The barrister Financial Supplement 2009

Personal Finance & Wealth Management

the barrister

Supplement 2009

personal finance & wealth management supplement the barrister 2009

Shaped by events.Proven byhistory.

Over the thousands of

years that storms have passed this way,

some rocks remain steadfast – shaped by events undoubtedly,

but holding strong nonetheless.

While the tempestuous times we live in now have left virtually no-one unscathed, for

the most adaptable of us, they may carve out new opportunities. With the investments in our portfolio

running at a material discount to their underlying net asset value, we believe we will fi nd rich-pickings washed

ashore once the storm has passed.

Find out more about how we’ve performed over the last fi ve, ten or twenty years at www.british-empire.co.uk or call 0845 850 0181 quoting BAM/1009

for our brochure. You’ll see how we’ve ridden out rough times before and combed the beach for value.

Past performance should not be seen as an indication of future performance. The price of investments and the income from them may fall as well as rise

and investors may not get back the full amount invested. The trust uses gearing techniques (leverage) which will exaggerate market movements both down and up which could mean sudden and large falls in market value. Please refer to the Key Features Document for further details of the risks affecting your investment.

Halifax Share Dealing Limited is the Administrator and Plan Manager for British Empire Securities and General Trust plc. Issued by Asset Value Investors Limited which is authorised and regulated by the Financial Services Authority. Subscriptions will only be received on the basis of the current Key Features Documentfor the British Empire Securities and General Trust plc. If you are in any doubt whether the investment is suitable for you, please contact an independent fi nancial adviser.

Halifax Share Dealing Limited. Registered in England No. 3195646. Registered Offi ce: Trinity Road, Halifax, West Yorkshire HX1 2RG. Authorised and regulated by the Financial Services Authority, 25 The North Colonnade, Canary Wharf, London E14 5HS. A member of the London Stock Exchange and an HM Revenue and Customs approved ISA Manager. We may record telephone conversations to offer you additional security, resolve complaints and improve our service standards. Conversations may also be monitored for staff training purposes.

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More moves towards Bank transparencyBy Andrew Watt, Managing Director, Tax Disputes & Investigations Alvarez & Marsal Tax

Why Gamble With Your Future? – The Importance of Top-Up InsuranceBy Justin Fenwick QC Chairman Bar Mutual Indemnity Fund Limited

The way in which we approach retirement, and the ideas people have about their later life are changing rapidly in the UKBy Andrew Tully, Senior Pensions Policy Manager, Standard Life

Protecting Your Pension Tax- Free CashBy Jason Butler

Tips on making the most out of your Foreign Income and Overseas InvestmentsBy Deepak Goyal, foreign exchange specialist at Currencies Direct

The 2009 Finance Bill and its impact on highly paid individualsBy Patricia Mock, director in the private clients practice at Deloitte.

Look for the silver liningBy Danny Cox CFP, Head of Advice at Hargreaves Lansdown.

How to Reduce the 50% Tax Rate!By Ann Gregory-Jones, director, Haysmacintyre

A final UK tax amnestyBy John Cassidy, partner at PKF, explains HMRC’s ‘new disclosure opportunity’

Investment: getting it rightBy Richard Cragg and Andrew Penman of Smith & Williamson.

Whose Wealth is it anyway?By Christine Ross is Group Head of Financial Planning at SG Hambros Bank Limited

Pensions and the recessionBy Amanda Fyffe, ACA, MAE, Senior Manager, RGL Forensics

The UK has one of the most complex tax systems in the world and, following changes announced in this year’s Budget, the position is set to get even more confusing

By Andrew Tully, Senior Pensions Policy Manager, Standard Life

Contents:

4 personal finance & wealth management supplement the barrister 2009

Three recent, momentous

announcements by HMRC, one of

which is ‘ground-breaking’, may well

lead to a flurry of activity in Chambers over

the next few months. Private Banks in the

UK will be considering how to respond to

the information notices which have been or

about to be served on them under paragraph

2, Schedule 36 Finance Act 2008. The holders

of offshore bank accounts and structures, who

are the ultimate targets of these notices, will

be considering their options as crucial and

hitherto confidential information is handed

over to the taxman.

In late August, HMRC provided further detail

for an initiative to the effect that this autumn,

UK taxpayers are to be given a second and

last opportunity to disclose irregularities

connected with offshore funds.

The conditions attaching to the New Disclosure

Opportunity (NDO) are very similar to those

which governed the Offshore Disclosure

Facility (ODF), launched in April 2007.

• To be able to take advantage of

the NDO, taxpayers must have some tax

irregularity associated with an offshore bank

account, property, asset or structure such as

a trust, stiftung or anstalt. Disclosures must

include all tax unpaid.

• The intention to make a disclosure

must be notified to HMRC between the start of

the NDO from 1 September until 30 November

2009. Failure to comply with this fairly narrow

time-frame will mean taxpayers cannot take

advantage of the NDO. Such notifications in

September must be made on paper and on-

line or on paper in October and November.

• Disclosures on paper can only

be made between 1 September 2009 and

31 January 2010. From 1 October 2009

disclosures can be made on-line and only on-

line disclosures will be accepted between 1

February and 12 March 2010 when the NDO

period ends. Tax due on a paper disclosure

must be paid by 31 January 2010 and by 12

March if made electronically. The six weeks

additional time to pay will make electronic

filing attractive where the payment due is

substantial.

• Disclosures can be made either

by taxpayers themselves or by their duly

authorised agents

• HMRC has said that wholly domestic

disclosures will be dealt with under a

different process and will not attract the same

favourable penalties. However, HMRC note that

in practice unprompted full disclosures are

likely to result in a reduced penalty of between

10% and 20% and therefore those with

domestic disclosures will be little worse off,

if at all, than those with undisclosed offshore

income. This contrasts sharply with the ODF

where domestic and offshore disclosures were

given identical treatment. Such discriminatory

treatment should be challenged vigorously.

• The penalty payable under the

NDO will be 10% of the understated tax but if

taxpayers received a letter from HMRC in June

2007 alerting them to the ODF, the penalty

payable will be 20%. In practice it is unlikely

be simple for HMRC to prove that such a

letter was either written to or received by any

particular taxpayer and attempts to impose

this additional penalty should be resisted. If

taxpayers notified their intention to make a

disclosure under the ODF but failed to do so,

they will be required to pay a 20% penalty

under the NDO. Where the tax payable is less

than £1,000 no penalty will be payable.

