TRUSTEE INVESTMENT PLANNING

2. TRUSTEE INVESTMENT PLANNING

3. The reasons to incorporate trustee investment as part of your service delivery under adviser charging • Trustee investment fundamentals • Putting it into practice: Case study

4. These slides and the presentation in which they are used are put forward for general consideration only. They are based on fictitious persons. No action must be taken or refrained from based on their content. Accordingly, neither Technical Connection Limited nor any of its officers or employees can accept any responsibility for any loss arising of whatever nature to any person. Professional advice based on the facts of each case is essential.

5. WHY WILL CLIENTS PAY FOR ADVICE?(HOWEVER IT’S DELIVERED) • Recognition of the limits of their own knowledge • The adviser has expertise that the consumer doesn’t possess or can’t get by “googling” • The adviser makes them aware of the need/risk/opportunity

6. SO WHAT WILL THEY PAY FOR? SO WHAT WILL THEY PAY FOR? Basically, what they perceive as “difficult / complex” EXPERTISE / TIMESAVING

7. AND IF WE ARE TALKING ABOUT TAX …. • You can’t have missed that it’s in the news • Tax and tax planning polarises opinions • Government committed to action • So……….

8. Tax Avoidance What’s going on?

9. A LOT! • General anti-abuse rule (consultation) • £50,000/25% income tax relief cap (consultation) • “Enhanced DOTAS” :more advance information and negative publicity • (Lifting the lid on tax avoidance) • Continued HMRC success in tribunal/court cases • Public opinion (Times campaign)

10. FINANCIAL PLANNING GAAR should not affect “the centre ground of tax planning” Opportunities to reinforce the power and effectiveness of “acceptable” financial planning for individuals , businesses and trustees

11. TRUSTEE INVESTMENT ADVICE:A “PERFECT STORM”? • High degree of difficulty • Adviser charge justifiable • Relatively high trustee tax rates • Trusts are an essential part of estate planning

12. TRUSTEE INVESTMENT ADVICE :A “PERFECT STORM” ? • Trustees must take investment advice • Solicitors and accountants rarely have the necessary financial planning skills • Strong collaboration potential for advisers

13. TRUSTEE INVESTMENTS – A GROWING MARKET TRUST STATISTICS • 176,000 made S/A returns in 2009/10 • Trust income £2,650m in 2009/10 • £900m £1,750m iip discretionary • Income tax £750m in 2009/10 • £150m £600m iip discretionary • Chargeable gains £2,045m in 2009/10

14. BARRY’S WILL TRUSTS • Died on 17 May 2005 • 2 years prior to death gifted £20,000 to each of his four grandchildren • Left • - a widow - two children - four grandchildren - two great grandchildren

15. BARRY’S ESTATE • Jointly held property passes directly to Britney • - house - contents • Discretionary Will Trust for investments up to available nil rate band • Life Interest Will Trust for balance of investments • - life interest to Britney - capital to children in equal shares on Britney’s death

16. UNDERSTANDING THE FUNDAMENTALS TRUSTEE ACT “IMPERATIVES”

17. TRUSTEES MUST TAKE INVESTMENT ADVICE • Trustee Act 2000 • Wide implied investment powers – if not specifically provided • Statutory investment criteria • Applies to all trusts whenever created

18. STATUTORY INVESTMENT CRITERIA • Diversification • Suitability • AND • Obtain and consider proper advice

19. “PROPER ADVICE” Advice of a person who the trustees reasonably believe to be qualified to give it by his (or her) Ability in + Practical experience of financial + other matters

20. UNDERSTANDING THE FUNDAMENTALS TRUST TAXATION

21. TRUSTEE TAXATION Income Tax IIP (including Bare Trust) Income taxed on IIP beneficiary at marginal rate

22. TRUSTEE TAXATION Income Tax • Discretionary Trust • Income taxed on trustees at:- • - Standard rate on first £1,000 • 42.5% on dividend income 50% on other income IIP (including Bare Trust) Income taxed on IIP beneficiary at marginal rate

23. TRUSTEE TAXATION • Income tax – other relevant points • Income assessed on settlor if“settlor- interested” trust ie: - settlor a beneficiary settlor’s spouse a beneficiary - not widow/widower • £100 rule (on vested or distributed income) • - Beneficiary is minor unmarried child of settlor - Gross income (or income on all gifts) exceeds £100

24. DISCRETIONARY TRUST – INCOME TAX DETAIL 2 STAGE PROCESS

25. DISCRETIONARY TRUST:TRUSTEE TAX Discretionary Trust - Income tax Income received Discretionary Trust Trustee income tax 50%/42.5% (if over £1,000)

26. INCOME DISTRIBUTION Discretionary Trust - Income tax Income received Discretionary Trust Trustee income tax 50%/42.5% (if over £1,000) Income distribution: trustees must have paid 50% income tax Income taxed on beneficiary as trust income

27. DISCRETIONARY TRUST – INCOME TAX DETAIL STAGE 1: RECEIPT OF INCOME

28. THE DISCRETIONARY TRUST “INCOME TAX TRAIL” • Interest • Trustees receive £80 net interest • £20 income tax already deducted • Trustees pay extra £30 to HMRC • Trustees are left with £50 net income • Note: • Assumes other trust income absorbs £1,000 • Applies even though settlor-interested trust • 50% 45% from 6.4.2013

29. THE DISCRETIONARY TRUST “INCOME TAX TRAIL” • Dividends: • Trustees receive £80 net dividend • £8.89 income tax deemed to have been paid • Trustees pay extra £28.89 to HMRC • Trustees are left with £51.11 net income • Note: • Assumes other trust income absorbs £1,000 • Applies even though settlor-interested trust • 42.5% 37.5% from 6.4.2013

