for less than 50 years and paid as a lump sum, part of that lumpsum is treated as property income.

The formula is:

Premium minus [(years of lease minus 1) x premium / 50].

Example

Where a lease premium is £100,000 for a 40-year lease, then the amount treated asproperty income is £22,000.

£100,000 – (40-1) x £100,000 / 50 = £22,000

We work this out by subtracting 1 from the 40 years, multiplying that by £100,000 anddividing the total by 50. This gives us £78,000. We deduct this from the premium of£100,000 giving a lump sum chargeable as property income of £22,000.

The £22,000 is treated as the lessor’s income in the year the lease is agreed.

The remaining £78,000 is taxable under CGT rules as if it were a part disposal of thefreehold.

The lessee can claim the ‘rent’ as a deduction, spread equally across the period of the lease.We therefore take the £22,000 and divide it by 40 years giving £550 per year as a deductiblebusiness expense, providing the lessee doesn’t use the property for a trade or sublets it.

A reverse premium is when a landlord pays a sum to induce a potential tenant to take out alease. The premium is taxable on the tenant. The sum is not deductible from the landlord’sletting income but will be allowable against a capital gain.

Letting part of the home

If all or part of the home has been let out, Letting Relief may be available instead of PPR.For further information you can revisit our capital gains tax module.

Rent-a-room relief

Available to owners of UK properties who rent out a furnished room (not a self-containedunit) for residential purposes.

Rent of up to £7,500 not chargeable to tax, unless the landlord chooses within 12 months ofthe 31st January following the end of the tax year for normal property income rules to apply.This might be useful if loss made.

Where there is more than one person receiving the rent, this £7,500 relief is split betweenthem.

Where rent is more than £7,500 the landlord can choose to be taxed on normal basis ofincome less expenses; or gross receipts less £7,500 without deduction of expenses.


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Furnished holiday lettings

Qualification rules:

Located in UK or EEA Furnished Let on commercial basis Available for 210 days per tax year Let for 105 days per tax year May be let for continuous periods of more than 31 days but not for more than 155

days in tax year Does not need to be in a holiday resort, tenants do not have to be holidaymakers

Tax advantages:

Treated as trading income, though losses can only be offset against other furnishedholiday letting losses

Income counts as relevant earnings so pension contributions can be made based onit

CGT 18/28%. Rollover, holdover, IHT and entrepreneurs’ relief available.

Woodlands

Profits exempt from income tax IHT postponed until trees cut/timber sold provided woodland owned 5 years Commercially managed woodlands exempt from CGT

Pensions

Tax advantages

Tax benefits include tax relief on input, fund grows free of UK income tax and CGT, 25% taxfree cash at retirement, remaining fund taxed as earned income (but no NIC payable). Deathbenefits tax-free within certain limits on death before 75.

Contributions

Maximum total contribution for any individual from any source that qualifies for tax relief is£3,600 per tax year / 100% earnings whichever is higher.

Contributions below annual allowance (£40,000 in 2018/19 for most people) have noadverse tax consequences. Contributions in excess of the available allowance are subject toa tax charge at the individual’s marginal rate – effectively negating any tax relief given.

Where adjusted income is in excess of £150k, annual allowance is tapered by £1 for every£2 in excess of that figure to a floor of £10,000 (for income over £210k). Adjusted incomeincludes employer pension contributions, but tapered AA only applies if threshold income isabove £110k (which does not include employer pension contributions).

The money purchase annual allowance (MPAA) – which now stands at £4,000 - appliesonce an individual starts flexibly drawing taxable pension income (i.e. income in excess ofthe tax-free cash)


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Employees’ payments to occupational schemes are deducted under the net payarrangement (deducted from pay before tax is calculated.)

Most other contributions are paid under the relief at source method where payments aremade net of basic rate tax relief and higher relief claimed via self-assessment (extension oftax bands).

Relief for contributions into Retirement Annuity Contracts and for self-employed GPs anddentists who contribute to the NHS Pension Scheme is given by deduction from totalincome.

Carry forward of the annual allowance is available from the previous three tax years.Providing the individual was a member of a registered pension scheme for the year theallowance is being carried forward from, has relevant UK earnings and has not flexiblyaccessed their defined contribution schemes.

Pension contributions can bring other income into lower tax brackets (either by beingdeducted from gross pay or extending tax bands) and reduce gains subject to higher rate ofCGT. May also preserve entitlement to CTC & reduce/eliminate high income child benefit taxcharge.

Other limits

The lifetime allowance is £1.03m (2018/19).

The maximum tax-free lump sum (Pension Commencement Lump Sum (PCLS)) is usually25%.

55 is the earliest age at which most people can start to take pension benefits, but there is noneed to physically retire from a job to do so.

Death benefits from defined contribution schemes are tax free before age 75 provided theyare paid out within 2 years of death, otherwise they are charged at the recipient’s marginalrate. Death benefits after age 75 are charged to tax at the recipient’s marginal rate viaPAYE.

IHT generally only payable if transfer of pension assets or unusually large contributionsmade while member was in ill-health and does not survive 2 years.

Penalties apply for exceeding the lifetime and annual allowances and making unauthorisedpayments.

Income in retirement

Members of defined benefit (final salary) schemes usually receive a scheme pension.

Personal pensions pay out secured pension (annuities) or drawdown (existing capped ornew flexi-access).

An annuity bought with the proceeds of a UK pension scheme is known as a compulsorypurchase annuity, it is all taxed as earned income. This contrasts with a purchased lifeannuity which is bought with an individual’s own funds. Here a proportion of the annuity isdeemed to be a return of capital and is tax free, the remainder is interest and is taxed assavings income. The proportions are based on life expectancy; the longer the life expectancythe larger the interest element.


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Under flexi-access drawdown there is no minimum or maximum income. 25% can be takentax-free, the remainder as income taxable at marginal rate.

If exceed maximum income of capped drawdown contract, individual becomes subject toreduced MPAA of £4,000 and contract becomes flexi-access drawdown. Otherwise, theyretain the full allowance and the capped contract can continue.

Benefits do not have to be crystallised on reaching retirement age, but when they are aPCLS can be taken.

An uncrystallised funds pension lump sum (UFPLS) is another method of accessing pensionfunds flexibly. 25% is tax-free, the remainder taxable.

Pension fund

Grows free from both income tax and CGT.

Pensions that invest in residential property and tangible moveable assets (antiques, art,jewellery and fine wine) may trigger tax charges.

Borrowing to fund property purchase/investment cannot exceed 50% of net value of fund.


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Individual Savings Accounts (ISAs) and Collectives

Individual Savings Accounts (ISAs)

ISA tax advantages

Neither income nor gains from ISAs are taxable, although investments may suffer foreignwithholding taxes.

They do not use up the PSA/DA/annual exempt amount nor do they have to be reported toHMRC by the investor, although the investor will have to supply the ISA provider with their NInumber so that their provider can make their returns and any reclaims.

ISA’s provide greatest tax benefits to cash/fixed interest investment holders & those whowould otherwise pay CGT.

ISA eligibility and conditions

Individual contracts only (no joint ISAs.)

UK resident or non-resident Crown employee working overseas or their spouse/civil partner.

On becoming non-resident, no further contributions can be made, but the tax benefits can bekept.

Maximum contribution £20,000 across cash (including Help to Buy), stocks and shares andinnovative finance ISAs. Up to £4,000 of that £20,000 can be invested in a Lifetime ISA bythose eligible to invest.

Only invest with one provider per ISA type per tax year, though this can be a differentprovider to other ISA types.

Cash can now be withdrawn from an ISA and replaced in the same tax year without itcounting towards the annual limit (if provider permits this).

ISA benefits can be passed on to a spouse/civil partner by means of an additional ISAallowance. The surviving spouse/partner can invest the value of their deceased partner’s ISAsavings without it counting towards their own ISA limit.

ISAs can be transferred between ISAs of the same or a different type. Money saved inprevious years that is transferred does not affect the current year’s limits.

Cash ISA

16+

May be in bank or building society account or money market unit trusts which hold depositsrather than securities.

Parental settlement rules apply while child under 18 and not married/in a civil partnership(income exceeds £100 taxed as income of parent, may not be tax free).

Someone aged 16/17 can contribute the full amount to both a Cash ISA and Junior Isa.


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The Help to Buy ISA is a type of cash ISA. For every £200 the first-time buyer saves, a £50bonus up to maximum £3,000 on £12,000 savings is paid by the government. The bonus isrestricted to first homes valued up to £450k in London, £250k elsewhere. It is only paid forhome purchase. Own funds can be withdrawn if needed.

Stocks and shares ISA

18+, invest in unit trusts, OEICs, UCITS or investment trusts, other authorised collectiveinvestment scheme provided no restrictions on withdrawals, shares on recognised stockexchange (including AIM), corporate bonds and EEA government securities, life assurancepolicies and cash.

Shares from an employee share scheme can be transferred directly CGT-free within 90 daysof receipt. All other subscriptions must be in cash.

Innovative finance ISA

18+, peer-to-peer lending product.

Lifetime ISA

Under 40s can save up to £4,000 each tax year with 25% bonus on contributions at end oftax year. Bonus can be used to fund first house purchase or retirement.

Child Trust Funds (CTFs)

Available to children born after 31 August 2002 and before 3 January 2011.

Originally £250 was added by the government (£500 for low income families), with anadditional £250 (£500) at the child’s 7th birthday. Children born after 1 August 2010 receivedonly £50 (£100) and the 7th birthday contribution stopped.

Savings, shares and stakeholder accounts (maximum 1.5% charge) are available. Moneyinaccessible until child is 18 when they can withdraw the proceeds.

Annual limit same as that for Junior ISAs. Parental settlement rules do not apply.

Junior ISAs

Junior ISAs available to children not eligible for a CTF and to those who transfer out ofCTFs. Annual limit of £4,260 can be contributed by parents, family and friends. Moneyinaccessible until child is 18 when they can withdraw the proceeds.

Junior cash and junior stocks and shares ISAs available.

Can transfer from one type to the other and between providers.

Parental settlement rules do not apply.


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Collectives

UK collectives

Interest distributions now paid gross and taxed in the same way as other savings income.

Dividends are taxed in the same way as shares. Paid gross. Can be offset against DA.

Gains are liable to CGT if they exceed the annual exempt amount. Losses are allowable.

Offshore collectives

Set up in countries where there is low or no local taxation. May be suited to non-UKresidents.

Most offshore investment funds are established in a form similar to OEICs. The mostcommon form of this fund is a SICAV (Socieite d'investessement a Capital Variable).

UCITS is an EU Directive setting common standards for schemes including providing asingle market passport for schemes that comply with the standards. OEICs, UK unit truststhat are securities or warrant funds and certain SICAVs qualify. Qualifying schemesauthorised in their home State can be marketed to other member states.

Offshore collectives can be either ‘reporting’ or ‘non-reporting’ funds:

Reporting funds are those that report full details of their income to HMRC. Investors mustdeclare their share of the income via self-assessment. Income is paid gross, and taxable aseither savings or dividend income (depending on underlying fund investments) even ifincome not actually distributed. This means the PSA and DA can be used to offset savingsand dividend income as appropriate. Once these have been used the income is taxed at theappropriate savings/dividend rates. Gains on encashment are charged to CGT under theusual rules.

Non-reporting funds are taxed on encashment only. The gain is calculated on CGTprinciples (but without the annual exempt amount) but the tax is charged at income tax rates(20%, 40%, 45%). The PSA and DA do not apply.

Dividends received by offshore funds may be subject to a non-reclaimable withholding tax.Some countries levy a small tax charge on offshore funds.

Protected and Guaranteed Equity Products

Provide a return linked to the performance of an index with some of that return eitherprotected or guaranteed.

Different tax vehicles are used for these products, each with different tax treatment:


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Onshore insurance bonds Basic rate deemed paid at source. Additional20%/25% payable by higher and additional rate taxpayers respectively. Cannot be held in ISA.

Offshore insurance bonds No tax taken at source. Tax due at 20%, 40% and45% depending on tax status of investor. Cannot beheld in ISA.

Closed-ended investmentcompanies

Share-based investments. Income classed asdividend income. Dividend allowance available. Thentaxed at 7.5%, 32.5% and 38.1% depending on taxstatus of investor. Gains subject to CGT. Can be heldin ISA (in which case tax-free).

Listed bonds or medium term notes(MTNs)

Income taxed as savings income meaning the £5,000starting rate band and personal savings allowanceare available. Then taxed at 20%, 40% and 45%depending on tax status of investor. Gains subject toCGT. Can be held in ISA (in which case tax-free).

Deposit accounts Income and gains taxed as savings income. Can beheld in ISA.

The table below summarises the taxation of shares and collectives:

Investment Type Income Tax CGTDirectly held shares Paid gross, taxable as

dividend income10%/20%

Dividend distributingUTs/OEICs/ITs

Paid gross, taxable asdividend income

10%/20%

Interest distributingUTs/OEICs/Its

Paid gross, taxable assavings income

10%/20%

ISAs Paid gross, tax free,but subject to £100parental income rule ifcapital for an under-18-year-old comes from aparent

Tax free

Junior ISA / Child trust fund Paid gross, tax freeand exempt fromparental income rule

Tax free

UCITS (offshore) reportingfund

Paid gross, taxable aseither savings ordividend income(depending onunderlying fundinvestments) even ifincome not actuallydistributed

10%/20%

UCITS (offshore) non-reporting fund

Calculated on CGTprinciples but liable toincome tax. See →

Subject to income tax ratherthan CGT in year ofencashment - cannot useannual exempt amount,personal savings allowance ordividend allowance


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Life Assurance-based Products

Qualifying rules

Secure capital sum on maturity, death or earlier incapacity Minimum term 10 years Premiums annual or more frequent Term policies sum assured no less than 75% premiums payable for term Whole of life sum assured no less than 75% premiums payable should death occur at

75 Premiums in one year not more than twice premiums payable in any other year and

no more than 1/8th of total premium payable over term (first 10 years for whole of lifepolicy)

Premiums no more than £3,600 per annum

Qualifying status is retained if on surrender / assignment for money premiums have beenpaid for the lesser of least 10 years / ¾ of the term (10 years for whole of life policy)

In either case, the fund of an onshore policy is deemed to have been taxed as follows:

No tax on dividend income, 20% on interest, rental and offshore income. Capital gains at 20%, gains eligible for indexation allowance if made prior to January

2018 Tax paid by life office

If the qualifying rules are breached policy becomes non-qualifying and proceeds may beliable to income tax if a chargeable event occurs and the chargeable gain arising pushes theinvestor into a higher rate tax bracket (should therefore try and manage timing of disposal /other income (make large pension contribution so that this does not happen). If the policyremains qualifying, no tax is payable on the proceeds.

Chargeable events include:

– Death– Assignment for money or money’s worth (sale)– Maturity– Partial surrender in excess of 5%– Surrender (full)

Withdrawals of up to 5% per annum cumulative are tax deferred so attractive to higher /additional rate tax payers as no tax payable until bond encashed (and then they may bebasic rate). Downside – not tax free, may not match ‘income’ needs of in times of inflation,underlying funds may not produce net 5% needed therefore capital eroded, adviser fee mayeat into it. Could take less than 5% over a longer term, e.g. 2.5% for 40 years rather than 5%for 20.

Withdrawals in excess of 5% are chargeable and may result in an income tax liability for thepolicyholder depending on their tax status.

Top slicing may be available to mitigate the tax due.


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If the policyholder was not resident in the UK for some of the time they owned the policy thechargeable gain benefits from time apportionment relief and is reduced by:

Number of days non-resident in the UKNumber of days the policy was in force

Example

Terry was resident for 6 out of the 10 years his policy was held. Therefore only 60% of hisgain is chargeable (the gain is reduced by 40%.)

Tax due on encashment

To work out the tax due you firstly calculate the gain which is the final proceeds minus andpremiums paid plus any tax deferred withdrawals. We add these back in because tax hasnot yet been paid on them.

We divide this figure by the number of full policy years. Add this figure to the client’s taxableincome and then deduct the basic rate tax threshold to see if any is in excess of the basicrate tax band.

If it is, then multiply this by 20% and then back up by the number of full policy years to getthe tax due.

Example

Andrew surrendered his onshore investment bond which gave him a total gain of£20,000. He has gross earnings of £42,500 and he has held the bond for 5 ½ years. Whattax liability, if any, will he have?

Firstly, we divide the gain by the number of full policy years to give the top slice of £4,000.(£20,000 / 5).

Then we add the slice to his taxable income of £30,650 (£42,500 - £11,850) which gives usa figure of £34,650.

From this we deduct the basic rate tax band of £34,500 giving us an amount of £150 fallingwithin the higher rate tax band (£34,650 - £34,500).

We multiply this by 20% (£150 @ 20% = £30) and then multiply this back up by the 5 policyyears to give us the final tax due of £150 (£30 x 5).

NB The whole of the gain is added to an individual’s income for the purposes of working outtheir eligibility for the personal allowance, married couple’s allowance and child benefit taxcharge. Top slicing relief cannot help here (although it can still be used to work out theeventual tax due on the bond.) In contrast, it is only the top-sliced gain that is added to otherincome when establishing whether a gain for CGT purposes falls above or below the basicrate tax threshold.

The taxation of jointly owned policies is split in accordance with the proportion of ownershipunless HMRC is advised otherwise. Policies can be assigned from a higher/additional ratepaying spouse to the other spouse before a chargeable event occurs.

Life office issues chargeable event certificate following chargeable gain so policyholder cancomplete their self-assessment. Copy sent to HMRC if policy is assigned or the amount ofthe gain and any connected gains exceed half basic rate threshold.


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Traded endowment policies

Person buying second-hand policy pays premiums and receives maturity value. No incometax due on assignment if the policy remains qualifying, otherwise taxed as a chargeableevent. Disposal of second-hand policy may be subject to CGT.

Friendly society policies

The underlying fund is tax-exempt and the proceeds tax free providing:

Annual premiums under £270, £25 per month (£300 per year) Limit applies across all friendly society policies an investor holds ‘Baby bond’ can be taken out for under 18s. If qualifying conditions are breached, taxed as per non-qualifying policy but with no

credit for basic rate paid at source (i.e. 20%, 40% and 45%).