• HMRC remains keen to highlight

that no criminal proceedings have been taken

against anyone who made a full and accurate

disclosure under the ODF. Prosecutions arising

out of the NDO are likely to be rare, perhaps

only where it transpires that the funds arose

out of criminality other than tax evasion.

• HMRC will issue acceptance letters

by 12 July 2010 in most ‘low risk’ cases.

Where their assessment suggests a higher

degree of risk taxpayers may have several

months to wait for a decision.

The second highly significant announcement

by HMRC impacts directly on its ability to

test-check disclosures under the NDO. Before

the ODF, HMRC made separate applications

to a Special Commissioner for leave to serve

information notices under s20 (3), Taxes

Management Act 1970 (now repealed) on the

main UK retail Banks. This was ultimately

successful but was a lengthy and fairly

complex process. HMRC did the same again

with a further four banks in March 2009.

However, there are a large numbers of banks

trading in the UK and in order to avoid the

difficulty of going before a Judge in the Tax

Chamber of First Tier Tribunal with a large

number of separate applications, HMRC

has been given blanket authority to serve

information notices on over 300 UK banks

with an offshore presence. Lawyers acting

for the banks concerned will undoubtedly

consider the legality of the short cuts taken in

this particular process.

The third announcement concerns a landmark

deal between the UK and Liechtenstein – the

Liechtenstein Disclosure Facility (LDF) - which

will have repercussions beyond these two

jurisdictions. Details of the LDF are embodied

in a lengthy Joint Declaration and an even

longer Memorandum of Understanding. Its

principal features are as follows-

• The facility will run from 1

September 2009 for those with an existing

asset in Liechtenstein on that date. Where the

asset in Liechtenstein is acquired between 2

September 2009 and the final compliance

date of 31 March 2015, those affected may

participate in the disclosure facility from 1

December 2009.

• Under the terms of the agreement,

financial intermediaries in Liechtenstein (FIs)

will have a crucial role to play in identifying

UK taxpayers who are ‘relevant persons’ and

who are eligible to participate in the LDF.

- Individuals who the FI knows have,

on or after 1 August 2009, a residential

More moves towards Bank transparencyBy Andrew Watt, Managing Director, Tax Disputes & InvestigationsAlvarez & Marsal Taxand

www.dentonspensions.co.uk

At Brewin Dolphin, every investment relationship begins with a blank sheet of paper and the individual. We’re independently owned and we’re free to tailor portfolios to the individual’s needs. Our investment managers have the freedom to choose from the whole investment market, as do their clients. There are no in-house funds to ‘push’ or sell and we’re happy to give advice that is not always in our commercial interests. So you’ll find the way we do things is rather different to the way some other companies do them, and you’ll see that it all stems from the simple philosophy that guides everything we do: that the first thing we earn is your trust.

brewin.co.uk For more information please contact us on 0845 213 1000 or at [email protected] Brewin Dolphin is a member of the London Stock Exchange and is authorised and regulated by the Financial Services Authority No.124444.

LISTENING TO WHAT OUR CLIENTS WANT HELPS US TAILOR-MAKE EACH PORTFOLIO TO SUIT THE INDIVIDUAL.

IN OTHER WORDS, WE LET YOU SPEAK BEFORE YOU’RE BESPOKEN TO.

Barrister Magazine_210x297.indd 1 09/09/2009 13:15:38


address in the UK, or have been resident in

the UK for tax purposes, or for whom a UK

address has been given under Liechtenstein

anti-money laundering legislation.

• A company incorporated in the UK

or which, on or after 1 August 2009, has

been resident in the UK for tax purposes,

which has a beneficial interest in a bank or

financial portfolio account in Liechtenstein

or in another corporate entity, partnership,

foundation or trust managed in Liechtenstein.

Taxpayers already under investigation for

suspected serious tax fraud – whether under

Code of Practice 9 or who has been arrested

for a criminal tax offence - are not eligible

to participate in the LDF. Those who have

been investigated in the past and who did

not declare their Liechtenstein assets will be

eligible to participate but will be subject to a

significantly higher penalty

• Having identified those who are

eligible, the FI will be under a duty to inform

the person that it has 18 months at the most

either to satisfy the FI that it is not a ‘relevant

person’ or to provide a certificate showing

that it has registered with HMRC its intention

to make a disclosure under the LDF and in due

course a certificate from HMRC confirming

that it has fulfilled its disclosure obligations.

If the FI does not receive these assurances,

it will be obliged to stop providing corporate

and banking services to the UK individual or

company. If the FI feels that compliance with

this obligation make it liable to legal action for

breach of its fiduciary duties, the Liechtenstein

Government will review the situation and

direct the FI accordingly. Ultimately HMRC has

the right to obtain details of how that decision

to make such a direction was arrived at.

• As an alternative to making a

disclosure under the LDF, the ‘relevant

person’ will be required to prove it is not

liable to UK tax or is totally compliant with its

UK tax obligations. Such proof can be given

in various ways including notarised copies

of tax returns and written confirmation by a

UK qualified legal, tax or accounting adviser

that it is compliant in the UK or has applied to

make a disclosure under an HMRC disclosure

facility.

• In due course, in order that HMRC

can be satisfied that full disclosure of unpaid

liabilities has been, and continues to be made,

banks’ and trust companies’ compliance with

these obligations will be subject to periodic

audit by HMRC. Unlike under the NDO,

where unpaid tax for up to 20 years will be

recoverable, tax payable under the LDF will be

limited to the years on and after 6 April 1999 (1

April 1999 for companies). Most importantly,

taxpayers with a bank account outside of the

UK and Liechtenstein which was not opened

through a UK branch or agency, and unpaid

tax liabilities covering more than 10 years, will

be able to transfer that account to a financial

institution in Liechtenstein and make their

disclosure under the more favourable terms

of the LDF. Clearly these assets would not be

disclosable under a Schedule 36 information

notice and HMRC has concluded that offering

such favourable treatment represents the

best hope for recovering at least some of the

unpaid tax which is due.

