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Trust in financial planning

Making sure that you have your affairs properly planned is a crucial part of financial planning; and trusts can be a useful mechanism in leaving a legacy for your family and future generations.

This is the first in a series of articles on trusts – what is a trust, what are the various types of trusts, who are the parties involved and what are some of the advantages and disadvantages of establishing a trust?

Let’s start from absolute basics and discuss what a trust is.

You have to go back into the mists of time, to the medieval period to find the origins of the law of equity. However, trusts evolved as a way of separating the ownership of property between legal and beneficial ownership. In other words, the legal ownership was retained by one person (a trustee) and the benefit of that property was enjoyed by another person (the beneficiary). A simple example would be that a property is legally owned by a trustee, who allows the beneficiary to live in the property or receive the rent without ever having legal ownership of the property itself. It’s a separation of the ownership between legal and beneficial.

There are three parties (sometimes four) involved in a trust. The first is the settlor who establishes the trust, appoints the trustees (which may include him/herself) transfers an asset to the trustees and nominates the beneficiaries. The fourth possible party is a protector, who is sometimes seen with offshore trusts. However, let’s not complicate it at this stage.

In order for a trust to be valid, there needs to be three certainties. These were established in law by a famous case that occurred as far back as 1840 known as Knight -v- Knight; and that law still stands to this day.

The three certainties are the basic ingredients that must exist in order for a trust to be valid. These are, certainty of intention, certainty of object and certainty of subject. In very basic terms, the settlor must have intended to create a trust; you must be able to identify the assets of the trust (the subject) and the beneficiaries (the objects) must be named or identified or at least defined so they can be ascertained. If any one of these tests are failed, then the trust is unlikely to be valid.

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Sadly, coronavirus has made people think about death!

The Coronavirus pandemic has, sadly, increased the demand for people wanting to put their financial lives in order. Solicitors have seen an upsurge in demand for writing wills, for example.

I must admit that I feel uncomfortable writing this article, but we are being asked for advice on what clients should do in the knowledge that they might die sooner than they anticipated. So, I’ve decided to set out some of the issues that we would highlight as financial planners to a client who is close to death – often referred to as ‘deathbed’ planning.

Here’s a very simple list of things that should be thought about in those difficult circumstances:

  1. If you haven’t written a will, write one now; and if you have a will, make sure that it is reviewed by a suitably qualified solicitor.
  2. Review letters of wishes in relation to any discretionary trusts that you may have settled. These should be lodged with the trustees but not made available to the beneficiaries of the trust.
  3. Consider the exempt gifts, such as the Annual Allowance (£3,000 2020/21) and the small gift allowance (£250 2020/21).
  4. If you have a life expectancy of at least 2 years, you might want to consider investments that qualify for Business Property Relief or in agricultural land that attracts Agricultural Property Relief.
  5. Including a legacy in your will of at least 10% of the value of your net estate to a registered charity, reduces the inheritance tax (IHT) rate from 40% to 36%.
  6. Investing in woodlands may open up Woodlands Relief on the value of any trees or underwood growing on the land.
  7. Life assurance and pensions should be checked to make sure that trust deeds and nominations are in place to ensure that any benefits fall outside the estate.
  8. Check the joint ownership of assets, in case the equitable interest needs to be severed to ensure the disposition passes under the will to maximise IHT savings.
  9. Where the estate exceeds £2m, it may be worth making gifts to capture the ‘additional threshold’ available on a main residence. Even if the gift is a Potentially Exempt Transfer (PET) there may still be an advantage.
  10. Transfer assets owned by a spouse to take advantage of the Capital Gains Tax (CGT) uplift upon death. Make sure the will is reviewed though to ensure they are transferred back to the surviving spouse to ensure they receive the asset back at the uplifted probate value.
  11. Consider investing in buildings, land, works of art and heritage chattels that qualify for the ‘Conditional Exemption Tax Incentive Scheme.’ These are exempt from CGT and IHT as long as the owner agrees to look after them, allow public access and keep them in the UK.

Anyway, I hope the helps anyone who may be concerned about the current situation and would like to know what practical steps are available. Stay safe and stay healthy; and I’ll see you on the other side!

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Spring Statement 2019

The Chancellor found himself presenting his second Spring Statement sandwiched between a series of crucial Brexit votes. His speech was peppered with references to the need to achieve a smooth exit from the EU. Beyond that, Mr Hammond chose to keep the Statement a low-key affair.

The Spring Statement had no new tax proposals and indeed deferred any extension of Making Tax Digital (MTD). However, the Chancellor did introduce various consultations, early-stage discussion papers and calls for evidence. These covered a wide range of topics, stretching from a forthcoming review of the National Living Wage to the development of a low carbon Future Homes Strategy. One notable absentee from the Chancellor’s consultation list was the second part of the Office of Tax Simplification’s review of inheritance tax, which had been promised for Spring 2019.

See attached our full Spring Statement summary below…

Spring Statement 2019


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Reduction to money purchase annual allowance (MPAA)

At Spring Budget 2017 the government announced that from 6th April 2017 the money purchase annual allowance (MPAA) will reduce to £4,000. Legislation will be included in Finance Bill 2017.