Offshore life policies

Funds benefit from gross-roll up, although may suffer non-recoverable withholding tax.

Double taxation agreement may apply.

Time apportionment relief available for periods of non-residency (same as per onshorepolicies described earlier).

Gains taxed as savings income. Top slicing available as is the PSA.

Offshore funds may result in lower net gains as higher and additional rate taxpayers only pay20 and 25% on the net return from an onshore funds (where 20% has been taken at source)as opposed to 40 and 45 % on the gross return of an offshore fund.

Non-residents planning to return to the UK may want to encash their offshore bond while stillnon-resident to avoid a liability to UK tax (although there may be a liability in their country oforigin so this needs to be weighed up).

Overseas life assurance business (OLAB)

Life office taxed only on profit made from writing the business, not on the income and gainsfrom investments in the OLAB fund. OLAB is business with non-UK residents. OLABs arenot qualifying – they are taxed in the same way as an offshore life policy.

Life policies in trust

Some specific rules apply where a life policy is held in trust.

If settlor is alive and UK resident, they are liable to tax on any chargeable gain, but canrecover tax from the trustees

If settlor is not liable, then UK trustees have the liability at 20% (up to their Standard RateBand) and then 45%, credit will be given for the 20% deemed taken at source for onshorebonds.

If trustees are not UK resident, then any UK resident beneficiaries are liable at their personaltax rates, but with no top-slicing relief.


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For trustees to avoid high rates of tax, it is best to assign the policy to the beneficiaries in thetax year before the chargeable event.

The tax treatment of life assurance-based investments is summarised in the tables below:

Investment Type Income Tax CGTUK life policy Basic rate deemed paid at

source by insurancecompany

Gains on qualifyingpolicies are liable to thehigher rates of income tax(less credit for basic ratetax taken at source) inyear of encashmentsubject to top slicing relief

Tradedendowmentpolicy

Basic rate deemed paid atsource by insurancecompany

Gains on qualifyingpolicies are liable to thehigher rates of income tax(less credit for basic ratetax taken at source) inyear of encashmentsubject to top slicing relief,may be charge to CGT onsubsequent disposal

Friendly societypolicy

Tax free Exempt

Offshore lifepolicy

Investment rolls up more orless free of tax, althoughfund may suffer withholdingtax on income

The whole gain is liable atinvestor’s highest marginalrate with relief given forperiods spent outside theUK (top slicing availablefor time spent in UK)

Personalportfolio bond

Deemed gain of 15% oftotal premiums paid + totaldeemed gains fromprevious years on top ofusual gain for partsurrender with no top-slicingrelief.

Gain liable to income tax,accumulated deemedgains can be deducted


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Investment Type Income Tax CGTPurchased lifeannuity anddeferredannuities

Part tax-free, part taxed assavings income. 20% takenat source, remainder viaself- assessment. Canreclaim if tax taken atsource exceeds liability.

N/A

Purchasedannuity certain(Set term,regardless ofdeath)

Part tax-free, part taxed assavings income (unlesspurchased for someoneelse when income fullytaxable). 20% taken atsource, remainder via self-assessment. Can reclaim iftax taken at source exceedsliability.

N/A

Pension annuity Taxed in full as earnedincome.

N/A

Annuities forbeneficiaries

Taxed in full as savingsincome. 20% taken atsource, remainder via self-assessment. Can reclaim iftax taken at source exceedsliability.

N/A

Immediate needsannuity

Tax-free if payments madeto care provider

N/A

Form R89 can be completed to receive annuity income gross if an individual is unlikely tohave a tax liability on it.


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Indirect Property Investments, VCTs, EISs, SEISs and SITR

Special Purpose Vehicles

Limited partnership or exempt UK unit trust or investment trust set up to finance specificprojects.Allow investments to be made from self-invested personal pensions, small self-administeredschemes and charities.Highly geared (up to 90% of purchase cost).Income (rental) is used to service the debt so only offer capital growth over a term of, say,between 3 and 7 years.Enable small investors to build portfolio in commercial property market (by investing smalleramounts into a number of different vehicles).These are non-mainstream pooled investments (NMPI) and can only be marketed toexperienced investors by an authorised person.

Shares in listed property companies

Enables diversification over a number of different properties, although share prices affectedby quality of management and level of borrowing as well as underlying value of propertyportfolio. Property shares tend to move more rapidly than property market itself.

Real Estate Investment Trusts (REITs)

A single company or group that owns and manages commercial or residentialproperty on behalf of shareholders (but not the letting of owner-occupied buildings)

Company must be UK resident, closed-ended and quoted on a recognised stockexchange.

If at least 75% of the company’s total gross profits come from property letting, andinterest on borrowing is at least 125% covered by rental profits, then the company isexempt from corporation tax on property letting portion of the business.

Gains on sale of properties developed are taxable at 30% unless they are held for atleast three years from completion.

At least 90% of rental profits must be paid out to investors within 12 months of theend of the accounting period. Such distributions consist of two elements:

o A payment from the (corporation) tax-exempt element – this is classed asproperty income and paid net of 20% tax which non-taxpayers can reclaim (ifheld in ISA wrapper paid gross). Higher and additional rate tax payers oweadditional 20 and 25% of gross payment respectively.

o A dividend from the non-exempt element – this is classed as investmentincome, paid gross. Dividend allowance applies. Thereafter taxed at 7.5, 32.5or 38.1% depending on investor’s tax status.

Any capital gains are taxable in the usual way.


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Venture Capital Trusts (VCTs)

Income tax relief of 30% as a tax reducer, up to a maximum investment of £200,000per tax year. Tax relief withdrawn if shares disposed of within five years.

No income tax on dividends from investments up to the maximum per tax year. Exempt from CGT on disposal (no minimum holding period). Cannot defer a capital gain Will be included in value of estate on death HMRC must approve the company as a VCT which means it has satisfied the

following conditions:o Must not be a close companyo Must be listed on an EEA stock exchangeo Income must be mainly or wholly derived from shareso At least 70% (80% April 2019) of these shares must be qualifying unlisted

trading companieso The VCT must not hold more than 15% of ordinary shares in any one

companyo At least 10% of investments in any company must be in ordinary, non-

preferential shares or certain preference shareso Companies the VCT invests in must have gross assets of not more than

£15m before their investment and no more than £16m after their investment.Such companies must have fewer than 250 employees (500 knowledgeintensive firms (KIFs)).

o Maximum annual investment by VCT of £5m (£10m KIFs).

Enterprise Investment Schemes (EISs)

Income tax relief at 30% as a tax reducer, up to a maximum investment of£1,000,000 (£2,000,000 KIFs) per tax year. Relief is withdrawn if shares are soldwithin three years. Investment can be carried back one year if this is moreadvantageous.

Disposal proceeds exempt from CGT provided EIS is held for three years and thatincome tax relief was given at outset.

Can be used to defer a gain from CGT if original disposal proceeds are reinvested inan EIS no more than one year before or up to three years after the original disposal.No maximum one the amount that can be deferred. Gain becomes chargeable upondisposal of EIS shares (unless proceeds reinvested in another EIS).

If disposal creates a loss, the amount of the loss (less income tax relief given) caneither be deducted from other capital gains OR income.

Income and CGT relief only available to investors unconnected with the company,although deferral of CGT is available to everyone. Investor cannot have any pre-arranged exit provisions.

Conditions the company must fulfil to qualify for EIS:o Company must be unlisted when EIS shares are issued, there can be no

arrangements at the time for it to become listed (although being quoted onalternative markets like AIM is OK).

o Company must have a permanent establishment in the UK.o Company must have fewer than 250 (500 KIFs) full-time employees.o Gross assets must not be more than £15m before investment or £16m after

investment.


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o Must be carrying on a qualifying trade or be parent company of a tradinggroup. Excluded trades include dealing in land, commodities, financialinstruments, financial activities, property development, legal or accountancyservices, coal or steel production or farming or market gardening.

o Cannot raise more than £5m (£10m KIF) in past 12 months from EIS or VCTinvestment

o £12m cap (£20m for KIFs) total investment 100% IHT relief provided shares held for two years before and still being held at

death.

Seed Enterprise Investment Schemes (SEISs)

Income tax relief given as a tax reducer up to a maximum of £50,000 (half of themaximum £100,000 investment permitted in the current (2018/19) tax year). Relief iswithdrawn if shares disposed of within three years.

Relief can be carried back a year, but the SEIS shares are then treated as havingbeen issued in the same year.

An income tax relief claim can be made up to five years after 31 January followingthe tax year of investment.

Half of any chargeable gains reinvested in SEIS shares that qualify for income taxrelief during the 2018/19 tax year are exempt from CGT, up to £50,000, same as forincome relief. SEIS reinvestment can take place before disposal of the assetprovided that disposal and reinvestment take place in the same year.

Disposal proceeds are exempt from CGT provided shares have been held for at leastthree years but only if a claim for IT relief was made at outset.

Investment must be in ordinary shares with no prior exit strategy in force for theinvestor.

Provided they are not otherwise connected, investor may be a paid director of thecompany when the shares are subscribed for

Conditions the company must fulfil to qualify for SEIS:o Company must have been trading for less than two years, carrying on a

genuine trade, have gross assets of less than £200,000 and fewer than 25full-time employees.

o Company must be unquoted at time of share issueo Must be carrying on a qualifying trade or be parent company of a trading

group. Excluded trades include dealing in land, commodities, financialinstruments, financial activities, property development, legal or accountancyservices, coal or steel production or farming or market gardening (plus a fewothers).

100% IHT relief provided shares held for two years before and still being held atdeath.


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Social Investment Tax Relief (SITR)

Income tax relief at 30% as a tax reducer, up to a maximum investment of£1,000,000 per tax year. Relief is withdrawn if investment sold within three years.Investment can be carried back one year if this is more advantageous.

Can invest in debt as well as equitieso Debt must be unsecured and rank lower than other debt on wind up

Disposal proceeds exempt from CGT Can be used to defer a gain from CGT Organisation concerned must have

o ‘defined and regulated’ social purposeo fewer than 250 employeeso assets no more than £15mo raised no more than £1.5m in lifetime


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Trusts

In this module we review what a trust is, the parties to a trust (i.e. the settlor, the trusteesand the beneficiaries), the main types of trusts and their uses, the different methods that canbe used to create trusts and the rules that must be followed to ensure that the trust createdis valid.

You might find the following website a useful summary:

https://www.gov.uk/trusts-taxes/overview.

(Accessed 14 May 2018)

TopicsOverview of a TrustMore on TrusteesTypes and Uses of TrustsHow Trusts are CreatedTrust Rules


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Overview of a Trust

A trust is a way to hold property for others without them having full control of it.

There are three parties to a trust.

In short, the trust is created by the settlor.

The trustee has a legal obligation to deal with trust property for benefit of beneficiaries.

Characteristics of a trust

Assets are a separate fund, i.e. not part of trustee’s own estate Trustees (or their representatives) have title to trust assets Trustees must deal with trust property (manage it, sell it) in line with trust deed and

trust law

The settlor

Original owner(s) of trust property Transfers legal ownership to trustees

o Usually via ‘deed of trust’ or ‘deed of settlement’ May also be a trustee, giving them some control over trust property

o This must be to the advantage of the beneficiary not to themselves. Can be a beneficiary, but this may have tax disadvantages (becomes gift with

reservation) which might defeat purpose of trust. Offshore trusts may also have a ‘protector’

o Role to ensure trustees follow settlor’s intentionso Can veto trustee decisions/remove trustees

The trustee(s)

Legal owners of trust propertyo Can therefore, say, make a claim on a life policy

Must use it for benefit of beneficiarieso Cannot use it as their own property

Can usually be any number of trusteeso Exception when trust property is land: minimum is 2 (1 if trust corporation)

maximum 4 Only legal criteria: must be over 18 and of sound mind. Could use a trust corporation instead of an individual

o Trust corporation cannot die, has expertise, but may have high charges 2 types of trustees – professional and lay

o Professional trustees have professional knowledge/experience to managetrust, may work for professional trustee firm, will not be beneficiary of trust,may include financial advisers, solicitors, accountants in managing trust andtrust assets

o Lay trustees are individuals with no specialist knowledge; e.g. relatives


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o While lay trustees cannot charge, professional ones can either under aprofessional charging clause in the deed or under s.29 of TA 2000 (thoughonly applies to non-charitable trusts), although expenses can be reimbursed(s.31) provided they have been properly incurred.

o Directors’ fees paid where a trustee has taken a directorship of a company inwhich trust owns shares must be paid into the trust fund unless deed saysotherwise (Re Macadam 1946)

The beneficiary(ies)

Equitable / beneficial owner(s) of trust property.o Cannot, therefore, make a claim on a life policy under trust, but can claim

against trustees if terms of trust gives them entitlement to proceeds

Main types of beneficiary:

Absolute interest Full equitable ownership to both income and capitalCannot be taken away

Life interest Entitled to income from trust but not capitalLife tenant

Remainderman Entitled to capital after death of life tenantUntil then have reversionary interest only

Contingentbeneficiary

Interest depends on a particular event that may or may not occur

Beneficiary(ies) can be named (John Smith) or described (all my children). Cannot control trustees

o Can demand they act in line with trust deed and trust accounts be audited. Under Saunders v Vautier (1841) beneficiaries can bring a trust to an end providing

o all beneficiaries are ascertainedo no possibility of further beneficiarieso all of full age and mental capacityo all agree

Trust property

Most property can be placed under trust (not ISAs though). Assets divided into

Realty – freehold interest in land Personalty – other assets categorised either as

o Chattels real – leasehold interest in lando Chattels personal

Choses in action – intangible assets (life assurance, debt, shares) Choses in possession – tangible objects (jewellery, art, antiques)


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Main types of trust investments

Collectives / shares

Selected for income and/or growth depending on needs of beneficiary Under discretionary trust taxed at 38.1% (dividend income), 45% (all other income) in

excess of standard rate band CGT at 20% in excess of up to ½ usual annual exempt amount

Investment bonds

No income therefore no need to self-assess until a chargeable gain occurs Benefit from 5% tax deferred withdrawals Can assign to beneficiary prior to chargeable event so can be taxed at their rates Onshore bonds: 20% tax deemed taken at source (non-reclaimable) Offshore bonds: benefit from gross roll up

Differences between a trust and a contract

Trust No need for offer, acceptance or considerationBeneficiaries may not be aware of the trustBeneficiaries can be minorsTrustees are legal owners

Contracts Offer, acceptance and consideration requiredAll parties must be aware of the agreementContract with a minor may or may not be enforceableOnly parties to contract have legal / equitable rights


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More on Trustees

Questions around the roles and responsibilities of trustees (especially with regards toinvestments), what happens when they retire (whether they need to or want to!) and whathappens when they move abroad have all appeared regularly as question topics. As youcan see below this is list and we know how the CII feels about list type questions! In the listof duties and responsibilities below, I have separated out the general duties and the dutiesthat specifically relate to investment.

General duties and responsibilities of trustees

Protect trust property by holding title documents Ensure they are registered as legal owners for any trust property Avoid conflicts of interest including making personal profit as such a transaction can

be declared void at request of beneficiary

Investment duties and responsibilities of trustees:

Follow specific instructions and powers given in trust deed Ensure everything they do is for benefit of beneficiaries, within terms of trust deed

and trust law TA 2000 s.1 established statutory duty of care – must act in way an ordinary prudent

business person could be expected to act and must invest cash wisely andappropriately (unless it is being paid out immediately) – this duty applies toinvestment powers, acquiring land, appointing agents / nominees/ custodians and theinsurance of trust property

TA 2000 s.1 must exercise reasonable care and skill bearing in mind own knowledge/ expertise (professional trustee expected to exercise higher duty of care and skillthan layperson)

TA 2000 s.3 has to invest in same range of investments as an ordinary individual(unless limited by trust deed where trust was set up after 3 August 1961). Does notapply to pension trusts, authorised unit trusts, some charitable trusts

Under TA 2000 s.4 must pay attention to ‘standard investment criteria’ – ensureinvestments are suitable and appropriately diversified, keep investments underreview and vary as appropriate, obtain appropriate professional investment advice(advice does not have to be in writing, but it might be a good idea), unless theydecide it is unnecessary or have the necessary skills themselves

Invest trust money properly and monitor investments regularly Duty to maximise return on trust fund (Cowan v Scargill 1984) but not to risk fund by

investing in hazardous or speculative investments, i.e. maximise return andsafeguard assets

Must take account of tax position of both trust and beneficiaries Must bear in mind interests of all beneficiaries, present and future (balance income

and capital) Must keep proper accounts of all trust property and show them to beneficiaries if

required (beneficiaries are entitled to reasonable information, but not to internalminutes illustrating why trustees exercised discretion in a given manner)

Must use utmost diligence to avoid losses and are liable to beneficiaries for anybreach of duty

Be honest and prudent - not attempt to invest in any way that results in them makinga personal gain (if they do, pay profit to beneficiary)


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Trustees’ powers

Specific powers are stated in trust deed – all trustees must agree to any decisionsmade (unless there is a clause in the deed that states a lesser proportion will suffice).