• Anyone eligible to take advantage

of the LDF will have the option either to pay

a single composite rate of tax of 40% of all

omitted income, profits and gains to cover all

UK taxes with no reliefs or other deductions;

or, if more favourable, to calculate the actual

liability in respect of each tax. This option

can be exercised for each year in respect of

which a disclosure is being made. Interest will

also have to be paid on the unpaid tax and a

penalty of 10% - or 20% where the taxpayer

was notified of the ODF in June 2007. The full

amount due has to be paid when the disclosure

is made but HMRC will consider offers of

instalment payments subject to evidence as to

means and offers subject to timing of the sale

of assets

• Individuals, whose offence amounts

to no more than ‘innocent error’ will have to

pay no more than 6 years’ back tax and no

penalty will apply. This is in marked contrast

to the terms of the NDO.

• The LDF states explicitly the

circumstances in which non-prosecution

is guaranteed whereas the NDO is slightly

ambivalent on that issue. Those who make

incomplete disclosures may have their names

published on the HMRC website in accordance

with the provision in Finance Act 2009. The

LDF also allows taxpayers and their agents to

initiate discussions with HMRC on a no-names

basis. Such discussions were outlawed years

ago and there is no such provision in the NDO.

To further demonstrate their commitment to tax

transparency and to comply with obligations

set by the OECD, Liechtenstein has entered

into a Tax Information Exchange Agreement

(TIEA) with the UK, This agreement, means

each jurisdiction will be able to make specific

tax information requests of one another. In

due course, the two countries have expressed

their intention to enter into a Double Tax

Agreement.

There is no question that these arrangements

between the UK and Liechtenstein constitute a

landmark agreement. We’ll watch with baited

breath to see if there is a domino effect which

leads to other so-called tax havens following

suit.

Andrew Watt

Managing Director,

Tax Disputes & Investigations

Alvarez & Marsal Taxand

1 Finsbury Circus

London EC2M 7EB

Tel: +44(0) 207 715 5214

Fax: +44(0) 207 715 5201

Mobile: +44(0)7770 221051

Direct email: [email protected]



Elsewhere in this supplement, you will find helpful guidance on many aspects of personal financial planning, from

investments to pension arrangements. Most barristers take those matters seriously. Yet the statistics show that a large number of barristers are risking their future financial security by taking out inadequate professional indemnity insurance, year after year. When questioned, the majority of these would respond with the words “too difficult”, “too expensive”, or “why would I need it?”. This article seeks to put the debate into perspective.

BMIF was set up over 20 years ago as a mutual insurer to provide accessible, affordable indemnity cover to the entire profession. However, its objective was always to cover small to medium sized claims, which comprised the vast majority of claims against barristers, rather than very large claims. That basic cover was for a minimum of £250,000.00, rising to £2.5 million, depending on income. Although for many years BMIF offered cover of an additional £2.5 million over and above the first £2.5 million, that risk was always fully reinsured.

When I first became Chairman of BMIF 10 years ago, I was surprised and concerned to learn how little top-up insurance was purchased by members of the Bar. It soon became clear that one reason was that the providers of top-up insurance were not well known or always easy to get in touch with and there was a lack of awareness of the available sources of excess insurance.

In order to remedy this, BMIF forged links with two brokers offering a programme of top-up insurance for barristers. As a result, for several years, barristers have been able to obtain a quotation for top-up insurance from either or both of these brokers simply by ticking the appropriate box in their renewal form. This has led to a significant increase in the number of barristers taking out top-up insurance. However there are still many who do not.

In addition to now being readily available, by ticking a box, top-up cover is also offered at remarkably competitive rates. The premiums for top-up cover, except for those with a significant claims history or certain practitioners at the tax bar, are at a fixed price for each layer, which is not affected by area of practice, fee income or claims

history. By comparison to those available for other professionals, the premiums are also extremely low.

Many readers may however still point out that all of this does not answer the question of why they should need top-up cover at all, let alone cover at the higher levels available, currently up to a maximum of £100 million per claim. Although most claims remain small, in recent years there have been an increasing number of large claims where the potential exposure is significantly above the level of cover offered by BMIF. That experience reflects claims against other professionals; in particular solicitors where the largest claims notified have risen from about £50 million to almost £2 billion over the last few years.

As well as becoming larger, claims against barristers in commercial disputes have become more frequent. In an increasingly litigious society, claims against professionals, although once a rarity, have become commonplace and the sweeping away by the House of Lords in Hall v Simons of the protection once afforded to barristers has encouraged claimants to view barristers as potential targets.

Although a barrister’s best protection is as always to exercise skill and care and to keep good records, including written notes of advice given, coupled with the robust defence of unmeritorious claims by BMIF, I predict that large claims against barristers are likely to increase over the coming years, particularly in the fall-out from the current financial crisis. When deciding how much top-up cover is needed, care must be taken to consider the range of likely claims. Although a broad brush approach of either “50 X the highest earnings in the last six years” or “as much as you can afford” may offer the simplest way, there are a few specific points worth bearing in mind.

Firstly, there are the provisions for “aggregation” in the terms of cover. Although the size of individual transactions on which a barrister gives advice may be comparatively modest, it is important to remember that if more than one transaction is based on the same error, all claims arising from that mistake may, depending on the facts, be aggregated so that only a single limit of indemnity is available. To take a simple example, if a barrister negligently drafts an agreement for the hire purchase of a photocopier, and that draft agreement is used in 1,000 transactions,

then the losses in all 1,000 transactions may be aggregated and treated as one claim for the purposes of the limit of cover.

Secondly, it is surprising how often barristers overlook the fact that professional indemnity cover is provided on what is known as a “claims made” basis. That is to say, even if the negligent error was committed several years before any claim was made, it is the professional indemnity policy for the year in which the claim is made which is relevant and which will respond, rather than the policy for the year when the error was committed. As a result, barristers need cover which will protect them not only in respect of the work that they are currently carrying out but also in respect of advice they have given in the past. With the provisions in section 14A of the Limitation Act 1980 permitting claims to be brought long after the expiry of six years in certain cases, or where the barrister has acted for infants or those under a disability, it can be seen that when fixing their level of cover for any given year, the barrister needs to take into account work done over the last six years and even longer.