30. DISCRETIONARY TRUST – INCOME TAX DETAIL STAGE 2: INCOME DISTRIBUTION

31. DISTRIBUTION OF SAVINGS INCOME (2012/13) 50% 40% 20% 0% £ £ £ £ Receives 50 50 50 50 Grossed-up 100 100 100 100 Tax bill 50 40 20 0 (Pay) reclaim - 10 30 50 Net 50 60 80 100

32. DISTRIBUTION OF DIVIDENDS (2012/13) [£88.89 grossed-up equivalent] Income received by trustees £80 [42.5% of £88.89 = £37.78 £37.78 less tax credit of £8.89 so tax of £28.89 to pay] Income tax of £28.89 paid to HMRC by the trustees Income remaining £51.11 [£80 less £28.89]

33. [£88.89 grossed-up equivalent] Income received by trustees £80 [42.5% of £88.89 = 37.78. £37.78 less tax credit of £8.89 so tax of £28.89 to pay] Income tax of £28.89 paid to HMRC by the trustees Income remaining £51.11 [£80 less £28.89] Trustees` extra tax on distribution £11.11 Distribution to beneficiary £40 [Total liability £40.00 less £28.89 already paid] [£80 available less £40.00(ie. 50% of £80]

34. £ £ Net trust income 80.00 Tax on dividend receipt 28.89 Tax on income distribution 11.11 40.00 Net to beneficiary 40.00

35. Beneficiary receives trust income 50%40% 20% 0% £ £ £ £ Receives 40 40 40 40 Grossed-up 80 80 80 80 Tax bill 40 32 16 0 (Pay) reclaim - 8 24 40 Net 40 48 64 80 INCOME DISTRIBUTION OUT OF DIVIDEND INCOME

36. INCOME DISTRIBUTION OUT OF DIVIDEND INCOME Beneficiary receives trust income 50%40% 20% 0% £ £ £ £ Receives 40 40 40 40 Grossed-up 80 80 80 80 Tax bill 40 32 16 0 (Pay) reclaim - 8 24 40 Net 40 48 64 80 ORIGINAL GROSSED-UP INCOME £88.89

38. A SOLUTION TO THE PROBLEM? - ADVANCEMENT OF CAPITAL • Trustees invest for equity-based capital growth • Use trustees’ annual CGT exemption to release capital and appoint • Care over disguised dividend distributions - amounts and timing of accumulations/ advancements • Must be power to advance in trust • But…tax planning subject to investment suitability

39. SUPPLEMENTING INCOME WITH CAPITAL: DETAIL Assuming capital growth year-on-year of same amount as net dividend At best At worst Growth 80 80 Tax (exempt) - (@ 28%) 22.40 Net 80 57.60

40. ANOTHER SOLUTION TO THE PROBLEM? • Trustees in UK/Offshore bond • No trustee taxation of income or gains • No underlying investment “constraints” • Trustees withdraw/encash (care which) • Trustees advance capital • Must be power to advance capital

41. TRUST CAPITAL TAXED AS INCOME? • Original Revenue view - purpose of payment • Brodies Will Trustees • Stevenson -v- Wishart (1987) • Don`t advance if in exercise of a specific direction to augment income under trust

42. TRUSTEES Capital Gains Tax Bare Trusts • Beneficiary assessed: • £10,600 A/E • then 18%/28% as appropriate

43. TRUSTEES Capital Gains Tax Bare Trusts All other Trusts • Beneficiary assessed: • £10,600 A/E • then 18%/28% as appropriate • Trustees assessed: • £5,300 A/E * • then 28% * Pro rata reduction according to number of trusts created by the same settlor – subject to minimum of £1,060

44. TRUST TAXATION:INHERITANCE TAX • Inheritance Tax • Which type of trust? • IPDI • Bare Trust • Trust for disabled • PET if lifetime • Capital taxed as part of taxable estate of beneficiary entitled to income

45. TRUST TAXATION:INHERITANCE TAX • All other trusts eg. discretionary trust • CLT • Periodic charge • Exit charge • Inheritance Tax • Which type of trust? • IPDI • Bare Trust • Trust for disabled • PET if lifetime • Capital taxed as part of taxable estate of beneficiary entitled to income

46. RELEVANT PROPERTY CODE • CLT on entry • - possible 20% on excess over NRB - 7 year cumulation • Periodic charge at 10 year anniversary • - Trustees have NRB - Maximum charge 6% - Trust fragmentation (Rysaffe) • Exit charge when property leaves trust – IHT based on • - charge on entry (first 10 years) - charge at last 10 year anniversary

47. RATIONALE Trust is treated as a person and charges broadly the same as if individual had owned the property….and disposed of it every 10 years

48. EXAMPLE - JOE • Periodic charge • Joe creates discretionary trust for £250,000 on 1/9/12 • No CLTs in last 7 years • On 1/9/22, value of trust £750,000 • NRB £500,000 • IHT: £250,000 @ 6% = £15,000 • Equates to 2% on £750,000

49. EXAMPLE - JOE • Exit charge • Property (£600,000) distributed in year 8 = No charge • Property (£1,000,000) distributed on 1/9/28 24/40 x £1m x 2% = £12,000

50. RELEVANT PROPERTY CODE - COMPLICATIONS • Added property • Related settlements • Income accumulations • Inter-trust transfers • Property leaving the trust • 7 year cumulation periods – pre-trust • Creation – recategorised PETs