In addition, Trustee Act 1925 contains the following statutory powers:

s. 31 Apply trust income to infant beneficiary for maintenance or education. Unlessdeed says otherwise, beneficiary becomes entitled to income at 18

s. 32 To advance whole (prior to Oct 2014 50%) of a beneficiary’s presumptiveshare subject to any provisions of the trust. But – if another beneficiary isentitled to income, their permission needs to be obtained. The amountadvanced will be taken into account later on if the beneficiary becomesabsolutely entitled at a later date with other beneficiaries (so if twobeneficiaries are entitled to equal shares of the trust property and one hasreceived an advanced payment they will get a smaller payment (if any) thanthe other beneficiary to reflect this)

Trustee Act 2000 gives trustees power to invest trust assets in the same way as ifthey owned them outright and to own land on a freehold/leasehold basis as aninvestment (the beneficiary may occupy the property)

Appointment of trustees (at outset)

Named (appointed by) in trust deed Named in will (usually the executors) Administrators (intestacy)

Replacement/retirement of trustees

The trust deed usually names appointer (who can be the settlor) with power toappoint new trustees (including themselves)

o If no provision either surviving trustees or legal personal representatives oflast surviving trustee will appoint new trustees

o Exception for corporate trustees who are expected to remain constanto In extreme cases where no other option exists, court can appoint trustees

Under Trustee Act 1925, s.36 new trustee can be appointed to replace one who:o Has diedo Has been outside the UK for more than a yearo Wants to be dischargedo Refuses to acto Is unfit or incapable of actingo Is a minor

An appointer can appoint themselves as a trustee to replace an outgoing trustee ifthe trust deed permits it (no statutory power to do so, so it must be in deed)

If no appointer is made and all beneficiaries are over 18, have mental capacity andare absolutely entitled they can order the retirement of a trustee and say who shouldreplace them

o The same applies where a trustee has become mentally incapableo These powers both exist unless trust deed says they do not


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A trustee who retires should be replaced using a deed of retiremento A trustee can only retire without being replaced if there are at least two

trustees left, or a corporate trustee, who agree to the retirement (s.39) A sole trustee cannot give good receipt for property (in other words if there is land or

property as a trust investment, there must be at least two trustees or a trustcorporation if they want to sell it)

On death of a trustee (s.18), then either the remaining trustees continue as they are,or if their numbers are insufficient (as in bullet above) the legal personalrepresentatives of the deceased trustee can act of their behalf until another isappointed. Death of the trustees does not void the trust

Trustees’ powers to delegate

Generally trustees’ functions cannot be delegated Under TA 2000 trustees can appoint agents and delegate to them any of their

powers except:o power over trust asset distributiono fee handlingo appointment of new trustees/nominees/custodianso delegation of trustees’ powers

Trustees can appoint nominees to hold property in their name and custodians toundertake safe custody of trust assets/documents unless deed says they cannot

Trustees can delegate exercise of any powers under a general power of attorney(Trustee Delegation Act 1999) providing:

o it is for less than a yearo it gives written notice of power and reason for it to appointer and all other

trustees within 7 days of it being put into effecto note the donor remains liable for the acts and defaults of their attorney

Trustees’ diligence and integrity

If a trustee departs from statutory duty of care they can be held liable for loss causedby own breach of duty, including where they have failed to act

They are not liable for acts/omissions of other trustees, unless they appointed themwithout due care

Standard of care is lower for discretionary actso ‘in good faith with the diligence that an ordinary person of business would use

in managing their own affairs’ (Speight v Gaunt 1883) Compared to

o ‘an ordinary prudent person would take if they were minded to make aninvestment for the benefit of other people for whom they felt morally bound toprovide’ (Re Whiteley 1886).

Trustee should not buy from or sell to the trust to avoid allegations of conflict ofinterest / personal gain

o Such transactions are voidable by the court if beneficiary requests it(Benningfield v Baxter 1886).

o Self-dealing acceptable if trust deed permits it.o Can buy beneficiary’s interest from beneficiary unless trustee is abusing their

position by doing so


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Breach of trust

Beneficiary can take legal action against trustee if a breach (i.e. trustee doessomething they shouldn’t have or doesn’t do something they should have) has beencommitted

Court can:o issue injunction preventing trustee taking that course of actiono order trustee to make restitutiono order return of property wrongly transferred

If guilty, trustees must compensate beneficiaryo However, if trustee was acting honestly and reasonably court may relieve

them of that liability (s.25 TA 1925)o Trustee exemption clauses now widely used and valid for non-fraudulent

accidental breaches (Armitage v Nurse 1998) If 3rd party helps trustee commit breach of trust / persuades them to do so, 3rd party is

liable to beneficiary for consequential loss if 3rd party was:o dishonest, not just negligento dishonest, even if the trustee was noto aware of the trust or of the facts which gave rise to it.


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Types and Uses of TrustsThere are a number of ways in which a trust can come about:

Express Trust expressly created either in writing / orally

Implied Trust not expressly createdImplied by the actions or intentions of parties

Presumptive Similar to an implied trustWhere one person buys property in the name of another and holdsit for them

Purpose Exists not to benefit an individual but a purposeSuch as to maintain a building

Successive Property held for a succession of interestse.g. spouse, then children

Constructive A trust that is imposed by law

Resulting A trust that arises where there is a failure of the trust on which theproperty is held

There are also a number of different types of trust, the taxation of each type will differ:

Bare (Absolute) Assets transferred by settlor to legal ownership of trustee(nominee) for benefit of beneficiaries absolutely

Discretionary Type of relevant property trustNo beneficiary has a right to income or capitalTrustees have power to accumulate or distribute income and/orcapital at their discretionMay be subject to IHT lifetime, periodic and exit charges

Relevant property Most trusts created on/after 22nd March 2006 that create flexible/ successive / contingent interests are relevant property trustsand therefore potentially subject to IHT lifetime, periodic andexit charges

Exceptions are where property is in: an IiP trust set up before22.3.06, is subject to a transitional serial interest made before5.10.08, an immediate post-death interest (IPDI) – basically atrust created by will/intestacy, see below, or a trust for adisabled person, bereaved minor, 18 – 25 trust

Life interest and interestin possession trusts

Interest in possession (IiP) = the right to income of the trustfund or the right to use trust assets (Pearson v IRC 1980) –beneficiaries are life tenant(s) and remainderman(men)


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Immediate post-deathinterest (IPDI)

A trust where a person has an IiP and settlement was effectedby a will/intestacy or beneficiary became beneficially entitled toIiP on death of the testator/intestateIPDI trusts are not treated as relevant property trusts and nolifetime/periodic/exit charges will apply

Power of appointment(flexible) trusts

Trustees have power to alter beneficial interests within class ofpotential beneficiariesFlexibility advantageousDefault beneficiary has right to income /possibly capital if noother appointment is madeAvoid including settlor as potential beneficiary to avoidreservation of benefit for IHT

Accumulation andmaintenance trusts

Used to enjoy beneficial IHT treatmentOne or more beneficiary becomes legally entitled to capital /income prior to 25Prior to that income held by trustees but can be applied formaintenance/ education / benefit of beneficiaryCould last no longer than 25 years unless set up for benefit ofgrandchildren of a common grandparent

Statutory trusts Created under statute e.g. Married Women’s Property Act1882 or trust created for minor under intestacy rules

There are many different ways in which trusts are used:

Tax planning / mitigation Assets transferred into trust are outside estate after 7 yearsMay be no immediate charge to tax if transfer is exempt orwithin nil rate bandIncome-producing assets could be placed into trust to avoidtax being paid at the higher rates (although may not work ifbeneficiary is spouse of settlor / settlor’s minor children)

Intestacy If no will is made, assets left to minor children are placedunder trust

Wills Asset left to minor under will is held in trust until 18 (unless willstates executors can make payment to their parent)Can leave instruction in will that an asset may not be givenoutright to a beneficiary until a condition is met (e.g. are 25,marry) – will trust

Pension Many pensions are set up under trust

Family Life assurance can be written under trustMoney can be put under trust to avoid it being spent tooquickly


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Charity Charities use trusts for ease of administration and indefinitecontinuance of existence

Property Minors and mentally incapacitated cannot hold propertyProperty can be held under trust for them so they can enjoythe benefit of it

Disabled / vulnerablepersons

Trusts for vulnerable beneficiaries benefit from tax advantages

Protect business fromcreditors

Trust property is often protected from bankruptcy (because itbelongs to the trust rather than the settlor), unless there hasbeen fraud

Ownership of land Land can be held as either:Joint tenants – both owners have identical and equal interestin property. When one dies, property belongs to survivingowner (right of survivorship). No transfer of value for IHTpurposes. JT severed on bankruptcyTenants in common – on death deceased’s share of propertygoes to their estate and is distributed in line with terms of theirwill / rules of intestacy. Transfer of value for IHTJT can be converted to TIC during lifetime if desired

Advantages and disadvantages of using trusts

Advantages Disadvantages

Reduce liability to IHT Usually need to survive 7 years to beeffective

Keep element of control over assets thathave been given away

May not be able to change trust onceestablished

Keep some access to assets that have beengiven away

Access may be restricted

Prevent assets falling into the wrong hands Income / CGT rates can be higher for trustsPut off decisions regarding ultimate recipientof assets

Potentially ongoing IHT charges


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How Trusts are Created

Deed Usual method Settlor executes deed giving legal ownership of property to trustees

for benefit of beneficiaries Deed states trust property, names of trustees and their powers,

names of beneficiaries and their rights If transfer made by deed of assignment this should be correctly

done, i.e. signed by settlor and trustees and independentlywitnessed

Will Either expressly stated in terms of will or implied due to propertybeing left to minor

Executors become trusteeso Collect in assets and pay out to beneficiarieso Hold property for minors under trust until 18 / pay to parents

if terms of will allows this Life interest trust set up as a result of a will = immediate post-death

interest (IPDI trust) Discretionary trust may be set up to use nil rate band (NRB) (less

common now NRB transferable) Trust written into a will does not take effect until after death (and

then only if will is still valid at that time) Assets placed into will trust once the estate has been administered A will can be revoked by the testator (person who made the will)

physically destroying it / making a new one which includes a termthat previous wills are revoked / on marriage (unless will states it ismade in contemplation of that marriage, in which case it stands)

Statute Administration of Estates Act 1925 s.33o Trust for sale over intestate’s estateo Modified by Trusts of Land and Appointment of Trustees

Act 1996 Personal reps now have power but not a duty to sell

Law of Property Act 1925o s.34 Land conveyed in undivided shares as tenants in

common vests in the first 4 named in conveyanceo s.36 Property held as joint tenants is held on trust

Trusts of Land and Appointment of Trustees Act 1996o Land held for minor held on trust

Married Women’s Property Act 1882Court order Constructive trust is imposed by law where it is unfair for the legal

owner to keep beneficial interesto If claim an interest in land you do not owno Arise from divorce / breach of trust

Secret trusts Hides identity of recipient (legatee) of property from deceased’sestate

Fully secret trusto Does not appear in willo Testator must communicate to apparent legatee that

property is subject to fully secret trusto Communication can be made at any time in testator’s

lifetime and either before or after date of will


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o Terms of trust must be clearly communicated (can be in asealed letter)

o Testator must communicate legally binding obligation onlegatee and legatee must accept fully secret trust

o Trust fails if not communicated to legatee during testator’slifetime, takes effect as beneficial gift instead

Half secret trusto Terms of will state legatee will hold property on trust but

terms of trust are not disclosedo Details must be communicated to legatee before will is

executed or it will failo If it fails trustees will hold property for those entitled to

residue / intestacyUnwrittentrusts

Implied by actions


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Trust Rules

Three certainties

Knight vs Knight 1840 established there must be three certainties present for a trust to bevalid:

words – must unmistakably show that a trust is intended subject matter – must be certain with property clearly identified object must be certain – i.e. the beneficiaries

o they can be namedo described as a class

wording should be precise capable of legal definition e.g. wife, civilpartner

NB. children includes illegitimate and adopted children but notstep-children

o does not apply to charitable trusts

Perpetuities and accumulations

Law deems it against public policy for property to be settled into a trust indefinitely.Perpetuity laws prevent this from happening.

Trusts created on or after 6 April 2010 are governed by the Perpetuities andAccumulations Act 2009:

125 year perpetuity period (overrides trust deed) (s.5(1)) No restriction on accumulation (s.13) except for charities which is 21 years (s.14) Shorter term can be chosen and written into deed Existing trusts can write 100 year perpetuity period into deed if existing perpetuity

period is based on a specified person or on a life who the trustees cannot easilyestablish if they are still living. This act is irrevocable. (s.12)

Trusts created prior to that date governed by Perpetuities and Accumulations Act 1964:

Perpetuity period eithero Lifetime of specified person plus 21 years; oro Fixed period of 80 years from date trust created

Accumulation (Law of Property Act 1925) income could not be accumulated forlonger than:

o Life of settloro 21 years from death of testator/settloro Duration of minority(ies) of anyone living at death of testator/settloro Duration of minority(ies) of anyone entitled under the settlemento 21 years from date of disposition (trusts after 15 July 1964 only)o Minority(ies) of anyone in being at that date (trusts after 15 July 1964 only)

If any of these are breached then the accumulation is invalid andincome released to the person entitled to it.


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Conversion and apportionment

Trustees must consider interests of all beneficiarieso must not favour one class over another (e.g. life tenant in favour of

remainderman or vice versa) Pre Trusts (Capital and Income) Act 2013 trustees had to sell wasting assets to

avoid unfairnesso Known as duty to convert

Not apply to property settled by deed, land or intestacy Had to convert within 1 year Unless trust deed said otherwise

o Trusts created on or after 1 October 2013 no longer need to do this unlessthe trust deed says the duty to convert remains

Variation of trusts

Once trust is created it is usually irrevocable and invariable Variation of Trusts Act 1958 allows court to vary a trust for any:

o Beneficiary incapable due to infancyo Contingent beneficiaryo Unborn persono Person with a discretionary interest under a protective trust.

The court must feel that the variation must be for the benefit of the beneficiary (e.g.social, moral, educational or financial) but cannot take away an interest of an adultbeneficiary (except with their agreement) and although it can be used for taxpurposes, court may not agree to it

TA 1925 s.57 court can permit trustees to do something outside their remit if it is‘expedient for the trust as a whole’ thus allowing for unforeseen circumstances(beneficiaries in financial difficulty), but cannot vary beneficial interest

Settled Land Act 1925 permits the same for land and beneficial interests can bechanged

Matrimonial Causes Act 1973 can vary marriage settlements previously made forbenefit of ex-spouses / children

Charitable trusts

Must be wholly and exclusively of charitable nature for public benefit Includes – among many others – poverty, education, religion, health, art, sport,

animals, environment, emergency services Governed by Charities Act 2011 How charitable trusts differ

o Cannot be void for uncertaintyo Can continue indefinitely and can be varied if become obsoleteo Only accumulate for 21 years (s.14 Perpetuities and Accumulations Act

2009) unless court / Charity Commission say otherwiseo Cannot fail – instead trust property can be given to a similar charity – cy-pres

doctrine.


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Taxo Trust – exempt from income tax and CGTo Donors – gifts exempt from CGT and IHT, IHT reduces to 36% on estate of

an individual where 10% or more of their net estate (estate after reliefs andexemptions) is left to charity. Income tax relief where gift aid / payroll givingused.

Scottish law terminology

England ScotlandSettlor Granter / trusterLife interest Life rentLife tenant Life renterRemainderman FiarAppointment of new trustees Assumption of new trustees

Scottish legislation

Trusts (Scotland) Act 1921 Trusts (Scotland) Act 1961 Charities and Trustee Investment (Scotland) Act 2005

For a valid trust in Scotland, there must be delivery of trust property to trustees orbeneficiaries or an overt act that signifies irrevocability

A Scottish trust can continue in perpetuity, but there are limits on accumulation of income.Limit is longest of:

Granter’s (settlor’s) life 21 years from granter’s death / trust’s creation Minority of anyone living at granter’s death / trust’s creation

Only 1 signature needed on Scottish trust deed.

Overseas trusts

Trust created overseas subject to laws of that country May be tax advantages if not UK domiciled/deemed domiciled Not all countries recognise trusts Creation of trust with foreign residence trustees is usually a transfer of value for IHT

purposeso Chargeable unless

an IHT exemption arises the property is ‘excluded property’ (property located overseas and

settlor not UK dom/deemed dom)o HMRC must be told when overseas trust created

Excluded property trust (EPT)o Offshore discretionary trust for UK tax resident but not UK dom/deemed domo Ring-fence non-UK assets and protect them from UK tax on their death


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o Remain excluded even if settlor is a beneficiary and later becomesdom/deemed dom providing Trust created while non-dom Any further property only added while non-dom Property must be non-UK and never based in UK No further assets added once dom UK Residence status is irrelevant

o If above criteria are met then Transfers into EPT not transfers of value for IHT Trust not subject to periodic / exit charges Beneficiaries can include settlor, spouse/civil partner, children and will

not be a gift with reservation On settlor’s death EPT outside estate (unless they are a returning UK

domicile on/after 6 April 2017)

Domicile

Origin – permanent home of father (usually), given at birth Choice – move permanently to another country and break previous ties Dependency – If domicile of father (mother if illegitimate) changes before age 16,

domicile of child changes too Deemed domicile – if UK resident for tax purposes for 15 out of last 20 tax years If born in UK, have UK domicile of origin and become tax resident in UK after a

having acquired a domicile of choice outside of UK, will be deemed domicile if alsoUK resident in at least one of last two tax years (residence condition) for IHT (theywill then be a returning UK domicile)

If UK domicile / deemed domicile at date of death then worldwide assets liable to IHT If non-dom then only UK-based assets liable If have a UK dom spouse/civil partner can elect to be UK dom

o Transfers between spouse/civil partner then become unlimited (rather than£325k)

o Can inherit spouse/civil partner’s estate tax free and their transferable nil rateband / residence nil rate band

o But – would then be taxed on worldwide assets rather than just UKo Election irrevocable, can be backdated 7 years (but not pre 6 April 2013)


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Powers of Attorney and Bankruptcy

In this module we review the different types of attorney that can be created, the rulesregarding setting them up and the procedures in place to protect those who use them.


https://www.gov.uk/power-of-attorney/overview.


We will then move on to review the options available to those who are unable or unwilling topay off their debts themselves. We will cover bankruptcy, individual voluntary arrangements,deeds of arrangement, debt relief orders and administration orders. We will also look at theeffect of bankruptcy on financial planning.


https://www.gov.uk/bankruptcy/overview.