Finally, and on a similar note, barristers should be wary of falling into the trap of assuming that once they have retired or gone on the Bench, they no longer need to worry about top-up insurance. Despite receiving a letter from me on their retirement from the bar stressing the importance of adequate run-off cover, a surprising number of those leaving practice opt to reduce their cover to the minimum of £500,000, to reduce their premium. Many others fail to extend their cover after the first six years when claims under Limitation Act section 14A or by infants remain a real possibility. The proper advice to those retiring is that that is the time when they most need top-up cover to protect them, as their income is likely to be significantly reduced and an underinsured claim would be potentially devastating.

The real benefit of top-up insurance is that if you insure adequately, you should be able to face the risk of a claim, however unlikely, with the peace of mind that comes of knowing that you have sufficient insurance protection either to meet any claim, however unlikely, in full, or at least to persuade any claimant not to pursue you beyond your limit of insurance. Commercial claimants are unlikely to have much pity on those whom they consider to be inadequately insured.

Why Gamble With Your Future? – The Importance of Top-Up InsuranceBy Justin Fenwick QC Chairman Bar Mutual Indemnity Fund Limited


The traditional position where people worked for one company for forty years, received a gold watch on the

Friday of their 65th birthday, and retired on the Monday is long gone. Increasing life expectancy, reducing state pension benefits, the inadequate private pension that many people have, along with changing retirement patterns suggest increased retirement income flexibility is required to match people’s needs and desires.

Recent research carried out for Standard Life1 shows that many of the stereotypical ideas that society has about old age are flawed. Most people believe that the ‘time of our lives’ is when we are between 18 and 25 years old, when there is lots of fun and socialising, time to play sport and participate in hobbies and, generally, be adventurous. Retired people are often perceived to lead dull and unadventurous lives. But our research found the opposite to be the case. In reality, over 55 year olds are most likely to be active in the community, most likely to be travelling abroad and least likely to be lonely. Of all age groups, over 55s are most likely to be happy and content. In contrast, 18 to 25 year olds are most likely to be lonely and have financial worries.

So what do people approaching retirement need, and what desires do they have for their future? One in three 46-to- 65 year olds want to keep working in new jobs, ‘on their own terms’, after the official retirement age2. This can mean different things to different people – there are a growing number of people easing their way into retirement through part-time working. Others want to start a brand new business. VSO, the overseas development charity, recruits ten times more people aged over 50 than twenty years ago, illustrating that people are choosing to use their skills and experience in different ways.

And it’s not just work where things are changing. Two-thirds of more affluent 46-65 year olds plan to travel more in their long-term future, compared to 23% of their parents’ generation who planned to do likewise. While nearly a third want to learn a new skill, such as a useful hobby or new language2.

The good news is that we are healthier and will live longer than previous generations. For the first time in the UK, the number of people over retirement age now exceeds the number of children. By 2050, it’s predicted that 65 year olds will live another 30 years, on average. A rapidly ageing population has implications for every part of our society, not least of which is how our economy evolves to remain sustainable.

One consequence we will see is changes to our state retirement benefits system. State retirement age for women will gradually increase from age 60 to 65 over the next decade. And then it will further increase, for everyone, to age 66 in the mid-2020s, 67 in the mid-2030s and to 68 in the mid-2040s. Other Government announcements point in the same direction. Currently employers can prevent employees working past age 65, even if the individual wants to continue. But the Government is bringing forward a review of this default retirement age to 2010, with strong indications the restriction will be removed, and people will be able to continue working as long as they want to.

All of this points to a new age of retirement. Employers won’t dictate retirement ages. Instead, people will be able to carry on working for as long as they want to, or need to.

The financial services industry needs to find a way to provide the flexibility people will want and need as they deal with this new reality. Our research shows that the baby-boom generation want to travel, work, even launch new business ventures. But as well as being personally ambitious, people may also need to provide for financial dependants, such as their childrens’ university fees or parents’ care. These are complex financial needs but there are certain pension products which allow income to be taken when people want and need, switched on and off, as well as reducing or increasing as circumstances change.

Self invested personal pensions (SIPPs) are one solution which may help people approaching retirement. SIPPs are known for giving people more control and flexibility around their investment options, including commercial property, bonds, shares, pension funds and mutual funds. And it’s easy to consolidate a number of other pensions into one SIPP to simplify your arrangements, and make it easier to keep track of your pension. SIPPs also give more options as people start to take their pension benefits. Since 2006, people can take some, or all, of their tax-free lump sum - normally up to one-quarter of their pension pot - without having to take any income. This lump sum can be used to help baby boomers set up a new business, pay off debt, help children through university or fund that holiday of a lifetime, with any remaining amounts continuing to be invested.

Another way SIPPs can help people near retirement is by gradually phasing their pension income. SIPPs allow you to draw an income from your pension pot, rather than

buy an annuity. In fact, the pension tax rules don’t require you to draw an income at all. You can leave your pension fund invested as long as you want.

This can help people who want to gradually ease into retirement - moving to part time working will usually see earnings fall - or who have other sources of income. While they may not want, or need, their whole pension income, taking some to top-up their part-time earnings can be very useful. And having the ability to vary this income up and down means that people can cope with ongoing changes to their working patterns.

One point to note concerns the minimum age for taking pension benefits which will rise from age 50 to 55 from 6 April next year. For example, someone born on 7 April 1960 could have started drawing their pension from their 50th birthday on 7 April 2010 before these changes were introduced. Now, they will have to wait until 7 April 2015 – their 55th birthday – before they can touch their pension. Everyone reaching age 55 on or after 6 April 2015 is affected in the same way. In truth, few people can afford to retire completely on their 50th birthday, but as the line between work and retirement becomes blurred, some would like to access part of their pension. Anyone aged between 50 and 55 on 6 April 2010 who wants access to their lump sum or income may need to take action before April next year.

SIPPs are one step towards providing for the flexible future that baby boomers aspire to. Put simply, people don’t grow old like they used to. Generation by generation we are living longer and the over 65s will be healthier with greater ambitions for their future than ever before. If we can make the connection between aspirations for retirement and the products available for long term saving, we will help people achieve their goals and also reduce reliance on subsequent generations.

Sources1 Standard Life research, May 20092 Standard Life research, January 2009

Tax and legislation are liable to change. This information is based on Standard Life’s current understanding of law and HM Revenue & Custom’s practice.

Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circumstances. No guarantees are given regarding the

The way in which we approach retirement, and the ideas people have about their later life are changing rapidly in the UKBy Andrew Tully, Senior Pensions Policy Manager, Standard Life

The articles in this supplement are intended for general information

only and should not be construed as advice under the Financial Services

and Markets Act

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Not all insurance is equalThe interests, assets and lifestyle of professional people are so diverse that mainstream insurers can find it difficult to provide the correct insurance cover to meet their individual needs.

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We look behind the hypeMainstream insurance companies also use marketing tactics such as TV advertising to persuade people to think simply about the ‘competitive’ premium rather than thinking properly about whether the cover they are buying is fit for purpose.

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We provide each of our clients with an expert insurance broker who can navigate them through the sea of insurance products. They are available face to face, through their direct line, mobile or email.

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New pension rules were introduced

in April 2006, with the objective

of ‘simplifying’ what had become

an extremely complex pension world. The

new rules set relatively simple criteria

for maximum contributions and benefits,

including the amount which may be received

as a tax-free lump sum. However, for those

individuals who had accrued pension benefits,

prior to 6th April 2006, which provided

more generous benefits than the new rules

would otherwise allow, special ‘transitional’

protection was available. One aspect of this

transitional protection, which is not very well

understood, relates to the impact on tax-free

lump sum benefits, now known as the pension

commencement lump sum (PCLS).

There are four types of PCLS protection:

1.Scheme specific – where the lump sum

is greater than 25% of the fund value but no

other benefit protection has been applied for;

2. Transitional protection for standalone

lump sums - where there are no other pension

benefits and no formal protection has been

applied for;

3. Where primary protection has been

applied for and the pre-6th April 2006 lump

sum is > £375,000 (i.e. >25% of the then

lifetime allowance of £1.5m);

4.Where enhanced protection has been


sum is > £375,000.

What follows is a simplified explanation of the

way that transitional protection works and

the implications for future investment and

financial planning.

1.Scheme specific – where the lump sum

is greater than 25% but no other benefit

protection has been applied for

In this scenario the total value of tax-free cash

available on 5th April 2006 is increased in

line with the growth in the lifetime allowance

(LTA) of £1.5m from 6th April 2006 to the date

benefits are taken, PLUS an additional amount

based on the growth of the scheme’s assets.

The formula used to calculate this entitlement is:

Lump sum available @ 5th April 2006 (indexed

by LTA) + (25% x [retirement fund – 5th April

2006 fund (indexed by LTA)]).

The ultimate amount of tax-free cash

entitlement will depend on whether the

pension fund experiences good or bad future

growth.

Let’s look at an example of good fund growth. Mike Jones had a fund of £900,000

on 5th April 2006 and a lump sum entitlement

of £600,000. He takes benefits in 2010/11

when his fund is worth £1.6m. The maximum lump sum he may take is £850,000 [i.e. £600,000 x (£1.8m/£1.5m)] +

(25% x [£1.6m - (£900,000 x (£1.8m/£1.5m)].

Let’s now take the same scenario but assuming

poor fund growth. Mike had a fund of

£900,000 on 5th April 2006 and a lump sum

entitlement of £600,000. He takes benefits in

2010/11 when the fund is worth £1m. The maximum lump sum he may take is now £720,000 [i.e. £600,000 x (£1.8m/£1.5m)] +

(25% x [£1m - (£900,000 x (£1.8m/£1.5m)].

Higher fund growth will, clearly, allow Mike to

take a higher lump sum. In this situation it

might be better for growth assets to be held

within the pension fund and more defensive

assets to be held on other wrappers, such as

an offshore bond or ISAs.

2. Transitional protection for standalone lump

sums - where there are no other pension

benefits and no formal protection has been

applied for

In this scenario the entire fund must qualify as

a lump sum on 5th April 2006 based on HMRC

rules for occupational schemes applying at

that time. This means that 100% of the entire

fund value can be paid as a tax-free lump

sum, whenever benefits are taken. However,

protection is lost if:

•‘Relevant benefit accrual’ occurs (which

means that additional contributions are made

or defined benefits are increased above a

small amount);

• If pension benefits are not taken in their

entirety (i.e. benefits are ‘phased’ over several

months or years);

•If a transfer IN or OUT of other than stand

alone lump sum benefits is made; or

•If the fund paid as a pension.

Let’s consider the example of Jane Swift, who

has an executive pension plan from a previous

employment. The plan was worth £500,000

on 5th April 2006 and Jane had an entitlement

to take the entire fund as a tax-free lump sum

at that time. The fund grows to £1.5m when

she comes to take benefits. Even though

lifetime allowance has only grown by 20%

(from £1.5m to £1.8m) over that period, Jane

can take the entire £1.5m fund value as a tax-

free lump sum.

Where stand alone lump sum protection

applies, it therefore makes sense to maximise

returns, as, under current rules, the entire

amount would be available as a tax-free

lump sum. A transfer of a poorly performing

or investment-restricted plan to, say, a self-

invested plan to improve the chances of higher

returns is possible but this must not be mixed

with non-stand alone lump sum benefits and

benefits must be ‘activated’ all in one go.

3. Where primary protection has been applied

for and the lump sum on 5th April 2006 is >

£375,000

In this scenario the amount of tax-free lump

sum entitlement as at 5th April 2006 is

protected and is indexed by the growth in the

lifetime allowance (LTA) from 6th April 2006

until the date benefits are taken, i.e. the lump sum is not calculated as a percentage of the fund. The calculation is:

Pre-5th April 2006 lump sum x (current

LTA/£1.5m) = maximum lump sum.

For this reason if the pre-5th April 2006 lump

sum is > 25% of the fund, it could become

< 25% of fund on crystallisation if the fund

grows faster than the LTA. It should also be

noted that no tax-free lump sum is available

from any pension contributions made after 5th

April 2006.

To illustrate how this works in practice, let’s

consider Barry Meads, who has an executive

pension plan (EPP) worth £3m on 5th April

Protecting Your Pension Tax- Free CashBy Jason Butler

personal finance & wealth management supplement the barrister 2009 13

LAWRENCE GRANT CHARTERED ACCOUNTANTS TO THE BAR

With some 20 years of experience in barristers’ tax and accounts affairs, we would be delighted to assist you in paying the least amount of tax permissible by law and keeping your tax house in order.

We offer a fixed fee scale which has gone unchanged for over a decade!

Call, fax or e-mail us for our FREE Barristers’ Tax-Deductible

Expenses Checklist.