Anyone who has already triggered the MPAA may wish to consider making maximum use of the current £10,000 MPAA prior to 6th April. Once triggered, it is not possible to use carry forward to increase the MPAA.

As a reminder, we have included a list of the actions that trigger the MPAA and our full guide is available at the link below.

The following will trigger the MPAA (either from a UK registered pension plan or from an overseas scheme that has had UK tax relief)

  • Taking income from a flexi-access drawdown (FAD) plan (includes short term annuity purchase) – only withdrawing tax free cash won’t trigger the MPAA
  • Taking an uncrystallised funds pension lump sum (UFPLS) – if the UFPLS is £10,000 or less, see if it’s possible to take the funds as a ‘small pot’ instead as this won’t trigger the MPAA and isn’t a Benefit Crystallisation Event (BCE).
  • Converting capped drawdown to FAD and then drawing some income
  • Taking more than 150% GAD from a capped drawdown plan
  • Receiving a stand-alone lump sum when entitled to primary protection and Tax Free Cash protection is more than £375,000.
  • Receiving a payment from a flexible lifetime annuity (ie. one where payments can decrease)
  • Receiving a scheme pension from a Defined Contribution (DC) arrangement where it’s being paid directly from those DC funds to less than 11 other members (e.g. a SSAS).
  • In addition, anyone who was in the old ‘flexible drawdown’ before 6th April 2015 is subject to the MPAA from 6th April 2015 (irrespective of whether they have taken an income withdrawal before then)

The above relate to a member and their own funds – these triggers don’t apply where benefits are being paid to a dependant/beneficiary (eg. where a beneficiary receives a FAD income payment from a dependant’s/nominee’s/successor’s FAD arrangement this isn’t a trigger).

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MPAA and Implications of Reduction

From 6th April 2017, the Money Purchase Annual Allowance will fall from £10,000 down to £4,000 for those who have accessed their pensions and are taking an income. This strategy is clearly aimed at setting the allowance as low as possible without impacting on Auto-Enrolment.

For the purposes of the consultation, the Treasury outlines the situations where ‘accessing a pension flexibly’ – and therefore the new cap – applies:

  • Flexi drawdown including short term annuities.
  • Taking a lifetime annuity that allows actual or possible decreases in the amount of annuity payable.
  • Taking an uncrystallised funds pension lump sum.
  • Those without earnings who cannot normally “recycle” pension withdrawals by putting money withdrawn from a pension back into a pension, although contributions of up to £3,600 can be made, unsupported by earnings.
  • A stand-alone lump sum payment, made where the person has primary protection and a protected tax-free lump sum right which is greater than £375,000.
  • Where a pension scheme delivers the DC pension directly – a “scheme pension” and there are fewer than 12 individuals receiving a scheme pension.
  • Payment of one of the types of benefits listed above is from an overseas pension scheme that has benefited from UK tax relief.
  • The MPAA restriction applies from the day after the above trigger event has occurred.

Pension options that do not constitute accessing benefits flexibly include:

  • Receipt of a pension commencement lump sum.
  • An individual commences flexi-access drawdown, either by a new designation or through conversion of a capped drawdown contract, and does not receive any income.
  • An individual holds a capped drawdown contract that was set up before 6th April 2015, and does not receive income above the maximum income limit for the contract after 5th April 2015.
  • Receipt of payment from a standard lifetime annuity or scheme pension.
  • Receipt of a small lump sum or trivial commutation lump sum.
  • Receipt of income from a dependant’s drawdown contract.

Once triggered, the restricted allowance applies for the rest of the tax year and each subsequent year. Perhaps most importantly it is not contract-specific: if it applies, it covers all of a client’s money purchase arrangements.

If contributions exceed £10,000 in 2016/2017 or £4,000 in tax years from 2017/2018 onwards this will result in an annual allowance excess, with no option to carry forward from earlier years.

The remainder of the standard annual allowance – called the ‘alternative annual allowance’ – can be used to accrue defined benefits, to which carry forward can be added.

In most cases, the trigger event will occur part of the way through a tax year. As it is only money purchase contributions after this that are tested against the MPAA, that year must be apportioned. Contributions that were paid before the trigger are tested against the alternative annual allowance along with defined benefit accrual; all other contributions are tested against the MPAA. For instance, a monthly contribution to a group personal pension of £1,000 gross paid by a member who triggers the MPAA half way through the tax year will have the following annual allowance test: £6,000 tested against the MPAA; £6,000 tested against the alternative annual allowance.

Subsequent tax years are much simpler because the MPAA applies for the whole year.

Planning Opportunity

With this in mind a good trawl through the client bank is necessary, and all clients approaching the stage where they may access benefits need to be notified that the next 2 months or so is vital to their financial planning, with the option to pay the maximum allowance using carry forward still available, allowing a contribution of up to £170,000.

Sean Donald – Chartered Paraplanner, Timebank

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Avoiding Mistakes When Selling a Business

Research has shown that many business owners fail to achieve the full or fair value of their businesses when trying to exit, simply through poor plrogeranning and preparation. There’s still enough time to learn from the experience of others……

You’ve had enough and so you’ve suddenly decided to sell?