TopicsPowers of AttorneyThe Mental Health and Mental Capacity ActsThe Process of BankruptcyThe Effects of Bankruptcy on Investments, Life Assurance, Pensions and TrustsAlternatives to Bankruptcy


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Powers of Attorney (POA)General Power of Attorney

Created under the Powers of Attorney Act 1971. Temporary measure

o E.g. where donor goes abroad temporarily and gives someone else authorityto run their affairs in their absence, or where someone struggles with runningtheir day-to-day affairs and wishes to appoint someone else to act for them

Only valid as long as donor (person who makes the POA) has mental capacity S.10 gives attorney to do anything donor can do

o Except in donor’s capacity as trustee / legal personal representative Attorney needs to show original /certified copy to prove authority Attorney can sign using own signature or own signature plus ‘on behalf of’ Can be revoked at any time by donor

o Automatically revoked if donor loses capacity, dies or is adjudged bankrupt. If attorney does not receive notice of revocation they are protected

and incur no liability to donor / any other person - any transactioncarried out will still be valid

If they carry out transaction after original expiry date of power or inknowledge of it being revoked, deemed as having had notice

Firms dealing with attorneys need to be sure the power was duly executed, still validand gives authority for the transaction concerned

o Can all be checked on power of attorney documento Firm should also check it has not had notice of power being revoked or death

of donor Attorney cannot give away donor’s property without consent in the power

o Making large gifts is not compatible with a power of attorney

Lasting Powers of Attorney (LPA)

Replaced Enduring Powers of Attorney (EPA) on 1 October 2007. We cover these in the next section No new EPAs can be created Existing ones still valid

Created under the Mental Capacity Act 2005 Does not apply in Scotland

LPA gives powers to someone to act on donor’s behalf in the event that donor losescapacity or no longer wishes to act for themselves

Two types (two separate forms): Financial decisions LPA – pay bills, collect benefits and income

Can apply if the donor has mental capacity, or can be written so thatattorney can only make these decisions after donor has lost mentalcapacity

Health and care decisions LPA – allows donor to plan in advance how theywish to be looked after once they lose capacity Attorney can only use the powers once donor has lost mental capacity

LPA doesn’t become effective until it is registered with the Office of the PublicGuardian (OPG)

Usually this is done straight away Can apply online using simplified forms Scottish equivalent continuing power of attorney (CPA) under Adults with

Incapacity (Scotland) Act 2000


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Donor must have mental capacity when they make the LPA Once lost, next of kin / friend must make application for deputyship if they

want to manage another’s affairs

Process

Complete prescribed form Signed by

Donor Attorney Certificate provider

Confirms donor understands effect of creating LPA and aredoing so of own free will / there’s been no fraud

Witnessed by independent person Process takes 4 – 10 weeks Can be done at any time after LPA is created, even if the donor still has mental

capacity. 3 week period during which people can object to LPA

e.g. if they suspect pressure of some kind

Validity

Donor and attorney over 18, not bankrupt Donor have mental capacity LPA made on prescribed form LPA state donor and attorney read prescribed info and attorney understands duties Certificate from prescribed person (as above) LPA can be revoked by the donor, if they have mental capacity

If they lost but then regained capacity medical evidence would be required toprove it

Also revoked on bankruptcy of attorney or donor (not health and welfare), if thedonor/attorney are married and they divorce, if the attorney is incapacitated

LPA made in England / Wales may not be accepted in other countries Fee £82

£41 for small error to be corrected and resubmitted Refunds are currently available for those who registered between 1 April 2013

and 31 March 2017 due to overcharging by the OPG. LPRs can apply onbehalf of a deceased person.

Benefits

Advance planning of who should make decisions and how they should be made inevent of an individual’s incapacity

If don’t make one, application for deputyship made to Court of Protection (COP) , nosay in who will look after their affairs or make decisions, assets inaccessible untildeputyship in place, deputy subject to more stringent supervision and an annual fee


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Attorney’s responsibilities

Make decisions (only those that are authorised by the LPA) in donor’s best interest Consult with donor and others with an interest in donor’s affairs before making

decisions Keep own money separate from donor’s Respect donor’s confidentiality Ensure no conflict of interest Only make gifts on customary occasions (birthdays, weddings, family events) to

those related to / connected with donor or to a charity donor either previously madegifts to or might have expected to donate to Size of gift must be reasonable in relation to the size of the donor’s estate and

circumstances LPA may restrict gifts, but cannot make them wider than this Same goes for EPA

If attorney breaches duty can be ordered to make restitution Fine and/or 5 years in prison if mistreat / purposefully neglect someone who lacks

capacity

Enduring Powers of Attorney (EPA)

Only EPAs made before 1 October 2007 are valid No changes can be made to an existing EPA If an EPA is no longer valid or a change is needed then a new LPA must be created Created under the Enduring Powers of Attorney Act 1985 No authority to make health and welfare decision under EPA The donor can either give their attorney powers to use immediately (i.e. before it is

registered) or they can stipulate that their powers only become available in the eventthat the donor becomes mentally incapacitated

o Donor can revoke power at any time while they have mental capacity and canstep outside power to make their own decisions if they so wish

Either way, EPA is usually revoked if donor becomes mentally incapacitatedUNLESS it has been registered with the Office of the Public Guardian (OPG)

o This must be done as soon as attorney believes donor is or is becomingmentally incapacitated

o EPA suspended temporarily while registration process take placeo Once EPA registered attorney can continue to act despite the donor’s mental

incapacityo If donor regains capacity they can apply to have the attorney revoked

although they will need to provide medical evidence to the COP. Do not apply in Scotland

o Pre 2 April 2001, all POAs created under Law Reform (MiscellaneousProvisions) (Scotland) Act 1990 after 1 January 1991 continue aftergranter’s (donor’s) incapacity unless POA says otherwise Known as continuing power of attorney (CPA)

o Post 2 April 2001, under Adults with Incapacity (Scotland) Act 2000 POAnot CPA unless expressly stated in POA that it will be. Can be financial/property affairs, welfare powers (not until lose

capacity) or both CPA must be registered once lost capacity


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o POA pre 1 January 1991 invalid on mental incapacity Attorney may continue to act under ‘negotiorum gestio’

Informal arrangement Act as would have done had they been given the authority and

were capable No obligation to accept actions of anyone acting under it

Duties

Act in donor’s best interests, not take advantage of donor for own benefit, keepmoney separate from their own

Gifts can only be made whereo Donor might be expected to meet donee’s needso Gift is reasonable and seasonable to a person related to / connected with

donor or to a charity where the donor had previously made / might beexpected to make a gift

Gifts for IHT planning cannot be made without court’s approval, although a recentcase suggests such gifts might now be approved in some cases

EPA automatically revoked on the attorney’s bankruptcy Donor can only revoke the EPA with permission from COP


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The Mental Health and Mental Capacity ActsMental Capacity Act 2005

Supports / protects those who are unable to make their own decisions througho Court of Protection (COP), Office of Public Guardian (OPG) and Independent

Mental Capacity Advocate (IMCA)

5 key principles – values person making decisions on behalf of another must followo 1. All adults have right to make own decisions

Must assume they have capacity to do so, unless proved otherwiseo 2. Individual must be supported and given all reasonable help to make own

decisions before treated as if cannot do soo 3. Individual cannot be treated as lacking capacity because they make unwise

decisionso 4. Everything done for individual who lacks capacity must be in their best

interestso 5. ‘Least restrictive option’ must be followed

must make decision that interferes least with rights and freedoms ofincapacitated individual

Factors determining mental capacityo Include injury / illness / condition that affects way mind works

Temporary or permanento Assessment made at time decision needs to be madeo Can they understand decision they need to make and why they need to make

it?o Can they understand possible outcomes if they do/don’t make the decision?o Can they make an informed choice?o Can they communicate their decision?

If cannot make own decisions, then if no LPA / EPA, the COP will appoint a deputy

Court of Protection (COP)

Powerso Decide whether someone has mental capacityo Make decisions / act for someone who does noto Appoint deputies where lack capacity and no LPA / EPAo Determine whether LPA/EPA valido Remove deputies / attorneys who fail to do their dutyo Hear objections to registration of LPA / EPAo Must apply MCA principles when reaching its decision and ensure they are in

best interests of those who lack capacity

Deputies

Close friend / family member Could be a professional Over 18 COP will issue court order confirming deputy Deputy must apply to / be appointed by COP

o Property and financial affairso Personal welfare


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Dutieso Safeguard client’s assets, ensure day to day financial needs meto Liaise with COP regarding investing any moneyo Deputy revoked on death (legal personal representatives take over)o Deputy only has powers given to them by COP

They are not an attorneyo Must

Only make decisions in person’s best interests, Only make decisions allowed by COP Apply high standard of care in decision-making

o Should keep records of decisions madeo OPG will investigate if duties not done properlyo COP may make single order if no need for ongoing powers

Restrictionso Deputy cannot make a will / codicil for person, make large cash gifts, hold

money or property for them

Office of Public Guardian (OPG)

Protects those who lack mental capacity to make own decisions Functions

o Maintain register of LPA / EPA, court orders appointing deputieso Supervise deputieso Deal with complaints re attorneys and deputieso Work with others e.g. social serviceso Provide reports to COP where concerns are raised

Public Guardiano Individual responsible for protecting those who lack mental capacity from

abuseo Duties

Protect those lacking mental capacity from abuse Register LPA/EPA Supervise COP appointed deputies

Receivershipo Another type of attorneyo Chosen by court rather after individual who has lost capacityo Supervised by court, must file regular accounts to OPG, restricted access to

client capital

Independent Mental Capacity Advocate (IMCA)

Support and represent individual lacking capacity with no one to speak for them Make decisions re: serious medical treatment and long term care only

o NHS must consult IMCA for most vulnerable Ensures all factors relating to their care are brought to attention of

NHS decision makers Involved if being moved to other NHS/LA accommodation IMCA can challenge decisions made by attorneys / deputies


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Mental Health Act 1983

Reception, care and treatment of those with mental illnesses and management oftheir property

s.2 – compulsory admission for assessment in hospitalo maximum 28 days

Can request further 28 days if need to investigate furthero Approved mental health practitioner / nearest relative can ask for person to be

sectioned 2 doctors must recommend 1 must be experienced in field of mental illness Other usually knows patient (e.g. their GP) Must assess within 5 days of each other And within 14 days of request

s.3 – compulsory admission for treatment in hospitalo initially for 6 months

can request further 6 monthso Approved mental health practitioner / nearest relative can ask for person to be

sectioned and admitted Process same as above plus doctors must confirm hospital has

appropriate treatment to offer s.4 – after-care

o If detained under s.3 LA must provide free non means-tested careo May have to start paying for own care if cease to be eligible, but LA must

ensure removing after-care is not done for financial reasons If mental health condition persists, so should after-care

ss. 7 – 10 – guardianshipo Limited powerso Make decisions on person’s behalfo Must be made in their best interestso Approved mental health practitioner / nearest relative can apply, 2 doctors

must agreeo LA will usually be guardian, but could be a relative / friend

Cannot proceed if nearest relative objectso Guardian has authority to ensure

Person lives at specified place Goes to that place (if they cannot do so without assistance) Attends medical treatment They have access to medical professionals

Deprivation of Liberty Safeguards authorisation (Mental Capacity Act 2005)o Hospital or care home must obtain authorisation to detain someone with

impaired mental capacity Not to be confused with being sectioned due to a mental illness which

requires a hospital stay / treatment or refusing stay / treatment Property and financial affairs

o MCA 5 principles apply


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Mental Health Act 2007

Responsibility for those with mental health conditions now sits with a wider range ofprofessionals

Can change designated nearest relative Rule changes relating to those with dementia include

o Civil partner included in list of nearest relativeso Someone who has been sectioned can challenge who their designated

nearest relative should beo Someone detained in hospital can request access to IMCA who can explain

their rights and how to challenge a sectiono Guardian can take a person to the place they are required to liveo Approved mental health practitioners and social workers can recommend an

individual is sectioned / has a guardiano Responsible clinician (person in charge of someone’s treatment in hospital)

could be a professional other than a doctor


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The Process of Bankruptcy

Where a person cannot or will not pay their debts.

Before making bankruptcy order

Petition presented (Insolvency Act 1986)o Creditor / creditors owed / owed jointly £5,000 unsecured debt

Must prove debtor’s inability to pay Debtor not complied within 3 weeks to statutory demand

requiring them to pay Bailiff’s unable to collect

o Debtor can petition themselves to stop creditors harassing them Must be unable to pay

o If debtor disposes of any assets after petition presented, transaction can bevoided if bankruptcy goes ahead (unless court decides otherwise)

o Petition now made online No need to go to court Adjudicator decides to make bankruptcy order or not

After the bankruptcy order

Official Receiver (OR) takes control of debtor’s assetso Debtor submits statement of affairso OR decides whether to call creditors’ meeting to enable creditors to appoint

insolvency practitioner as trustee in bankruptcy (TIB) Must call meeting if 10% (by value, i.e. amount owed) of creditors

demand it If no meeting, OR acts as TIB

The TIB collects bankrupt’s property, sells it and uses proceeds to repay creditors Debtor can keep

o Tools, books, vehicles needed for employment / self-employmento Household essentials to meet basic domestic needso Property held on trust for another

Property belongs to TIBo Once bankruptcy discharged it has to be assigned back to debtor

It does not automatically revert to themo TIB can claim any asset debtor receives during bankruptcy (e.g. an

inheritance) Bankrupt’s income

o TIB will use income in excess of that needed by debtor for essential expensesto pay off debts

o TIB can ask debtor to sign IPA = income payment agreement IPO = income payment order Both require debtor to make contributions to pay off debts if affordable IPA/IPO state amount to be paid / % of income to be contributed for Also state timescales (3 years maximum)

o TIB can ask court for attachment of earnings order Employees only – ask for salary to be paid direct to bankrupt’s estate

o If bankrupt’s income rises or falls IPA/IPO can be reviewed / suspendedo Fail to comply with IPA/IPO can prevent automatic discharge from bankruptcy


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Bankrupt’s home

Immediate sale If debtor does not live with spouse/civil partner/children under 18their share of property goes to TIB who can obtain an order for saleand sell the property

TIB has up to 3 years to do so, after then the property will not formpart of bankrupt’s estate and automatically reverts to bankruptunless the TIB realise their interest, apply for an order ofpossession, apply for a charging order or enter into an agreementwith the bankrupt re their interest

(The 3 years runs from date of the bankruptcy order, although ifbankrupt does not inform TIB of existence of property within 3months of that date, 3 years starts from TIB’s awareness ofproperty existing)

3 years can be extended by court

Shared interests TIB can only claim debtor’s interest

It property is in joint names, other party may have a legal orbeneficial interest or a statutory right of occupation

TIB must apply for court order. Court will consider interests ofcreditor(s), needs of spouse/civil partner/children, their resources,and whether conduct of spouse/civil partner contributed tobankruptcy

Delayed sale No eviction without court consent if debtor only has beneficialinterest in the home or just a right of occupation and home isoccupied by children. Court will consider needs of creditors andchildren as well as the bankrupt’s resources

After 1 year, creditors’ needs take precedence except in exceptionalcases

Spouse/civil partner will be given their share of proceeds for loss oflegal/equitable rights

Security for loans If borrower wishes to secure debt on a home they own with anotherperson then other person normally asked to postpone their interestin favour of the lender or lender will insist debt is taken out jointly


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Official Receiver (OR) Trustee in Bankruptcy (TIB) Officer of court Involved in every bankruptcy When bankruptcy restriction order

made (BRO) must investigatebankrupt’s affairs and report to theircreditors

BRO usually appoints OR as receiverand manager of bankrupt’s estate.

o OR must identify andpreserve bankrupt’s assetsbefore appointment of TIB

OR decides whether to call creditormeeting to appoint insolvencypractitioner as TIB

If they do not, OR acts as TIB

Realise assets Pay creditors If assets insufficient follow priority for

payment ruleso Secured creditors (who,

because of their security canchoose not to participate inthe bankruptcy)

o The expenses, fees and costsof the OR/TIB

o Preferential debts (pensionscheme contributions and upto four months wages owingto employees (£800 cap)including holiday pay (nocap)) Any creditor holding afloating charge over an asset

o Unsecured creditors and otherdebts (wages above cap, tax)

o Interest due on all debts sincethe BRO

o Debts due to the bankrupt’sspouse or civil partner

If a particular class of creditor cannotbe repaid in full, they are prioritisedequally and assets left dividedequally amongst them

Once all assets have been distributedthe OR/TIB calls another creditors’meeting to present their report andgain their agreement to release thebankrupt

Secured creditors

If value of secured asset is greater than debt can enforce security and be paid If not, can take part in bankruptcy

o Can value security and take part in bankruptcy for unsecured parto Can give up security and take part in bankruptcy for whole debto Can enforce security and take part in bankruptcy for remainder (usual)


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Bankruptcy restrictions

Bankrupts are usually encouraged to carry on earning to provide the income to pay off theirdebts.

BRO usually lasts 1 year before it is automatically discharged. Could be shorter / longer than this

An individual subject to a bankruptcy order cannot:

Get credit of £500 or more from a single lender without telling the lender about theirbankruptcy

Act as a director or get involved with setting up, promoting or running a companywithout permission from the court

Carry out a business in a different name from the one under which they were madebankrupt, without telling everyone they do business with the name under which theywere made bankrupt

Act as an insolvency practitioner.

In addition to disclosing all their assets to the TIB the bankrupt must not:

Hide debts/assets from TIB Destroy/falsify records Make false statements to TIB Sell assets to defraud creditors Give preference (fraudulently) to one creditor over any other Leave UK Take assets outside of UK

These restrictions do not apply to a bankrupt’s spouse/civil partner who is not liable for theirdebts (unless they’re business partners).