Lawrence Grant,Chartered Accountants,2nd Floor Hygeia House,66 College Road,Harrow,Middlesex HA1 1BE.

Tel: 020 8861 7575Fax: 020 8863 9198E-mail: [email protected]: www.lawrencegrant.co.ukContact persons: Graham Busch or Justine Davies

2006 with a lump sum entitlement of £2m

(based on HMRC occupational pension funding

rules applying at that time). Barry applied for

primary protection plus lump sum protection

of £2m. He takes benefits in 2010/11 when

the LTA is £1.8m. The maximum lump sum

he may take is therefore £2.4m (£2m x £1.8m/£1.5m).

Let’s now look at the case of Mandy Withers,

who has a personal pension which was

originally funded by a transfer from an

occupational scheme, with a ‘certified’ amount

of tax-free lump sum. Her plan was worth

£2.4m on 5th April 2006 and there were no

protected rights benefits (i.e. the value of

invested rebates arising from contracting out

of the state second pension or – previously

- SERPS). The certified amount of tax-free

cash on 5th April 2006 was £0.5m and

Mandy applied for primary protection and

lump sum protection of £500,000. She takes

benefits in 2010/11 when the LTA is £1.8m.

The maximum tax-free lump sum is therefore

£0.6m (£0.5m x £1.8m/£1.5m).

We now know that the pension lifetime

allowance will be frozen for five years after

2010/11. This increases the likelihood of high

investment growth converting a lump sum

entitlement that was > 25% on 5th April 2006

into one that is < 25% and also of the entire

fund breaching the indexed lifetime allowance.

A more defensive pension investment strategy

might therefore be more appropriate, perhaps

balanced by holding growth assets either in

one’s own name or another wrapper, such as

an investment bond or ISA.

4. Where enhanced protection has been


sum is > £375,000

In this scenario the lump sum is protected as a percentage of the fund as at 5th April

2006, not the cash amount as it is for primary

protection. The formula is:

[(lump sum on 5th April 2006/fund on 5th.

April 2006) x 100%].

The eventual lump sum entitlement is

calculated by applying the resulting percentage

to the fund when benefits are taken. The

lifetime limit is not relevant as enhanced

protection applies.

Let’s look at the example of Darren Jones, who

had £3m in a pre-March 1987 executive plan

on 5th April 2006 and a lump sum entitlement

under HMRC rules at that time of £1.5m. He

applies for enhanced protection and lump

sum entitlement of 50% ((£1.5m/£3m) x 100).

Darren’s fund is worth £5m when he takes

benefits, therefore his maximum lump sum

entitlement is £2.5m, being 50% of the whole

fund.

Or consider the case of Sophie Farrow, who

had £2.4m in a personal pension on 5th April

2006. The plan was funded from a transfer

of occupational benefits and thus the lump

sum entitlement under HMRC rules on 5th

April 2006 was £480,000, i.e. 20%. Sophie

applied for enhanced protection and lump

sum entitlement of 20% ((£480,000/£2.4m) x

100). Her fund is worth £3m when she takes

benefits and the LTA is £1.8m. Therefore her

maximum lump sum entitlement is £600,000, being 20% of the whole fund.

In this scenario maximising fund growth

clearly makes sense as the fund is protected

a g a i n s t

e x c e e d i n g

the lifetime

allowance and

the lump sum

entitlement is

preserved as a

percentage of

the fund.

Help is at

hand

For the lay

person with

s i g n i f i c a n t

p e n s i o n

benefits prior

on 5th April

2006, far

from being

s i m p l i f i e d ,

the options

available can

be complex

and are highly

sensitive to

the chosen

i n v e s t m e n t

s t r a t e g y

pursued. A

t h o r o u g h

k n o w l e d g e

a n d

understanding of pension rules and investment

principles are not just desirable but essential

when formulating a plan of action.

If your eyes are glazing over by now, don’t

worry, there are professional advisers out

there who understand (and even love) this

stuff. A small investment in their fees might

be the best investment you ever make so that

you can get your hands on as much tax-free

cash from your hard earned pension, when

the time finally comes to turn on that pension

tap.

Jason Butler is a Chartered Financial

Planner and Investment Manager at City

based Bloomsbury Financial Planning. He

has twenty years’ experience in advising

successful individuals and their families on

wealth management strategies. Jason can be

contacted on email:

[email protected]

Tel: 020 7194 7830

W E A L T H M A N A G E M E N T

The Personal Wealth Management Service

As a Senior Partner of the St. James’s Place Partnership, I offer a personal

bespoke wealth management service.

I provide face-to-face advice and specialise in meeting the financial needs of

people who have successfully created capital, or who earn higher incomes, and

whose circumstances and requirements can be more complicated than usual.

Whether a simple issue, or a complex multi-faceted problem, I provide wealth

management on an individual basis, bespoke to your personal needs.

The need for advice

Reducing the amount of income tax you pay.

Solutions to remove the Inheritance Tax burden.

How to beat falling interest rates.

Planning for your future.

One to One bespoke advice.


The international opportunity for UK Barristers is significant both in terms of fee potential from international

clients and also for investment in property and financial products. Emerging markets make ideal hunting grounds for profit hunters and holiday homes overseas offer a common sense way to enjoy time off and at the same time nurture a nest egg for the future. The global reach of the British justice and legal system has created ongoing global demand for UK Barristers expertise around the world. Some might say the global element was more than just a small consideration in their professional livelihood.

One should never take anything for granted, however our foray into the global marketplace has a trade off which often includes expensive charges for making and receiving international transactions, poor foreign exchange conversion rates when you need to buy currency and most importantly the potential to lose on foreign income if the exchange rates move against you over a period of time.

But how can you ensure that you are getting the most out of the international element of your life and work? More importantly can you be sure that the income that you receive or investments that you make overseas actually translate into positive returns both financially and otherwise?

Since de-regulation of the foreign exchange markets, individuals and businesses have been able to access specialised providers of international payments and foreign exchange. Through these providers, individuals and businesses have benefited from products and services which previously they may not have had access to. Let’s look at some of these in more detail.......

I receive fees and income from Europe and the Far East, how can I stop losing on exchange rates?

Foreign income is growing for barristers in the UK; as the public purse tightens, overseas client income is fast becoming an important

income stream. The majority of the Bar Council’s members work on a self employed basis which it key to think commercially about running your business most efficiently and profitably.