The decision to sell a business should not be taken lightly as there could be many things to be done to try and make the chance of selling a business a lot easier.  

Poor preparation without up to date accounts, legal entity records and other important paperwork will simply put potential buyers off.  Don’t think you can hide bad news or skeletons in the cupboard as these usually get discovered in the due diligence process – deal with the issues before you decide to sell. 

Always work to a realistic time scale (it can take up to six months to find a buyer and six months to sell a business) – turn a business around first and then sell.

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Wealthy savers acting now on tax relief

Higher earners are making the most of the marginal rate tax reliefs; up 120% this year compared to last year according to data recently released. In other words, more than twice the amount is being invested in pensions this year compared with last.

So, the question is, “why?”

Quite simply, it’s because the Government seem intent on applying a flat rate of tax relief at 20% on their pension contributions – so, higher earners understandably feel a sense of urgency to grab as much tax relief as possible while they still can.

With the Government consultation on this issue ending today, time may be running out if investors want to benefit from pensions tax relief of up to 45% – as it soon may be scrapped.

The effective rate of tax relief on pension contributions on earnings between £100,000 and £121,200 is actually a whopping 60%.

That is because of the way in which tax relief is applied to pension contributions and the fact that the personal allowance (£10,600 2015/16) is abated when earnings reach £100,000.

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Enhancements to the Profession

The Chartered Insurance Institute (CII) recently undertook a review of the standards and eligibility criteria for Corporate Chartered status.

The reason behind doing so was to ensure that this status continues to underpin customers’ expectations of Chartered firms and to further raise standards across the insurance and financial advice professions.

We are really proud to be one of only a small number of Chartered Financial Planning firms. In fact, there are only around 650 Chartered firms across the UK. When compared with other Independent Financial Advisers (‘IFA’s’) and firms of Accountants and Solicitors – we’re a very small club, but with very high standards.

The primary enhancements are:

  • The introduction of a formal Chartered contract
  • Stronger oversight and improved governance requirements
  • Clearer and more precise criteria centred around competence, conduct and culture
  • Enhanced qualification criteria providing greater access to individually qualified Chartered advisers.

We welcome these enhancements and are committed to continuing to help develop the industry into a well recognised and respected profession.

I recall one of the most memorable parts of the graduation ceremony, when all new Chartered Financial Planners had to read an Oath in front of an audience, which really hit home for me…


Following this, as well as conforming to the professional values, we decided to create a list of our own.

Not wanting to simply dream up what these should be, as a company we completed an exercise and all of us (as individuals) listed what we stood for and what we didn’t, or wouldn’t stand for.

To view the results, you might like to see our ten ground rules, which you may read by clicking here. 

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What’s changing with pensions on 6th April 2015

From April you will be able to take as much or as little from your defined contribution pension (DC) from age 55. A DC pension is also known as a ‘money purchase’ arrangement such as a personal pension or a stakeholder pension.

Apart from the tax-free cash element of the pension fund (usually 25%) any funds withdrawn will be added to your income and taxed accordingly depending which income tax bands they fall into (if taxable, the tax rate could be 20%, 40% or 45% or a combination of these rates depending on the amount withdrawn).

For those with incomes between £100,000 – £121,200 in 2015/16, the effective rate of income tax could even be as high as 60%!

So, care needs to be taken if you intend using the new flexibilities next year and beyond.

When the new system is in place, the government will not prescribe a particular product, which you will need to purchase or invest in to access your pension savings. It will be up to you to decide how you want to access them, either as a lump sum or through some sort of financial product:

If you want greater control over your finances in the short term you will be able to extract all your pension savings in one go, and invest or spend them as you see fit.

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Tax Avoidance versus Tax Planning

A lot has been said recently on the issue of tax evasion, tax avoidance and tax planning. It’s everywhere you look at the moment – TV, newspapers, social media; and is being focused on by the main political parties in the run up to the election in May.

I think everyone accepts that tax evasion is different to avoidance because the former is clearly illegal and usually relies upon the taxpayer making a false disclosure to HMRC. No one would condone tax evasion and professional advisers will always stay well away from clients seeking to break the law.

I’m not a tax adviser per se – I’m a chartered financial planner, authorised by the Financial Conduct Authority (FCA) to provide investment and pensions advice. There is an old adage in my profession, which is, “don’t allow the tax tail to wag the investment dog.”

However, I would not be doing the very best for my clients if I ignored the tax consequences of any financial planning or investment decision that they had to make.

So where is the distinction between “tax avoidance” and “tax planning”?

Like all of these things, it is perhaps easy to see the distinction at the extremes but more difficult as you approach the line between the two.

I had a minor debate going back and forth on Twitter with Paul Lewis of the BBC Money Box programme (@paullewismoney) and it ended with me suggesting that tax avoidance was legal but unpalatable and tax planning was legal and prudent.

So, for what it’s worth, here are five taxes that you can AVOID paying through the prudent and legal arrangement of your financial affairs:

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