Prior transactions

Transactions at undervalueo Bankrupt disposes of an asset at significantly less than it’s worth

5 years prior to BRO, TIB can ask court to set transaction aside ifdebtor was insolvent at the time / became insolvent as a result

2 years prior can ask court to set aside in any event Preferences

o Where treat one creditor more favourably than anothero Voluntary action by debtor

Not a preference if done under threat of bankruptcy, nor if creditorabout to call bailiffs to satisfy a county court judgment

o TIB can ask court to set aside preference made 6 months prior to bankruptcyor 2 years if recipient is an associate Trustee must prove debtor insolvent at time / became insolvent as a

result If recipient is an associate, preference is assumed unless debtor can

prove otherwise Spouse / civil partners, relatives or either party and their respective

spouse and civil partners are all examples of associates


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Transactions defrauding creditorso TIB can ask court to set aside transaction at undervalue of purpose was to

make property unavailable to repay creditors No time limit

Onerous propertyo E.g. an unprofitable contracto Ends bankrupts rights and liabilities re contracto Discharges TIB from responsibility for it

Discharge

Usually automatic discharge 1 year after BO made Bankruptcy restrictions are automatically lifted

o Unless they are subject to a BRO / BRU (see below) Former bankrupt is free from debt

o Even if debts weren’t paid in fullo Except

Damages owed due to personal injury arising from former bankrupt’snegligence

Maintenance / matrimonial orders Student loans Fines / debts arising from fraud

Property acquired after discharge belongs to former bankrupt If awaiting outcome of PPI claim where policy sold prior to bankruptcy proceeds go to

TIB Property vested in TIB remains the property of TIB

o Exception 3 year rule on family home Must continue to help TIB realise and distribute assets if this is ongoing

Bankruptcy restriction orders (BROs) and undertakings (BRU)

BRO may be court ordered if bankrupt acted dishonestly / blameworthy manner Last 2 – 15 years Bankruptcy is not discharged

o Further restrictions Cannot be a local councillor, school governor, other public posts


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Conduct Dishonest / blameworthy conduct includes: Fail to keep proper accounting records Preferring (creditors) Transactions at under value Excessive contributions to a pension scheme Failing to cooperate with OR / TIB Gambling / speculative actions

When application ismade

Within 1 year of making bankruptcy orderOutside of this time need court’s consent

Interim BROs Interim BRO made any time between start of proceedings forBRO and outcome of applicationUsually in cases where court feels public interest requires it

BRUs Rather than go to court OR may accept offer of bankruptcyrestrictions from bankruptLasts from acceptance by OR until date stated on BRU

Annulment ofBRO/BRU

Bankrupt can apply to annul / reduce period of BRO / BRUAnnulment of bankruptcy does not automatically annul BRO/BRUespecially where there’s an element of culpability

Register Insolvency service keeps public register Lists BROs, interim BROs and BRUs


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The Effects of Bankruptcy on Investments, Life Assurance,Pensions and TrustsInvestments

Ownership passes to the OR/TIB (unless jointly owned in which case it becomes jointlyowned by the OR/TIB and the other party).

The OR/TIB can then encash the investment to repay creditors, or claim any income arisingfrom the investment to repay creditors.

Investments remain in the ownership of the OR/TIB after discharge, until they are re-assigned to the bankrupt.

Life Assurance policies NOT written in trust

The policy becomes the property of the OR/TIB who can stop the premiums and surrenderthe policy if appropriate, in order to use the proceeds to repay creditors.

Life Assurance policies written in trust

Because the policy is written in trust it doesn’t belong to the bankrupt and therefore cannotbecome the property of the OR/TIB unless it can be attacked as a prior transaction (seebelow), although if the settlor is the bankrupt the OR/TIB can stop the premiums being paid(because they control the bank account).

Married Women’s Property Act 1882 (MWPA)

This is worthy of separate mention as it does get singled out for questions. The OR/TIBcannot claim the policy proceeds even if they can prove the policy was taken out deliberatelyto defraud creditors. If that is the case all the OR/TIB can do is reclaim premiums paid.

Pensions

The rules changed on 29 May 2000 so if a bankruptcy occurred before then the pensionrights are included in the bankrupt’s estate but the OR/TIB can only claim the max PCLS andresidual pension when the bankrupt reaches their retirement date, or age 55 if sooner. TheOR/TIB’s right to do this extends beyond discharge.

After 29 May 2000 all registered pension rights are excluded from the bankrupt’s estate (notunregistered schemes though). All the OR/TIB can do is apply to the courts if they feelexcessive pension contributions have been made that prejudice creditors, and the courts canorder the pension restored to a position as if the excessive contributions hadn’t been madeand the excess paid over to the OR/TIB.

Regardless of the date of bankruptcy the OR/TIB can apply for a court order for pensions inpayment (but not any GMP) to be directed to them for the benefit of creditors.


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In Horton v Henry (2014) it was determined that a defined contribution scheme pension thatis not already in payment, but where it could be because the scheme member is over theage of 55, could not be the subject of a court order.

Unregistered pensions are not protected and would go to TIB.

Trusts

Settlor No effect on trust unless it can be attacked as a prior transaction. Court can set trust aside where settlor transferred assets into it

to deliberately put them out of creditors’ reach at future dateo Dishonesty not requiredo TIB just needs to prove intent

Court can set trust aside if become bankrupt within 2 years oftransfer into trust

o No need to prove insolvency at the time / becameinsolvent, nor that the intent was to deprive creditors

Court can set trust aside if become bankrupt within 5 years ifo beneficiaries include settlor’s associates (see above) or

business partner(s)o No need to show intent to deprive creditorso Trustees of trust (not TIB) can resist if settlor was

solvent at the time and they can prove on balance ofprobabilities that they were

More than 5 years prior to bankruptcy likely to be safe

Trustee No effect on trust property May bring into question trustee’s suitability May wish to remove them Bankrupt cannot be a charitable trustee

Beneficiary No effect on trust property TIB may claim income arising that beneficiary is entitled to If it is a discretionary trust, trustees should probably avoid

making payments


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Alternatives to BankruptcyIndividual Voluntary Arrangement (IVA)

IVA less formal arrangement without ongoing restrictions or stigma of bankruptcy.

The procedure for IVAs is:

Debtor makes formal proposal to creditors to pay all or part of debt(s) If creditors agree, a supervisor (an authorised insolvency practitioner) is appointed to

oversee repayments Debtor and supervisor set out plan for how much will be repaid and what assets are

included Debtor can apply to courts for grant of an interim order to prevent creditors applying

for bankruptcy order while IVA being sorted Creditors’ meeting held where supervisor sets out proposed repayment schedule and

the creditors agree with it (or not)o If creditors representing at least 75% of debt agree then all creditors are

bound to agreemento If the creditors do not agree, they can apply for a BRO

Supervisor makes payments to creditors as per agreed schedule Once all sums paid, IVA ends IVA usually lasts five years If IVA fails, supervisor gives notice to creditors and applies to court for a BRO Advantages

o debtor closely involved in process, avoid restrictions, stigma anddisqualifications of bankruptcy, lower costs.

Deeds of arrangement

Also known as informal arrangements, family arrangements, debt managementplans, debt management agreements

Debtor writes to creditors to ask for an informal arrangement Debtor assess amount they can afford to pay each month after meeting basic needs If creditors agree to amount and timetable can go ahead Quick and cheap to set up But not legally binding

o Creditors can ignore and seek full debt repayment


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Debt Relief Orders (DROs)

Introduced in April 2009. Only suitable for people with assets worth less than £1,000 andqualifying debts of less than £20,000. They last for a year during which time creditorscannot take any action to recover their money. At the end of the year if nothing else haschanged the debtor is free from debt. Qualifying conditions:

Debtor can own a car to the value of £1,000 but all other assets must be worth lessthan £1,000

Debtor can have a disposable income of no more than £50 per month (after tax, NIand household expenses)

Must have lived, had a property or worked in England or Wales at some point in thepast three years

Must not have been subject to another DRO in the past six yearso Cannot borrow more than £500 without informing lender of DRO, act as

director, create / manage / promote a company without court’s consent ormanage a business without telling customers of their DRO

Must not be involved in any other type of formal insolvency proceeding

Administration orders

Alternative to bankruptcy where county court judgment is made against someone Make regular payment to court Court pays creditors Court charges administration fee

o Up to 10% of debt Total debt must be no more than £5,000 Money owed to at least 2 creditors Debtor must have regular income (weekly or monthly) If debtor fails to pay, subject to restrictions similar to those of bankruptcy Advantages

o 1 monthly payment to courto Payment based on affordabilityo Creditors cannot take further action without court consent

Disadvantageso Miss 1 payment, arrangement failso Arrangement noted on Register of County Court Judgments

Affects credit ratingo Must owe less than £5,000 and have a CCJ against them


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Wills and Intestacy

In this module we review the procedures to be followed when an individual dies leaving avalid will, including how a will can be changed after death and those that apply where theyhave not (i.e. the rules of intestacy.) We’ll also examine the impact of the transferable nil rateband and residence nil rate band.

This is a relatively short module and there is considerable overlap with our Inheritance TaxModule so you may find you have some ‘spare’ time this week to catch up on anythingyou’ve missed.


https://www.gov.uk/wills-probate-inheritance.


TopicsWills, Deeds of Variation and DisclaimerIntestacyTransferable Nil Rate Band and Residence Nil Rate BandTaxation of a Deceased’s Estate


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Wills, Deeds of Variation and DisclaimerChecklist for a valid will

Testator (person making will) over 18, of sound mind, under no pressure Written Signed by testator Signature witnessed by 2 independent witnesses

o Witnesses cannot benefit from will or be spouse/civil partner of a beneficiary Ideally dated, kept in safe place, executors keep copy

Procedure where valid will is left

Executors administer estateo Collect debtso Pay taxo Distribute assets to beneficiarieso If there’s a will trust usually named as trustees

Administer trust in line with terms in will Most ‘prove’ will to Probate Registry to get grant of probate (GOP)

o GOP enables estate to be administered (distributed) Scotland grant of confirmation issued by commissary department of

local sheriff’s court Duties of executors

o Determine assets and liabilities of estateo Get probateo Collet assets and pay debtso Settle tax liabilities (income, CGT)o Complete account for HMRC

List of assets Gifts made in 7 years Gifts with Reservation of Benefit

Tax due if sum of above exceeds nil rate plus, whereapplicable, residence nil rate band

IHT due must usually be paid before probate granted If executor unable / unwilling to act, Probate Registry will appoint an administrator to

act in their place

Why have a will?

If no will, laws of intestacy apply and estate may be administered in a way that doesnot reflect what deceased would have wanted

o E.g. co-habitees / unmarried partners have no rights Intestacy rules may not be tax efficient

o Cannot plan to maximise use of exemptions and reliefs To leave instructions for care / guardianship of children under 18


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Mirror wills

Where couples are involved, most common form of will is a mirror will. Here each partyleaves everything to the other on their death and to the children thereafter. So, where thehusband dies first, his estate goes to his wife and on her subsequent death her estate goesto the children. If the wife were to die first, the husband would inherit and then on his deathhis estate would go to the children. There is, however, no obligation on the surviving spouseto leave their estate to their children. If they change their mind, they are free to do so bywriting a new will after the death of their spouse.

Mutual wills

A mutual will does not permit this. A mutual will allows for two people to dispose of theirestates in a particular and identical way. For example, to the surviving spouse on first deathand to a charity on the second. While a mutual will can be revoked prior to the first death ofthe parties involved, it cannot be revoked after the first death because at this point aconstructive trust is established on behalf of the ultimate beneficiary – in this scenario, thecharity. The charity could sue the surviving spouse for breach of contract if they later attemptto revoke their will. Mutual wills are not usually recommended.

Deed of variation

A deed of variation is an IHT planning tool that allows alteration of an inheritance within twoyears of death. The most common occurrence of this question is where someone whoalready has a potential IHT issue has inherited a reasonable amount from a parent. In thiscase a deed of variation can be used to skip a generation and pass the inheritance directlyto grandchildren so that it doesn’t worsen the existing IHT issue. The key features are:

Heirs must be over 18 and of sound mind Normally a deed is executed which must state how estate was originally distributed

and how it is being varied and who will now benefit from this variation If variation is intended to take effect for IHT purposes

o must be a written statement to that effect If it is intended to take effect for CGT purposes (i.e. not treated as a disposal from the

former beneficiary)o must be a written statement to that effect

Variation must be made within two years of death, in writing and signed by theaffected beneficiary(ies).

o Only beneficiary(ies) who inherit less as a result of variation need agree to it(beneficiaries whose inheritance remains unaffected don’t need to agree)

If it means more IHT is payable, then executors or administrators must also sign andagree to the variation

o They can only decline to sign if they do not have enough money to pay extratax

No consideration for money / money’s worth Doesn’t actually need to have been a will; an inheritance by virtue of intestacy can

still be varied An estate can only be varied once If a parent gives up their inheritance for a minor child it will be treated as a parental

settlement and therefore any income over £100 charged to tax at parent’s rate


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If successful, those giving up their inheritances are not deemed to have made a transfer ofvalue – the effect is as if they had never received their inheritance – the will / intestacy is, ineffect, rewritten.

Deed of disclaimer

A disclaimer is similar to a deed of variation but applies to the situation where a personinherits property but does not wish to accept it. They must not already have accepted theproperty.

The property must be disclaimed in writing within two years of death. There must be noconsideration for money or money’s worth.

The disclaimer must contain a statement that it is to have effect for IHT as if the disclaimedbenefit had never been conferred.

The disclaimer is not treated as a transfer of value and the property is treated as if it had notbeen passed to the original recipient, it goes back into the will to be distributed to otherbeneficiaries.

Unlike a deed of variation, the person disclaiming has no choice regarding who then inheritsthe property.

Revoking a will

A will can generally be revoked at any time by either destroying an old will or making a newwill and specifically revoking all previous wills.

Getting married or entering into a civil partnership will usually revoke a previous will, unlessthe will was set up in anticipation of that marriage or partnership.

To revoke a will voluntarily, the testator must have mental capacity, must intend to revokethe will and must affect the revocation by physically destroying the old will or via a formaldocument.

Where a couple gets divorced, then the divorce cancels an ex- spouse who has beenappointed as executor and cancels any benefits due to the ex-spouse unless the wordingsays otherwise. Divorce does not, however, invalidate the rest of the will. A dissolution of acivil partnership is treated in the same way.

Challenging a will

Inheritance (Provision for Family and Dependants) Act 1975 Permits certain people to apply for financial provision from an estate if the will /

intestacy did not make reasonable financial provision for them Unlikely to succeed on other grounds Costly process


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Intestacy

If die without a valid will die ‘intestate’ Distribution of estate governed by

o Administration of Estates Act 1925o As modified by Inheritance and Trustees Powers Bill 2014

Person wanting to administer estate (administrator) applies to Probate Registry forgrant of letters of administration

Duties of administrator identical to those of executor listed earlier Once they have paid IHT due and obtained grant they can distribute estate in line

with intestacy rules

Distribution

1. Spouse or Civil Partner no issue (children / grandchildren and so on)

Spouse or Civil partner entitled to everything absolutely.

2. Spouse or Civil Partner and issue

Spouse or Civil Partner takes personal chattels, first £250,000 of estate (statutory legacy)and 50% of remaining estate absolutely.

Children take remaining 50% of estate absolutely. Any children below 18, estate held onstatutory trust on their behalf until they reach 18 or marry before then.


Children take estate absolutely.

If no children, then:

Grandchildren take place of parents; but if none: Parents; but if none: Brothers and sisters - full blood first, then half blood - (their children take their place if

deceased); if none: Grandparents in equal shares; if none: Uncles and aunts - full blood first, then half blood - (their children take their place if

deceased).

4. No relatives

Crown takes estate.

NB – children include adopted children, if a child is illegitimate can claim if they can provetheir parentage, ex-spouses/civil partners do not inherit, only the directly related uncle / auntinherits (not their partner).


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Inheritance and Trustees Powers Bill 2014

Applies since 1 October 2014 Previously a spouse without children had to share the estate with the deceased’s

close relatives if it was in excess of the statutory legacy amount, a spouse withchildren was only entitled to an income from half of the residue (with the capital heldunder trust for the children until second death)

Purpose of Bill to reflect needs and expectations of modern families Personal chattels definition now includes all tangible moveable property except for

o Cash / cash securities, property solely / mainly in deceased’s estate forbusiness purpose and property held solely as an investment

Inheritance (Cohabitants) Billo Gives rights under intestacy rules to unmarried partners after

5 years 2 years if have child together

o Not yet enacted, so not law yet

Scotland

Statutory prior rightso Rights of surviving spouse / civil partnero Deceased’s main residence (up to value of £473,000)

Plus furnishings (up to £29,000)o Plus

First £50,000 if deceased has children / grandchildren First £89,000 if deceased has no issue

o Take precedence over legal rights (below) Legal rights

o Heritable property = land and buildingso Moveable property = cash, shares, cars, antiques, etc.o Legal rights relate to moveable propertyo ‘Jus relictae’ / ‘Jus relict’ (rights of wife / husband)

Surviving spouse/civil partner half deceased’s moveable estate Reduces to a third if deceased left children entitled to ‘legitim’ (see

below)o ‘Legitim’ (rights of children / their children if they are deceased themselves)

A third of deceased’s moveable estate if there’s a survivingspouse/civil partner

Otherwise half Each child has equal claim - known as representation when a

deceased child’s descendant makes a claim Precedence

o Once statutory prior and legal rights are met the remaining property goes toissue then: Parents and siblings (50:50 split), or 100% to parents if no siblings,

100% to siblings if no parents Surviving spouse/civil partner Grandparents Siblings of grandparents Remoter ancestors Crown

http://www.gov.scot/Publications/2005/12/05115128/51285



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Ireland

1. Spouse or Civil Partner but no issue, parents, siblings, nephews or nieces

Spouse or Civil partner entitled to everything absolutely.

2. Spouse or Civil Partner and issue

Spouse or Civil Partner takes personal chattels, first £250,000 of estate (statutory legacy)and 50% of remaining estate absolutely (1 child), one third (more than 1 child).

Children take remaining 50% / one third absolutely.

3. Spouse or Civil Partner no issue but with parents, siblings, nephews or nieces

Spouse or Civil Partner takes personal chattels, first £450,000 of estate (statutory legacy)and 50% of remaining estate absolutely.

Parents, then siblings, then nephews and nieces take 50% of residue.