Overseas work contracts are typically agreed at the front end, especially when it comes to fees and timelines. A European project lasting 6 months may be worth €100k in income for your business, however the trickle of payments into your bank account may occur over a period of time. Although your client is paying an agreed price for your time and services, your actual income in terms of £ will depend entirely on the exchange rate you can achieve as and when the money comes in – something you cannot control. Whereas a property investment is something that can easily be dumped if the numbers no longer add up, a contract for your services is seen as much more final, particularly as your professional reputation is at stake.

So how can the risk of exchange rates be managed when it comes to income earned in $ and €. The answer is simply a product called Salary Risk Protection which is a simple way of protecting the income that you earn against foreign exchange loss. Using the forward contract principle, you are able to protect monies that you are certain to receive in the future. Without such protection, the lucrative €100k project might only bring in the same amount of £ as a lower value local contract.

Tip number 1: Protect your international income against exchange rate loss using Salary Risk Protection ensuring that you are paid appropriately and adequately for your services.

International Assets – buying investment property or holiday homes overseas

Whether an investment property held within your portfolio, or a holiday home for the family over summer; overseas bricks and mortar purchase presents a good opportunity for long term capital gain. Property investment is not

a risk free business – bubbles such as Dubai have recently felt the impact of falling demand and over saturation, which means care must be taken on choice of property

So what drives our decision to buy a specific property? The location’s potential? capital gain forecasts? Personal recommendation from a friend or your IFA? One factor certainly takes the common sense precedent – affordability. If you have a budget of £200k for your dream holiday cottage in the South of France, what can you actually afford? Assuming an exchange rate of 1.3 Euros to the Pound, you’re budget would be €260k, right? The retail banking channel in the Uk is the most commonly used mechanism to convert currency. It is convenient however the 2-3% cost of using a retail bank will have a huge impact on your buying power. Retail banks have been known to charge up to 4% on such conversions – Your €260k budget could have just shrunk to under €250k.

Tip number 2: Use a non bank specialist provider for the exchange. With typical margins of around 1%, they represent an immediate financial advantage against your retail bank.

Timing your transactions with the help of a specialist

The next challenge comes on deciding when to pull the trigger on the transaction. The daily up and down movement in the US $ exchange rate can be anything up to 3%. If you make the transaction at exactly the right time, you could reduce the price of your investment by several thousand pounds. You could easily spend a valuable day trying to second guess the exchange rate and transact at the perfect moment. You could also end of much worse off if you don’t succeed. In some cases your property investment decision may only be possible as and when certain exchange rates are achieved, for example you may only be able to afford an investment if the Euro exchange rate hits 1.25. How can you improve your chances of achieving this?

Tips on making the most out of your Foreign Income and Overseas InvestmentsBy Deepak Goyal, foreign exchange specialist at Currencies Direct

MEDIUM SIZED FIRM

OF THE YEAR

Tip number 3: Use a dedicated dealer to watch the market on your behalf. A dedicate dealer can keep you informed of market movements and even make the deal for you if you give them pre-defined instructions such as “buy the Euros when the rate hits 1.3”

Spot or forwards? Covering yourself against future exchange rate movement

Over the last 12 months, currency markets have fluctuated by up to 35%. Private and Corporate investors have struggled to keep up and most have not protected themselves against these movements. Imagine agreeing to buy a property only to be told that you need to pay an extra 20% or 30% on the cost price because of the exchange rates. Many investors have had their hands forced in forgoing their deposits and defaulting on investment plans on the back of market moves. A spot transaction (the transaction is agreed and transacted at the same time) would normally be used as and when the purchase was exchanged or completed.

The time lag between an agreement to purchase and the physical settlement of monies overseas creates foreign exchange

risk. Left unmanaged, this foreign exchange risk can quickly erode potential for capital gain and even jeopardise the investment altogether. With access to specialist provider’s products, investors can now enter into forward contracts – a fundamental tool of the trade in managing foreign exchange risk.

A forward contract is an agreement made by you to purchase a specific amount of currency, at a specific exchange rate, within a specific time frame. You are able to agree a forward contract at the time you agree to buy a property. Let’s assume that you’re ski chalet in Switzerland is agreed at a price of 300k Swiss Francs. At an exchange rate of 1.8 (£/CHF), the investment will cost you the equivalent of £166,667. Let’s assume that the deal will take 3 months to complete and will involve an immediate deposit of 10% followed by 3 instalments of 30% on a monthly basis. Over the course of the three month buying period, if the exchange rate moves towards 1.6, the property will end up costing well over £166k, perhaps even £20k more. If you buy a forward contract to purchase 300k CHF over a 3 month period at an exchange rate of 1.8, you will immediately create certainty

in your costs and protect yourself against adverse movements in the exchange rate. You will transact at an exchange rate of 1.8 using your forward contract regardless of where the spot market is trading at that point in time. This does also mean that if the exchange rate moves to 2, you will forgo the better exchange rate and be obligated to use the 1.8 rate you have booked forward.

Tip number 4: Understand how much risk you are willing to take. If you want to fix the real cost of your property purchase, contact a specialist foreign exchange provider to quote on a forward contract. Decide on how much you want to buy forward – do you want the whole amount to be locked in or would you prefer to fix only half of the amount and speculate on the remaining half?

Deepak Goyal is a foreign exchange specialist at Currencies Direct, a London based specialist provider of Foreign Exchange and International Payments. Deepak can be contacted on 0207 847 9421 or [email protected] . All of the above facilities are also accessible through the Member Services section of the Bar Council website.

18

The changes to the taxation of highly

paid individuals in Alistair Darling’s

2009 Budget announcement on

22 April 2009 have certainly come as an

unwelcome surprise to many. Two of the most

significant changes brought about by the 2009

Finance Bill are:

•the increase to a 50% tax rate; and

• the restriction of higher rate tax relief for

pension contributions.

This article will look at these changes in detail

and offer some potential ways to alleviate the

tax burden they will create.

Increased tax rate

Despite the fact that this increase will affect

only 1% of UK taxpayers (around 350,000

individuals), the news is something of a shock

to the highly paid, as this is the first time the

tax rate has been increased for many years.