Issue; Parents; Brothers and sisters (their children take their place if deceased); Next of kin; Crown.

https://www.nidirect.gov.uk/articles/what-do-if-there-no-will



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Transferable Nil Rate Band and Residence Nil Rate Band

Transferable nil rate band

As you know, transfers between spouses on death are exempt from IHT. As most couplesleave everything to each other on first death this used to mean the first spouse’s NRB waseffectively wasted. To address this HMRC allow the % of the first spouse’s NRB that isunused to be inherited by the surviving spouse, regardless of whether they subsequentlyremarry. The amount carried forward is a % so that it can be applied to the NRB in forcewhen the surviving spouse dies, rather than remain a monetary amount or % of the NRBwhen the first spouse died.

The unused NRB % must be claimed by the legal personal representatives (LPR) of thesurviving spouse within two years of the end of the month of death. There is a maximumlimit of 100% of the prevailing NRB at the time the surviving spouse dies, which basicallymeans that no-one can claim more than 2 x NRB against the value of their estate on death.This situation would occur when someone was married (and widowed) more than once andinherited a % NRB from each spouse that could total more than 100%.

Example:

Keith dies in 1996, leaving his wife Marie one quarter of the then nil rate band of £200,000(this is therefore unused due to the spousal exemption). The balance (three quarters) wassplit between their two children (and was therefore used).

Marie died in June 2018.

Marie’s personal representatives therefore have the following nil rate bands to set againsther estate:

£325,000 for Marie’s own nil rate band.

One quarter of Keith’s nil rate band applied at the rate of the nil rate band at the timeof Marie’s death, i.e. ¼ of £325,000 = £81,250.

In total, Marie’s estate benefits from a nil rate band of £325,000 + £81,250 = £406,250.

** Take care not to use ¾ of the nil rate band at the time of Keith’s death and to remember itis the unused portion that is brought forward, i.e. ¼. **


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Residence nil rate band

6 April 2017 saw the introduction of the residence nil rate band. The CII are always keen totest new measures so it’s important you get your head around this. The good news is it’s nottoo tricky.

The band is worth £125,000 in 2018/19 (rising to £175,000 by 2020/21, increasing thereafterby CPI). It is available where an individual’s main residence is left to a direct descendent(e.g. child, grandchild, spouse/partner of child/grandchild). It is also available where anindividual downsized/ceased to own their home after 7 July 2015 and left assets of anequivalent value to a direct descendant.

The residence nil rate band is transferable if unused in full on first death of a spouse or civilpartner where the second death occurs after 6 April 2017. It is irrelevant when the first deathoccurred.Estates with a net value over £2m will see the residence nil rate band reduced by £1 forevery £2 over £2m threshold.Note that if a property has a mortgage on it, the value of the mortgage must be deductedbefore applying the band. If the mortgage results in the property’s value being less than theavailable RNRB, then some of the RNRB will be wasted.

Example:

Bill died on 1 January 2015 leaving behind his widow Helen. His share of the family homepassed directly to Helen. Helen inherited the rest of Bill’s estate.When Helen died on 1 September 2018, she left their combined estates to their daughterEmma.At Helen’s death the estate was valued at £1,000,000 and included the family home worth£300,000.The following nil rate bands can therefore be used:100% of Bill’s nil rate band £325,000100% of Bill’s residence nil rate band £125,000100% of Helen’s nil rate band £325,000100% of Helen’s residence nil rate band £125,000Total estate exempt from IHT £900,000IHT therefore due on £1,000,000 - £900,000 = £100,000 @ 40% = £40,000.


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Taxation of a Deceased’s Estate

Income Tax LPRs pay any debts

Income received up to date of death All usual allowances and reliefs can be claimed by LPR Tax calculated on usual basis Full personal allowance – even if die early in tax year

Income received after death No personal allowance, personal savings allowance or dividend

allowance All taxed at basic rate

o 7.5% dividend incomeo 20% all other income

CGT LPRs liable at 20% or 28% (depending on nature of assetdisposed of) on disposals made by estate during administrationperiod

Charge on post-death gain only (LPR acquire asset at value ondate of death)

LPR benefit from annual exempt amount in tax year of date ofdeath and following two tax years only

LPR transfer asset to beneficiary is not a disposal for CGTpurposes, beneficiary acquires asset at value on date of death(probate value)

If LPR disposes of main residence used by a beneficiary beforeand after deceased’s death, main residence exemption applies ifbeneficiary will receive minimum 75% of sale proceeds

LPRs can claim capital losses arising in tax year of date of deathand carry them back against gains made in 3 tax years prior todeath (later years first) – may be CGT refund

Inheritance Tax IHT due on estate over available nil rate band at 40%(36% if minimum 10% net estate (estate after reliefs and exemptions)left to charity in will)

Taxes due must be paid by LPR before estate can be distributed If one LPR UK resident then estate usually UK resident for income tax purposes

o Unless deceased neither UK resident nor UK domiciled at deatho Then estate not UK resident if at least one LPR is non UK resident

CGT – LPR takes on residence of deceased at date of death Estate is treated by HMRC as a single entity, LPRs as single body When thinking about tax planning could

o Leave assets that qualify for IHT reliefs to non-exempt beneficiarieso Leave assets that do not qualify for reliefs to exempt beneficiarieso Skip a generation – leave to grandchildren rather than children so IHT not due

twice


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Taxation of Trusts

In this module we review the taxation of the different types of trust. Some of the material willbe familiar to you as we dealt with each of these taxes as we went through the income tax,capital gains tax and inheritance tax modules earlier on in the course. However, here wedraw all of the information we have on the taxation of trusts into one module which we hopeyou’ll find helpful for revision purposes.

You might find the following websites a useful summary:

https://www.gov.uk/trusts-taxes/overview

http://www.tolleytaxtutor.co.uk/taxtutor/files/subscriber/personal-tax/uk-trusts-and-estates/lectures/1d10.pdf

(Both accessed 14 May 2018)

TopicsIncome TaxCapital Gains TaxInheritance TaxCollectives and Unit Trusts


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Income Tax

HMRC views trustees as a single body.

Tax due is entirely separate from any tax they might have to pay in their capacity as anindividual.

Trustees pay tax under self-assessment in the same was as an individual, i.e. two paymentson account each half of the amount paid in previous tax year (Jan 31 of current tax year, Jul31 of following tax year), balancing payment on Jan 31 of following tax year, CGT also dueon that date.

Each trustee jointly and severally liable for all tax, not just a share of it.

Usually nominate one trustee to deal with HMRC, but all other trustees are liable for thenominated trustee’s acts and/or omissions and can collect unpaid tax / charge penalties toany / all of the trustees.

If one UK trustee, then trust usually liable to UK income tax.

Bare/absolute trusts

Trustee

None

Beneficiary

Usually taxed at beneficiary’s rates Their personal allowance, personal savings allowance and dividend allowance can

be used to offset any tax Include trust income on self-assessment

Settlor

Parental settlement rules apply where beneficiary is under 18o Where income from all capital gifted by parent exceeds £100 and settlor is

parent, it is taxed on the parento If income is under £100, taxed on child (beneficiary)


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Trusts for vulnerable beneficiaries

These are trusts created by the Finance Act 2005.

Two types of vulnerable beneficiary covered by the Acto Disabled persons and relevant minor children

A disabled person for this purpose is defined as:o someone unable to administer their property or manage their affairs because

of a mental illness within meaning of Mental Health Act 1983o someone eligible for any of the following State benefits: attendance allowance

(highest or middle rate care component or the mobility component at thehigher rate), personal independence payment, increased disablementpension, constant attendance allowance or armed forces independencepayment

o a person in receipt of a personal independence payment A relevant minor child is one who has lost at least one parent. Trusts that are eligible

are either statutory trusts for the relevant minor, a trust established under the will of adeceased parent or a trust established under the Criminal Injuries CompensationScheme which gives absolute entitlement to trust assets at age 18 and incomebefore then

In both cases, trust property can only be applied for benefit of disabled person /relevant minor child who must be entitled to any income arising

o Can apply £3,000 or 3% of trust fund each year without having to prove it isfor their benefit

o Trust itself could be discretionary, IiP or bare The trustees and vulnerable person must make a joint election to be subject to

favourable tax treatment no more than 12 months after 31 January following the endof the tax year in which the effective date of the election falls

o Once made, election is irrevocable and remains in force until beneficiaryceases to be a vulnerable person, trust ceases to be qualifying, or trust isterminated

Broadly speaking, a trustee’s income tax liability under a trust for a vulnerable person islimited to the tax liability that would have been suffered by the beneficiary were the trust notin existence.

2 amounts need to be calculated

The amount vulnerable beneficiary would pay if they had to account for the taxo This will usually be smaller than the amount the trustee would pay

The amount trustee would pay if they had to account for the tax Take the former away from the latter to give the relief the trustee can claim


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Interest in possession trusts

Trustee

Charged at basic rate, i.e. 7.5% dividend income, 20% all other income No allowances No liability to higher rate tax No relief for expenses of managing the trust, though these are deductible in arriving

at the beneficiary’s income Complete R185 and pass to beneficiary

Trustee expenses

Trustees not entitled to tax relief on expenses for managing trust Trust expenses are deductible in arriving at beneficiaries’ income

o Deducted in set order UK dividends, foreign dividends, savings income, other income

Higher/additional rate tax due by beneficiary is paid on income received afterdeduction of expenses

Example of applying trustee expenses in IiP trust

Taken from Gov.uk (2018)https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/685659/SA950-2018.pdf


(Note that although the example says 2017/18, there have been no changes for 2018/19)

© Image above, Gov.UK


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Beneficiary

Entitled to tax credit for tax paid by trustees Taxed at beneficiary’s rates with tax already paid by the trustees deducted from their

liability/ reclaimable as appropriateo Non taxpayer reclaim tax taken at sourceo Basic rate tax payer no further liabilityo Higher rate tax payer additional 20% / 25% to pay

PA, PSA, DA can be used to offset any tax due If trust income paid directly to beneficiaries rather than via the trust, taxed as per

bare trusts

Settlor

Parental settlement rules apply. If settlor interested trust (settlor/their spouse is a beneficiary) trust income taxed on

the settlor


Trustee

Trustees have a standard rate band (£1,000 spread across all settlor’s discretionarytrusts, minimum £200 per trust)

Income falling within standard rate band charged at basic rate, i.e. 7.5% dividendincome, 20% all other income

Thereafter, 38.1% for dividends or 45% all other income No personal allowances

Trustees’ expenses

Allowable in calculating income chargeable.o Expenses are set first against dividend income, then savings and then other

income.o Expenses are grossed up at the rate appropriate to the income they are set

against (i.e. 7.5% dividend income, 20% otherwise).o If trust has exempt income, allowable expenses reduced in proportion to ito Premiums on life policies and investment adviser fees not allowable expenses


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Example of trustee expenses for discretionary trust

Taken from Taxation.co.uk (2018)

https://www.taxation.co.uk/Articles/2017/10/10/337066/tax-treatment-discretionary-trusts

(Note that although the example says 2017/18, there have been no changes for 2018/19)

© Image above, Taxation.co.uk

Beneficiary

Only liable if a distribution is made out of the trust to them Income paid out as trust income and carries 45% tax credit

o Personal savings allowance, starting rate for savings income and dividendallowance therefore of no use

Because some income will fall within the standard rate band and thereafter dividendincome is only taxable at 38.1%, when income distributed becomes trust income at45%, the trustees must pay the additional tax to cover the 45% tax credit

o This means the beneficiary may receive less than the actual net income of thetrust

o Trustees might like to ensure they only pay out 55% of any gross dividendincome received to ensure they have the funds to pay the additional tax


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Non-taxpayer can reclaim the 45% tax paid. BRT can reclaim 25% tax and HRT 5%.An ART has nothing more to pay but cannot reclaim anything

Any reclaim is made by completing form R40 If the trustees decide to accumulate income rather than pay it out, the tax paid on

that income is carried forward in a ‘tax pool’o If that income is then distributed in later years the brought forward tax is

available to ‘frank’ the 45% tax credit and therefore reduces any additionalliability the trustees may have on distributions of dividend income where the45% tax credit exceeds the 38.1% tax the trustees must pay on that income

Settlor

Parental settlement and settlor interested trust rules apply.

NB If settlor receives capital sum from a trust they are subject to income tax up to amount ofany undistributed trust income. If capital sum is more than this, balance is carried forward forup to 10 years. The term ‘capital sum’ includes loans and loan repayments.

If a beneficiary receives a series of capital sums HMRC could try to tax them as income.


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Capital Gains Tax

If one UK trustee, then trust usually liable to UK CGT tax Gift into trust may be disposal for CGT purposes

o Holdover relief may be available depending on the type of trust and nature ofasset disposed of (see below)

Any gain is worked out on the same principals as a gain for a private individual Trust exemption

o half the annual exempt amounto if more than one trust it is shared between them

minimum = 1/5 of half annual exempt amount

Bare/absolute trust

Gift into trust is a disposal – holdover relief available if business asset Beneficiary taxable at their own rates on disposals by trustees They can use their annual exempt amount (£11,700 in current tax year) and any

taxable gains will be taxed at the appropriate rate given their other income,o 10% for those whose taxable income is under the higher rate tax threshold

(18% where the gains relate to non-exempt residential property)o 20% for those whose income is above that threshold (28% where the gains

relate to non-exempt residential property) Beneficiary must include the gains on their self-assessment form and pay tax due


Trustees are charged the amount of CGT that would be due if gains were assessedon the beneficiary


Gift into trust is a disposal CGT may be payable by the settlor

o Holdover relief available on all assets Unless it is a settlor-interested trust NB It was business assets only for trusts established pre-22nd March

2006o Trustees then acquire the asset at settlor’s base cost

Trustees pay tax on any disposals in excess of trust’s annual exempt amount duringthe life of the trust at 20% / 28% depending on nature of asset

Holdover relief is available on any assets leaving the trusto Election should be made jointly between trustees and beneficiaries.

Where life tenant of pre-22 March 2006 dies, assets are revalued at market value atdate of death.

o No CGT charge on trustees for any increase in value between the assetentering the trust and the death of the life tenant (unless holdover relief wasclaimed by the settlor, in which case the held over gains are chargeable withtax payable by the trustees)

o The same rules apply to immediate post death interest trusts, trusts forbereaved minors, the death before 18 of a beneficiary under an ’18 -25’ trustand trusts for the vulnerable and disabled trusts

o For trusts created on or after 22 March, there is generally no uplift on thedeath of a life tenant


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Gift into trust is a disposal CGT may be payable by the Settlor

o Holdover relief is available on all assets unless it is a settlor-interested trusto Trustees then acquire the asset at the Settlor’s base costo If not settlor-interested at outset but become so within 6 years of the end of

the year of disposal relief is withdrawn Trustees pay tax on any disposals in excess of trust’s annual exempt amount during

the life of the trust at 20% / 28% depending on nature of asset Holdover relief is available on any assets leaving the trust

o Election should be made jointly between trustees and beneficiaries. Losses can be transferred to the beneficiary

Main residence exemption

If beneficiary occupies a house which is the property of a trust as their mainresidence, trustees can claim principal private residence exemption (PPR) when sell

o Not usually available if holdover relief claimed when property put into trust

Settlor-interested trusts

CGT charged on trustees at the higher rates of 20% / 28% Settlor interest means if they, their current living spouse or minor children benefit in

any way from the trust propertyo Does not apply if settlor dies in tax year or not UK resident

Offshore trusts

A UK domicile who has put assets into an offshore trust is liable to CGT on trust gains if theyhave an interest in (spouse/civil partner, business, child, grandchild, spouse ofchild/grandchild the trust) and are a UK resident in the year in which the gain arises.

UK resident beneficiaries are liable to CGT on distributions of gains from offshore trusts.


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Inheritance Tax

IHT payable by trustees depends on the availability of the settlor’s nil rate band, the terms ofthe trust, available exemptions and CLTs made by the settlor in the previous 7 years.

Bare trust

Transfer of value to bare trust is PET Settlor survives 7 years, PET drops out of their estate

o If not, beneficiary liable for any IHT dueo Reduced by availability of nil rate band and taper relief

Value of bare trust included in beneficiary’s estate for IHT purposes


Transfer of value to trust for vulnerable beneficiary is PET regardless of type of trust Trust not subject to periodic / exit charges Settlor survives 7 years, PET drops out of their estate

o If not, beneficiary liable for any IHT dueo Reduced by availability of nil rate band and taper relief

Value of trust included in beneficiary’s estate for IHT purposes


IiP set up pre 22 March 2006 IiP set up on / after 22 March 2006(comes within relevant property regime)

Creation of trust during settlor’s lifetimewas a PET

No tax charge if settlor survived forseven years

If not, trustees liable for IHT if failed PETin excess of available NRB

Trust assets generally regarded asbelonging to the beneficiaries with an IiPand their share forms part of theirestates for IHT purposes

If IiP changes e.g. on death of absolutebeneficiary, life tenant or there’s anappointment made under a flexible trusta transfer of value takes place

This will usually bring the IiP into the‘new’ regime and be a CLT

Any tax due calculated using formerbeneficiary’s rates and exemptions, butpaid by trustees

Creation of the trust is a chargeablelifetime transfer

IHT treatment is now exactly the sameas per discretionary trusts (see nextpage)

Trust subject to periodic and exitcharges UNLESS it is either a disabledor vulnerable person’s trust, or an IiPcreated on death by will or intestacy(IPDI).


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Discretionary trust

Creation of a discretionary trust is a chargeable lifetime transfer, chargeable at 20%on the extent that the transfer takes the settlor’s cumulative total over the NRB

There may be further tax to pay if the settlor dies within seven years of creating thetrust, although taper relief will be available to reduce the IHT if the transfer uses upall of the available NRB

Because no beneficiary has a right to income or capital from a discretionary trust,there is nothing to include in the value of their estate on death

An IHT periodic charge is made on the tenth anniversary of the creation of a discretionarytrust.

This is 30% of the lifetime rate of 20%, i.e. 30% x 20% (or 6%) of the excess value of thetrust over the current NRB.

This is payable by the trustees.

Example of applying periodic charge

10 years after the trust was established, the value of the assets was £400,000. Theavailable NRB at this time is £325,000.

£400,000 - £325,000 = gives us a figure of £75,000 in excess of the NRB.

This is then taxed at 30% of the lifetime rate:

£75,000 x 30% x 20% = £4,500.

An IHT exit charge is payable every time a capital distribution or appointment is made to abeneficiary.

It is generally based on the number of quarters the last periodic charge.

The distribution is multiplied by the number of quarters over 40 and the effective rate at theprevious 10-year periodic charge.

Example of applying exit charge

Our fund has now grown to £450,000 and a distribution of £300,000 is made after 11years and 8 months.

Number of whole quarter years since periodic charge = 6

The effective rate at the time of the periodic charge was 1.125%. We work this out bydividing the value of the fund at that time by the tax charged at that time andexpressing it as a percentage. ((£4,500 / £400,000) x 100) = 1.125%)

Therefore:

£300,000 x (6/40) x 1.125% = £506.25 tax payable

NB. This is a simplified version of the calculation which can be very complex. Care shouldbe taken to keep assets within a discretionary trust to below the available NRB toavoid/minimise 10 yearly/exit charge.


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Trusts for minors

Finance Act 2006 created two new trusts

Trusts for bereaved minors 18 – 25 trusts Death of parent via will / intestacy Under Criminal Injuries

Compensation Scheme Must give absolute entitlement to

income and capital at 18 Assets treated as belonging to child

for IHT purposes No periodic / exit charges providing

absolute entitlement to trust propertyat 18

Death of parent via will / intestacy Under Criminal Injuries

Compensation Scheme Absolute entitlement to specified

beneficiary at 25 Exit charges apply from age 18 when

trust assets no longer deemed to beowned by the child for IHT purposes

Offshore trusts

Subject to UK tax if UK resident trustee If no UK resident trustees then usually no UK tax unless settlor or their associates

can benefit Beneficiaries can be taxed if capital is distributed from a trust where income has

accumulated No CGT on gains if no UK resident trustee unless settlor or associates can benefit Trustees can be charged to CGT on ‘stockpiled’ gains where capital distributed to UK

beneficiaries If UK dom makes transfer to offshore trust this is transfer of value for IHT


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Collectives and Unit Trusts

Trustees of trusts holding assets capable of producing income and/or capital gains (such ascollectives including unit trusts and OEICs, but not ISAs) need to complete online applicationto inform HMRC.

Bare Trust Discretionary TrustTransfer in

Deemed disposal, donor liable to CGT atmarginal rate

Transfer in

Deemed disposal, donor liable to CGT atmarginal rate unless holdover relief claimed(holdover available because gift intodiscretionary trust is chargeable lifetimetransfer)

IHT

Gift is a PET (unless other exemptionsapply), outside donor’s estate after 7 years, ifdonor dies sooner becomes chargeable

IHT

Gift is a CLT (unless other exemptionsapply), 20% lifetime charge paid at outset ifCLT exceeds cumulative nil rate band,outside estate after 7 years, if donor diessooner becomes chargeable (credit will begiven for any tax paid at outset)

Income tax

Assessed on beneficiary at marginal rateunless parental settlement rules apply,personal savings allowance / dividendallowance available as applicable

Income tax

7.5% dividends, 20% interest with standardrate band, thereafter 38.1% and 45%respectively, further tax may be payable ifincome paid out as tax must be accountedfor at 45%, income paid out as ‘trust income’therefore personal savings allowance /dividend allowance not available, recipientmay be able to reclaim some of the tax paidby the trustees if they pay tax at less thanthe additional rate

Capital gains tax

Assessed on beneficiary at their rate with fullCGT annual exempt amount available

Capital gains tax

Assessed on trustees at 20% with up to halffull CGT annual exempt amount available(minimum 1/5th of half).


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Financial Planning and Trusts

In this module we review how life assurance and pension policies are placed into trust andthe reasons for doing so. We examine the use of trusts to mitigate the inheritance taxpayable on an individual’s estate.

TopicsLife assurancePensionsTransfers on Lifetime and on DeathReviewing TrustsIHT Planning Arrangements


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Life Assurance

Can be placed into trust at outset or (usually) by assigning an existing policy.

Uses

Protect family, e.g. protection policies School fees Protect partnership - to buy out a deceased’s partner’s share of a partnership from

their estate or to compensate estate of a deceased partner for loss of their share of apartnership where this is left to a surviving partner(s) in deceased’s will

Directors’ share protection – to provide funds on death to buy out deceased director IHT planning – term assurance to pay tax potentially due on PET, whole life to

protect estate, savings plans to place money outside of estate

Statutory Trusts

Trust created by law e.g. rules of intestacy, Married Women’s Property Act 1882 (MWPA)

MWPA

Own life At outset No existing policies Benefit spouse / civil partner +/or children only

o Can be unnamed to account for future children / remarriageo Benefits will go to the spouse on claim / maturityo If spouse named, court could vary terms of trust on subsequent divorce but

this is not automatic (divorce does not destroy named spouse’s interest)o Children includes illegitimate and adopted but not step-children or

grandchildren.o Can specify children must reach certain age to benefito Can restrict to children of existing marriage or to legitimate children if so wisho Should child pre-decease parent, their share can go to their own children /

siblings as per policyholder’s wishes and terms of trust Usually bare / absolute trusts (therefore gift = PET)

o Not flexibleo Can set up power of appointment trust

Class of beneficiaries must only be spouse / civil partner +/or children But then subject to relevant property regime

i.e. subject to entry (CLT), exit and periodic charges Policyholder need not be married/in a civil partnership No need to be resident/domiciled in England/Wales (even though Act only applies

here) No joint policies No life of another policies Life policies only No need to name Act in policy for it to take effect, but best to do so for clarity Higher degree of protection from creditors on bankruptcy


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Trusteeso Appointed by policyo Usually spouse/civil partner and policyholder

On death spouse/civil partner only need policy and death certificate toclaim proceeds

o Can vest power of appointment in themselves / others Can include power to remove trustees

o If policyholder only trustee on their death their LPRs takeover They will require grant of probate / letters of administration to claim Quicker if ensure there’s another trustee (no need to wait for

grant/letters) Scotland – Married Women’s Policies of Assurance (Scotland) Act 1880

o Main difference if policyholder bankrupt within 2 years of taking out policy, TIBcan claim premiums paid.

o Also – delivery does not apply (see below) Northern Ireland – Law Reform (Husband and Wife) Act (Northern Ireland) 1964

o Differences Joint policy with spouse/civil partner allowed Child includes stepchild, illegitimate, adopted and legal guardian

Non-statutory (private / express) trusts

Created by declaration of trust Advantages over MWPA

o Wider beneficiaries, more flexibility, decide who will ultimately benefito Can put existing policy under trust

Must ensure 3 certainties are meto Word, subject, object Knight v Knight

Process for new policyo Proposer (settlor) completes declaration of trust

Life office issues policy under trust Settlor sole trustee

o Trust gives trustee (settlor) power to appoint other trusteeso Trustee completes deed to appoint other trustees

Legal title of policy then assigned to all trusteeso JL2D policies should usually have a 3rd trustee so that on 2nd death there is a

trustee left to claim and distribute the proceeds to the beneficiarieso No stamp duty

Process for existing policyo Policy must be assignedo Execute trust deed

Policyholder assigns policy to trustees for benefit of beneficiaries Deed usually states policyholder will continue to pay premiums

o Should inform life office of assignment Keep deed with life policy

o Assignment transfer of value for IHT


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Scotlando Delivery needed for a trust to be valid (except MWPA)

Trust property must be physically delivered to trustees/beneficiarieswith intent to create trust

Or register trust deed in Book of Council and Session

Or ‘Intimation’ (document confirming recipients informed oftrust)

o Can be made on behalf of minorso Life offices usually offer choice of Scottish / English law

Scottish court can overrule choice and decide Scottish law appliesunless deed expressly states English law applies

Claims

Life office can only deal with trustees (they are the legal owners) Trustees have right to claim on death / maturity

o If trust deed doesn’t specify then under Trustee Act 1925 s.15 have power tosurrender, make paid-up, and borrow

o Have duty of care to protect property anyway Covers making paid-up and borrowing to pay premiums

o Proceeds must go to beneficiarieso If convert any policy, must ensure it continues to be under trust

On claim need to provideo Trust deed, policy document, deed of appointment of (new) trustees (not

MWPA), deed of retirement of trustees, death certificate of any trustees whoare deceased

o Life office will expect all trustees to sign form of discharge acknowledgingpolicy has paid out

o Life office may agree to pay direct to beneficiaries at trustees request (willrequire identify check for beneficiaries and trustees to sign indemnity form) ormay only pay to trustees as legal owners

Beneficiaries

Cannot usually claim against life office Can only deal with their beneficial interest under the trust

o Can assign / mortgage this if over 18o Person they assign / mortgage to should inform trustees of their interest

Can bring trust to end under Saunders v Vautier 1841 rule

Bankruptcy

If life policy not under trust goes to TIB Under trust cannot usually go to TIB

o MWPA almost totally protected If proved set up to deliberately defraud creditors, TIB can only recover

premiums paid from policy proceeds Proceeds cannot be used to pay debts


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Taxation

Income taxo Chargeable event on a non-qualifying life policy (e.g. investment bond) may

give rise to a chargeable gain Death, assignment (though not to beneficiary), maturity, part surrender

over 5% cumulative annual allowance, full surrender 5% is based on original amount invested 5% can be taken each year and the tax is deferred until final

encashment If not used in one year, 5% can be carried forward (providing

no more than 100% taken overall)o If tax due then for UK based life policies there is a 20% tax credit, offshore

policies no credito Settlor pays

If settlor alive and UK resident just before gain tax assessed on them Same if settlor dies in tax year of gain Settlor pays at highest rate less 20% credit (if onshore) Top-slicing available Can recover tax from trustees If does not reclaim = transfer of value for IHT unless can cover it with

exemption (annual / normal expenditure)o Trustee pays

If gain arises in tax year after UK resident settlor dies If settlor was non UK resident before gain and trustees UK resident Trustee tax depends on type of trust

Discretionary - if gain falls within standard rate band no tax topay on onshore bond (20% credit covers it) 20% on offshore.Over standard rate band additional 25% onshore bond, 45%offshore.

Bare trust, beneficiary assessed to tax unless parentalsettlement rules apply

o Beneficiary pays Trustees not UK resident, settlor not UK resident just before gain or

died in previous tax year UK beneficiary pays at own rateso Dead settlor rule (trick)

Only applies to policies taken out and put into trust pre 17 March 1998and settlor died before then

Liability falls on settlor but because settlor is dead there is no liabilityas long as policy not altered to extend term / increase benefit sincethat date

o Assign policy to beneficiary Rather than cash in policy and giving rise to a chargeable gain, can

assign policy to beneficiary Beneficiary could then control when to cash in and pay tax at

their own rates


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CGTo Only arises where policy assigned for money/money’s worth

Unlikely to happen with trust policy

IHTo Regular premium life policy

Premiums are transfers of value May be exempt under annual exemption (£3,000 a year) or normal

expenditure from income Under latter criteria must be regular, paid from net income and

not affect settlor’s standard of livingo Single premium

Premium transfer of value Bare / absolute / vulnerable beneficiary trust = PET

Additional premiums, if made, also PETs Other trusts = CLT

IHT 20% of value exceeding NRB Die in 7 years charged at death rate (40%) less amount paid

during lifetimeo Taper applies after year 3

Periodic and exit charges may applyo Assignments

Transfer of value Greater of

o Premiums paid less surrender value paid out (if any)o Market value (surrender value)

Term assurance market value usually negligibleo Unless life assured in ill-health

Unit-linked policyo Can have a reduction if fund value has fallen since

outseto Not for bid-offer spread

o Annuities and related life policies (back to back) Covered in next module

o Death of life assured Generally no charge to IHT a trust policy outside deceased’s estate

Exception if transfer into trust was a CLT and further tax is nowdue


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Pre-owned asset tax (POAT)

Anti-avoidance measure to prevent setting up IHT schemes to avoid GWR rules Does not usually apply to life policy trusts

o May apply to business trusts POAT is an income tax charge (not an IHT charge) On gifts made since 18 March 1986 (despite only being introduced in 2005!) Converts benefit someone gets from having free or low-cost enjoyment of an asset

they formerly owned (or provided the money to buy) into a cash equivalent valuewhich is added to their other income for the year and liable to income tax

For land, the cash equivalent is the market rent For chattels and intangibles stuff it is the official income tax interest rate (currently

2.5%) of the capital value of the asseto For intangible assets, only applies if asset held in a settlement (i.e. not a bare

trust) and if the donor/their spouse can benefit from the income Land or chattels must be re-valued every five years No tax is payable if the cash equivalent is less than £5,000 in a tax year If full market rent/value is paid for use of the asset there is no POAT If a contribution towards the full market rent/value is paid, this amount is deducted

from the cash equivalent value (and therefore reduces the income tax chargepayable)

If do not wish to pay tax cano Bring benefit to an end, dismantle arrangement giving rise to benefit, pay

market rent, opt out and elect for benefit to be treated as GWR (electionirrevocable, done by 31 Jan after end of tax year liability to tax charge arose) Reasons to elect as GWR

Asset may qualify for BR/AR at 100 / 50%, spouse exemptionmay apply, asset fall within NRB, owner young/healthy

Reasons not to elect as GWR Can afford charge, short life expectancy, charge under £5,000

(and therefore not payable), prefers to keep IHT burden to theirestate rather than beneficiary

Business trusts

Make funds available on death / critical illness of owner of ltd company / partnership Take own life policy in trust Sum assured value of share in company/partnership Use discretionary trust

o Beneficiaries other shareholders/partnerso Settlor included so they can get the proceeds paid to them if leaveo Partners/children of shareholders/partners should not be beneficiaries

Cross-option agreemento Surviving shareholders/partners have option to buy deceased’s shareo Deceased’s personal representatives have option to sello If either party exercises their option, the other must comply

Providing they do so within permitted time frameo Share qualifies for BR if owned for 2 years

But not if binding or contract sale used Life policy premiums paid into trust are CLTs unless fall under annual / normal

expenditure out of income exemptions Periodic/exit charges unlikely on term policy unless life assured in ill-health


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Not deemed as GWR if all set up on purely commercial basis (ideally all partnersshould have reciprocal policies, if not HMRC may deem GWR for partner who has apolicy and access to it)

Proceeds won’t form part of deceased’s estate POAT charge could arise but due to market value (surrender value) of term policy

being low unless life assured in ill-health it is unlikely

Income tax and CGT for non-UK resident trustees / settlors

Trust non-UK resident if all trustees outside UK If 1 trustee in UK, trust is UK resident if settlor was UK res / dom when trust was set

up or had funds added to it If 1 trustee in UK, but settlor not UK res / dom when trust set up or had funds added

to it, then trust non-UK resident If trust becomes non-UK resident

o Assets treated as disposed of and bought back straightaway at market valueo Gains charged to CGT at settlor’s rate if they have an immediate or potential

future right to income / capital in the trust UK res & dom settlor can be taxed on gains in non-UK resident trust

o If they have an interest in the trust in tax year gain ariseso Can reclaim tax from trustees

If settlor not charged CGT, UK dom and UK res beneficiaries will be if they receivecapital payments

o Tax may be increased if gains not distributed in tax year they arise or the yearafter

If beneficiary dispose of interest in non-resident trust, gain is chargeable

Relevant life policies Employer funded life policy Written on life of employee Favourable tax conditions if

o Sum assured pays out lump sum on death before 75o No surrender valueo Any ill-health benefit only pays out while still employedo Beneficiaries individual / charity either direct / via trusteeso Main purpose of policy not tax avoidance

If conditions met premiums not taxable benefit for employee (no income tax due), noNI for employee or employer


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Discretionary trust should be set up at same time as life policyo Death payment goes to trusteeso Trustees decide which beneficiaries to pay it to

Usual to include spouse/civil partner, children, grandchildren Employee can make non-binding nomination Employee also beneficiary in case need to make terminal illness

benefit payment If employee stops working and employer carries on paying premiums

should remove employee as beneficiary otherwise = GWR If new employer starts to pay then can remain

o No IHT on creating discretionary trust, no periodic / exit charges unless in ill-health

o Payment of benefits no implications for IHT (outside estate)o Trustees do not have to pay out benefits in one go

Could invest for beneficiaries and pay out income stream But, once death benefits paid, belong to trustees If exceed NRB periodic/exit charges may apply


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Pensions

Defined benefit schemes

Benefit is proportion of salary at retirement Set up under trust

o Trustees hold pension scheme assets for scheme memberso Scheme rules determine how these are paid out

Usually pay lump sum death-in-service under discretionary trusto Usually exempt from IHTo Trustees have total discretion over who to pay lump sum within beneficiary

classes named in scheme ruleso Member cannot direct trustees therefore lump sum not part of their estate for

IHT purposes May be asked to complete ‘expression of wish’

Member should keep this up to date Not binding on trustees Trustee have duty of care to consider all potential beneficiaries

Spouse / civil partner / dependent children Can include spousal bypass trust (see below) Trustee usually follow members wishes but not obliged to

NEST death benefits paid under member’s direction Therefore included in their estate

Money purchase schemes

Usually set up under master trust / deed poll (deed made and executed by one party)/ individual trust

Pension provider is trustee Scheme rules determine how death benefits dealt with

o Nominationo Personal discretionary trusto Bypass trust

Trustees have discretion as to who to pay to so as to keep outside member’s estate

Inheritance Tax

Usually pension contribution not a transfer of valueo Unless in ill-health at timeo Or if die within 2 years of making it

Putting an existing RAP or PP in trust is a CLT.o The value of the transfer is the difference between the open market value of

the plan and open market value of the rights retained by the policyholder. Inpractice this value is negligible as pension policies have no surrender value. May therefore be covered by exemption

o Provided the policyholder is in good health at the time of transfer HMRC willregard the value as nominal, although they may challenge this if thepolicyholder dies within two years.

o It is not a GWR because pension rights are not assignable.o Future premiums are treated as a transfer of value.


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Nominationso Member can nominate who should get their death benefit

Revocable Update at any time Usually spouse/civil partner/ dependent children / bypass trust

o Not binding on trustees therefore benefit free from IHTo Cannot use on retirement annuity contracts unless written under trusto Under flexi-access can have dependents and nominees

On death of either can then go to successors Can keep pension out of estate for many years

Personal discretionary trustso Alternative to nominationo Lump sum assigned to trusto Trustees decide on who receives benefits

No tax benefits over and above normal route Downside cannot be revoked if change mind

Life covero Tax relief withdrawn on new personal pension term assurance on 6 Dec 06

Though still available where employer pays premiums Retirement Annuity Contracts (RAC) (s.226 policies)

o No discretionary powerso Unless use personal discretionary trust death benefits paid to estate and

subject to IHT Cannot use bypass trust

Bypass trustso To avoid unspent benefit accruing in estate of second spouse to die can

direct lump sum death benefit to spousal bypass trust May not suit flexi-access

o Tax implications No IHT when death benefits paid into trust May be periodic / exit charges Trust deemed to have started when member joined pension scheme

(rather than date of their death)o Structure

Member establishes discretionary trust with small gift (e.g. £1) Beneficiaries are spouse / civil partner / children / grandchildren

Can receive outright payments / loans at trustees discretion Surviving spouse/civil partner is a trustee so has some control Member should leave letter of wishes to guide trustee Trust has wide investment powers Does not form part of beneficiaries estates on their death


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Transfers on Lifetime and on Death

Consider

Are you willing / able to make gifts during lifetime or do you need to wait ‘til death Former more effective for IHT

o But no point saving tax at expense of survivor’s standard of living Former less effective for CGT

o Because gifts are disposals for CGTo Although holdover relief may defer gaino Whereas no CGT due on death

Could chose to hold on to assets that benefit from BR / ARo But, may not be assets they’d normally invest in (too risky) or may be

worthless on death (shares in family firm run by deceased)o Also, rules may change and reliefs withdrawn

Lifetime transfers - PETs

Gifts to individuals / bare / absolute trusts more IHT efficient than to discretionarytrust (because they are PETs, not relevant property trusts therefore no periodic / exitcharges)

o But less flexible and immediate loss of controlo Discretionary trusts can counter this but less tax efficient (CLT, periodic & exit

charges if exceed NRB) Take out 7 year term to cover potential tax on estate as a result of PET eating up

NRBo If PET exceeds NRB, 7 year decreasing term assurance to cover potential tax

on gift Write both in trust to be outside estate

When making outright gift considero Can donor manage without any income asset produces?o Does it qualify for any reliefs (and would gifting it mean these reliefs would no

longer apply?)o Is CGT holdover relief an option?o Is maximising pension contributions a better option?

Lifetime transfers - CLTs

Gift into discretionary trust CLT Either trustees or settlor can pay the tax

o If settlor pays this is a further gift Useful where tax benefits evident and ultimate beneficiary not yet chosen

o Also, for assets likely to appreciate in value Growth will be outside the estate But – need to watch for periodic/exit charge if exceed NRB

o Holdover relief available


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Order of gifts

Annual exemptions used in date order Make CLT before PET

o Minimise 10 year charge as if PET fails and it had been made first it will betaken into account in assessing available NRB

Make PET before CLTo Otherwise IHT paid on failed PET will be higher as will have to take into

account CLT Best just to leave 7 years between gifts to avoid issue!

Lifetime transfers and transfers on death

IHT paid at 40% on net estate over NRB and RNRB (where available, includingtransferable bands)

o 36% where 10% of net estate left to charityo LPRs must claim any transferable bands

BR and AR may give 100% relief on deatho But, AIM listed / unquoted companies may be outside appetite for risk

Pilot trusts

Pilot discretionary trust can reduce / eliminate periodic and exit charges Settlor establishes a number of pilot trusts on consecutive days with nominal amount

in eacho Then add larger amount in excess of NRB across all trusts on same day

Either during lifetime or on deatho Each pilot trust has its own NRB at 10 year anniversary

Rysaffe principalo But - Anti-avoidance rules apply from 6 April 2015

Must not make same day additions or will not work Trusts made before 10 Dec 2014 protected

Exemptions

Annual exemption £3,000o Pay premiums on life policy under trust, proceeds free from IHT and can be

used to pay IHT on estateo Use it to pay pension contributions for child (£2,880 net = £3,600 gross)

Small gifts exemption £250 Marriage, charity etc.


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Choosing investment wrapper

Investment bonds favoured for IHT planning Choice depends on

o Entitlements of settlor and their beneficiarieso Type of trusto Expenses of trusto Need for income / capital

Tax considerationso CGT

– ½ annual exempt amount, 20% (28% if non-exempt residentialproperty)

CGT regime less onerous tax than income due to annual exemptamount and lower rates

o Income – dividends 38.1% (7.5% standard rate band / IiP Trust), savings 45%(20% standard rate band / IiP Trust) Now paid dividends and savings income usually paid gross trustees

will have to report such income to HMRC Dividend allowance / personal savings allowance not available to

trusteeso May therefore prefer collectives to bonds

But bonds don’t produce an annual taxable income which keepsadmin costs down

Bonds can be assigned into and out of trusts without triggering incometax liability

Can also transfer segments rather than whole bond forbeneficiary to subsequently encash at their own rates (if theseare likely to be less than trustee rate)

Transfer of a collective into a trust may benefit from CGT holdoverrelief so no tax payable at time of transfer

Beneficiary may be able to use their own CGT annual exemptamount when collective transferred to them out of trust at laterdate

5% withdrawal facility on bond is used in a number of packaged IHTplans (see later on in this module)

Adviser fees could be taken from this (need to take care not toexceed 5%)

Could make capital withdrawals from collective too…but maylead to CGT liability

Income or capitalo Regular capital payments may be treated as income (Brodie’s Will Trustees

1933)o (Stevenson v Wishart 1987) regular capital payments were treated as

capital


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Reviewing Trusts

After death of trustee

Should not affect trust property or management Remaining trustees can continue

o New trustee can be appointed

After death of beneficiary

Other beneficiaries may be entitled to greater share of trust propertyo Or deceased’s share may go to their estate / follow rules of intestacy

If pre-22 March 2006 IiP / IPDI their share is included in their estateo Trustees pay any tax due

After death of settlor

Trustees will receive policy proceeds Should check IHT consequences before distributing them

After illness of trustee

Loss of mental capacity may come on graduallyo Could chose to retireo Settlor cannot dismiss a trustee who has lost capacityo Can be replaced under Trustee Act 1925 without applying to court providing

they do not have beneficial interest in trust propertyo If have LPA / EPA attorney cannot take over as trusteeo Other trustees should seek legal advice

After illness of beneficiary

Won’t affect entitlement Trustees might want to consider if illness affects their financial needs

Bankruptcy

Trusteeo Usually required to retire under terms of trusto If pension / charity trustee legally obliged to retire

Settloro Statutory trust almost totally protected from creditorso Less protection for non-statutory trustso Court set aside trust of ‘dishonest settlor’

Beneficiaryo Court can give trustee power to allow sale of trust property for impoverished

beneficiary


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Change of relationship status of beneficiary

Marriageo New spouse/civil partner may become potential beneficiary

Separationo Spouse / civil partner may no longer be includedo Or if main beneficiary is their spouse / civil partner then they may not be

included themselves anymore Divorce

o Matrimonial Causes Act 1973 Can vary trusts of marriage settlement

o Trust assets are usually taken into account in divorce settlement

Changes in income and wealth

If settlor’s wealth has increased, may wish to gift more into trusto Would need to consider CGT / IHT liabilityo May need to be a separate trust if this would affect existing trust’s tax status

If settlor’s income altered may wish to up/lower ongoing contributions into trust If trust income has increased / decreased

o Lead to changes of payments to beneficiaries / investment strategy If beneficiary’s income changes may be less or more reliant on trust income Different beneficiaries may have different needs Some trustees may pay same amount to all beneficiaries Beneficiary may require capital to buy first home / attend uni

Disputes

More common with discretionary than bare trusts May arise due to decisions made / not made by trustees, performance of trust

investments, actions made / not made by trustees, requests by beneficiaries notbeing met, conflicts between beneficiaries

Arbitration process might be stipulated in the trust deed to resolve disputes For cases involving families, mediation may be preferred to legal action Beneficiaries could call for trust to come to an end if conditions required under

Saunders v Vautier are met If not, legal proceedings can be brought

Other changes

Economico Market conditionso Must keep investment under review

Lawo Should review trust regularly

Taxo Rates may changeo Exemptions may change


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Trust review checklist

Investments in names of all trustees Trust deed and trust law being complied with Investments all appropriate and suitable Economic / tax changes meaning a change investment is required Changes to settlors, trustees, beneficiaries Changes to beneficiaries’ capacity for loss / risk appetite Changes to beneficiaries’ income / capital needs Deaths of settlor / beneficiary Terms of trust still appropriate / flexible enough Do beneficiaries have special needs? Can trustees distribute assets? Are trustees still appropriate? Any 10 year anniversary / exit charges due?


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IHT Planning Arrangements

Loan Trust

Settlor has access to original capital but growth is outside estate

Settlor establishes discretionary trusto Makes interest free cash loan to trustees, repayable on demando Trustees buy investment bondo No transfer of value (because it’s a loan)o Settlor is a trustee

Future growth belongs to beneficiaries, therefore outside of estateo Settlor cannot benefit from it

Loan must be paid back to settlor on their deatho They can ask for a payment or series of payments at any time should then

need capital / incomeo Can use 5% withdrawal to fund this

Though this means the loan will have been repaid after 20 years 10 year anniversary charge

o Amount owed to settlor deducted from value of trust Exit charge

o None on loan repayments Historically small starter gift into trust made first but HMRC stated not required No GWR / POAT as settlor cannot beneficiary Not within GAAR remit as established practice Advantages

o Growth outside estate – capital effectively frozen in valueo Settlor has access to capital whenever they wisho Can take an ‘income’

Disadvantageso Outstanding loan remains in estateo Paid to settlor’s estate on deatho If take 5%, run out of money in 20 years

Should plan lower withdrawals if this will be an issueo If do not spend withdrawals, money remains in estateo Takes time to benefit (e.g. for growth outside estate, spend capital)o If trustees make payments to beneficiary (e.g. spouse) must ensure they have

enough funds left to make loan repayments Could assign segments direct to beneficiary to avoid tax

Beneficiary pay at own rate Settlor can waive their right to loan repayments

o This would be a CLT unless covered by annual exempt amount Loan repayment is due on death

o Personal legal reps bound to call it ino Cashing in bond to pay could lead to income tax liability

Could write term in will for loan to be left to spouse (exempt gift) ortrust instead

Some loan trusts have limited liability clause that if amount in trust is less thanamount owed on death this is not a GWR


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Discounted gift trusts

These are only really suitable for individuals with an IHT problem who need a pre-determined size of capital payment with no requirement for flexibility and are likely tolive for at least seven years

The donor puts their gift into trust subject to a provision that they will receive a fixedpayment for life or until the trust fund is exhausted

An investment bond is typically used as the trust investment so that capital paymentscan be fixed within the 5% annual allowance

The transfer into trust is a PET if a bare trust or a CLT for all other types of trust. The value of the transfer is less than the amount gifted into the trust because it is

discounted to take into consideration the fixed payment streamo The discount will be based on the size of income payable and the donor’s life

expectancyo Providers will medically underwrite the donor at outset in order to reduce the

chances of HMRC disputing the amount of the discount in the event of deathwithin seven years although there is no guarantee that HMRC will agree withthe discount

In order to be effective, the donor must make sure they spend the income from thetrust and not accumulate it, otherwise they just end up increasing the value of theirestate for IHT purposes again

A DGT can either be written as bare trust or a discretionary trusto A discretionary trust provides flexibility over the choice of beneficiaries but,

depending on the amount placed in the trust, there could be an immediateIHT charge (if the gift, alone or together with other chargeable transfers madewithin the previous seven years, exceeds the nil rate band) as well as periodicand exit charges (the regular payments to the settlor are not subject to an exitcharge). On death within seven years of setting up the DGT, the immediatetax charge will be recalculated using the full inheritance tax rate of 40%. Onencashment of the bond the donor is assessable if they are alive and UKresident, otherwise the tax falls on any UK resident trustees, unless the bondis assigned to the beneficiaries before encashment

o With a bare trust, the beneficiaries and their share of the trust fund aredetermined at outset and cannot subsequently be changed. The gift into trust(excluding the discount) is a PET therefore there is no immediate IHT charge(but the situation is reassessed on death within seven years). The trust itselfwill not be subject to any periodic or exit charges, although each beneficiary'sshare of the trust fund will be treated as forming part of their estate. Onencashment the bond is taxed on the beneficiaries as if they individually ownthe bond

Advantageso Make a gift for IHT but retain a regular income without GWR / POAT applyingo Transfer value less than amount transferred, immediate tax saving if die in 7

yearso If into discretionary trust and amounts involved under NRB no lifetime /

periodic / exit chargeso Whole transfer drops out of estate after 7 years

Discount element drops out immediately Disadvantages

o Inflexible If die after 20 years ‘income’ exhausted

o CGT inefficient (because using bond)o May not permit capital distribution to beneficiary while settlor(s) live

If it does, tax efficient to assign


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Can appoint to settlor’s spouse if it is not a joint policy and they arenamed as potential beneficiary

Advice considerationso Life expectancy

Will they survive 7 years?o Potential IHTo Could they give capital away outright instead? Would beneficiaries prefer

this?o Do they want / need income, will they spend it? (If they do not, it just goes

back into the estate)o Is fixed income acceptable? What about inflation? Cannot be changed if

circumstances changeo History of gifting (establish NRB)o Joint / single nameso Can waive right to future income – this will be a PET/CLT depending on type

of trust

Flexible reversionary trusts

Revert to settlor trusts with single settlor only Settlor makes gift (cash) to single or double flexible reversionary trust and then

invests in a number of surrenderable single premium endowments with multiple livesassured

Double trusto Settlor assigns endowments to bare trust for own benefit

Then irrevocably assigns beneficial interest of each policy todiscretionary trust

Single trusto Settlor assigns endowments to discretionary trust

Each endowment has its own maturity date, typically spread over ten yearso Settlor access benefits on one day each year (policy anniversary)

If an endowment is allowed to mature, its value is paid out the settlor with any taxdue payable under the usual chargeable gains rules

Alternatively, the trustees can decided to let an endowment continue (by extendingits maturity date)

o This will not be treated as a new gift from the settlor Trustees can also decide to surrender an endowment whenever they see fit in order

to make a distribution to a beneficiaryo Even if the settlor is still aliveo If trustees assign the endowment to the beneficiary first, it will be assessed to

tax on them rather than the settlor HMRC has accepted that this is neither a GWR nor a transaction within the remit of

POAT The initial transfer into trust is classed as a CLT Advantages

o Effective gift for IHT purposes but retain right to receive ‘income’ from ito Neither GWR nor POAT provisions applyo Transfer is outside of estate after seven yearso Settlor can receive annual payments if requiredo Payments can be made to beneficiaries at trustees discretiono Growth outside of estate


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Disadvantageso Transfer remains in estate for seven yearso Immediate charge to IHT if CLT exceeds available nil rate bando There’s no discount (like there is for DGT)o At surrender / maturity gain chargeable to income taxo Unable to take 5% tax deferred while settlor lives

Advice considerationso Availability of nil rate band (as this affects initial and ongoing IHT charges)o If married, in whose name should the trust be (one each?)o Can client afford to give money away?o Do they need regular payments or are they happy with flexible payments?o Trustees should be carefully choseno Settlor should spend any money they receive or it will negate purpose of trust

Back to back arrangements

Buy own life annuity and take out own life policy under discretionary trust On death, annuity no value for IHT and proceeds of life policy outside estate Cash buys annuity and 1st premium on life policy Single or JL2D Life policy must be underwritten, need to be in good health Annuity = purchased life annuity

o Capital content tax freeo Interest element taxed as savings income

Premiums for life policy CLTo Can use annual exemption / normal expenditure out of income

Although capital content of annuity does not count as income Cannot use normal expenditure if use annuity to fund life policy unless

can show the two policies are not associated Annuity can be used to pay premiums and the rest to spend On death annuity stops and has no value for IHT Life policy pays out to trustees who pay beneficiaries

o Not in estate as under trusto Policyholder should not be a beneficiary under trust so as to not give rise to a

GWR or POAT charge If cannot show that arrangements are not associated then there’s a transfer of value

for IHT purposes which will be the lower of:o Price of annuity plus first premium of policyo Sum assured / value of greatest benefit from life policyo To demonstrate policies not associated best to take them out with different life

offices Advantages

o Can remove large amount from estateo The need to buy from different offices can lead to finding best rateso Trustee can make appointments to settlor’s spouse providing not a settlor

themselveso Can make loan to beneficiaries

Creates debt against beneficiary’s estate on death Reduce their IHT liability

Drawbackso Must be in good health at outseto Annuities are inflexibleo Need to have capital upfront to buy annuity


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Life assurance cover

IHT liability only arises on 2D where UK domiciled spouses/civil partners areconcerned

Life assurance needed foro Donor dies after making PET

If within NRB, term assurance to protect NRB that’s been used up for7 years while PET still in estate

If above NRB, also need decreasing term to pay potential tax due ifdonor dies within 7 years

o If place life assurance under trust Uses annual exemption Reduces tax payable on estate Provide relatively high payout on death that is outside estate WOL policy will payout on death (JL2D for couples) IHT free

Advantages WOL policy for IHT planningo Small, regular payments can lead to large, tax-free lump sum to pay IHT on

estateo Worthwhile even if dies early ono Accepted by HMRCo Premiums covered by exemptions

Disadvantageso Premiums could be seen as advanced payment of taxo May not be able to afford them long termo Could be expensive if live a long time (premiums may be more than payout)o Trust may be subject to periodic / exit charges

taxation & trusts - expert pensions

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