The increase to a 50% tax rate will affect those

with incomes over £150,000 and is set to come

into force from 6 April 2010, for the 2010/2011

tax year. Coupled with the proposed increase

of ½% in national insurance, this will mean

an overall marginal rate of 51.5% on income

over £150,000

An increased dividend rate of 42.5% (instead

of the 32.5% currently in place for higher

earners) is set to apply from the same time.

Effect on personal allowances

From 6 April 2010, personal allowances are

also due to be restricted for those earning in

excess of £100,000. The restriction will mean

that personal allowances are tapered away at

a rate of £1 of personal allowance for every

£2 of income above £100,000. At 2009/10

rates this means that those with income

over approximately £113,000 will receive

no personal allowances, and will suffer a

marginal rate on income between £100,000

and £113,000 of 60%.

Self Employed Individuals

Barristers and others who are self employed

may feel the effect of the increased tax rates

much sooner than others due to the way

in which profits are allocated to tax years.

Many individuals have selected an accounting

date ending early in the tax year, to provide

the maximum deferral in paying tax on this

income. For example, if an individual’s

accounting year ends on 30 April, for

2010/2011 their accounting period will be

from 1 May 2009 to 30 April 2010 and tax

on this income will be payable on 31 January

2012. However, this means that profits from 1

May 2009 will be taxed at the higher tax rate

of 50%, despite the fact that the new rates will

apply from 6 April 2010.

It may, therefore, be worth considering a

change of accounting date to mitigate the

effects of these new rates and alleviate this

tax burden. For example, if an individual

were to change their accounting date to 31

March, profits from 1 May 2009 to 31 March

2010 would not be subject to the 50% tax rate

as they would fall into the 2009/10 tax year,

instead of 2010/11 thus saving 11 months

worth of tax at the new higher rate.

However, there are important factors to

consider before changing your accounting

period, as it may not always be advantageous

to do so. A self employed individual must

first consider the level of profits that would

be brought into charge a year early, and the

extent of overlap profits that would be relieved

by changing the accounting date, which would

otherwise not be relieved until retirement.

The loss of deferral of tax payment is also

important – actual tax payments may be

accelerated. Each individual’s circumstances

will be different, and therefore it is difficult

to offer general sweeping statements that will

apply to everyone. It is advised that individual

tax advice is sought before considering

changing your accounting period.

The loss of higher rate relief for

pension contributions

From the 6 April 2011, higher rate relief for

pension contributions (currently 40% but

increasing to 50% from 6 April 2010) is to

be removed for individuals with an annual

relevant income of more than £180,000. This

means that individuals earning in excess of this

amount will only get relief against their income

tax liability for all pension contributions at the

basic rate of taxation (currently 20%).

Those individuals with a relevant income

between £150,000 and £180,000, will have

their higher rate relief tapered away, or

effectively reduced depending on their level of income.

The 2009 Finance Bill and its impact on highly paid individualsBarristers and others who are self employed may feel the effect of the increased tax rates much sooner than others due to the way in which profits are allocated to tax years

By Patricia Mock, director in the private clients practice at Deloitte.


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Any information contained in this advertisement relating to the London Central Residential Recovery Fund Limited is in summary form and is not complete and is subject in all respects to the placement memorandum issued by The London Central Residential Recovery Fund Limited and approved as a financial promotion under Section 21 of the Financial Services and Markets Act 2000 by LLP Services Limited (authorised and regulated by the Financial Services Authority in the UK). Prospective investors should be aware that investment in the fund involves a high degree of risk. The value of an investment in the fund may go down as well as up and investors may not get back the amount originally invested. The investment may be illiquid until the fund is wound up after eight years. Prospective investors should review the “Risk Factors” set out in the placement memorandum. London Central Portfolio Limited (LCP) is not authorised to give any investment advice to individual investors and if you require such advice it is recommended that you should contact your Financial Advisor. This unregulated exchange traded fund is not regulated in Jersey. The Jersey Financial Services Commission has neither evaluated nor approved: (a) the scheme or arrangement of the fund; (b) the parties involved in the promotion, management or administration of the fund; or (c) this prospectus. The Jersey Financial Services Commission has no ongoing responsibility to monitor the performance of the fund, to supervise the management of the fund or to protect the interests of investors in the fund. Application will be made for the listing of the ordinary shares of the fund on the Channel Islands Stock Exchange. Any reference to the London Olympics in 2012 is merely referring to the fact that it is taking place and not any endorsement or recommendation of the fund by the Olympic Delivery Authority or the British Olympic Association. * We refer to 1% over Meespierson (C.I.) Limited Base Rate which for sterling tracks the Bank of England Base Rate (currently 0.5%).

Contact: Hugh, Manager to the FundTel:+ 44 (0)20 7723 1733

[email protected]

personal finance & wealth management supplement the barrister 2009personal finance & wealth management supplement the barrister 200920

Although these changes will only apply

from 6 April 2011, in order to prevent the

forestalling of these new rules, for example by

making large pension contributions before 6

April 2011, the government have introduced

measures that took immediate effect from 22

April 2009.

Anti-forestalling measures currently in place

The anti-forestalling measures work by

introducing a special annual allowance

for 2009/10 and 2010/11 that will operate

alongside the normal annual and lifetime

allowances that were introduced from

2006/07. These measures only apply to

individuals whose income is at least £150,000

in the tax year, or one of the two preceding

years. For 2009/10 therefore, those with

a relevant (broadly total) income of at least

£150,000 in either 2007/08, 2008/09 or

2009/10 are potentially caught.

This special annual allowance was originally

set at £20,000, although £30,000 may be

available in some cases. So pension savings in

excess of this amount that are not protected

(see below) will be taxed at 20% in 2009/10,

via an individual’s self assessment. This

means, therefore, that any contributions above

the limit will receive only basic rate relief,

due to the 20% tax charge, which effectively

claws back the higher rate relief claimed. For

2010/11 the charge is expected to be 30%.

Protected pension contributions

The good news is that the special annual

allowance charge will only apply where

pension contributions are in excess of the

individual’s pre-existing normal pattern.

Therefore any normal ongoing contributions,

in existence before noon on 22 April 2009

are protected. These must be paid at least

quarterly, although a limited relief on up

to £30,000 of contributions has now been

introduced for those paying contributions

less frequently. An individual whose average

infrequent contributions for 2006/7, 2007/8

and 2008/9 exceed £20,000 will get an

increased special annual allowance equal to

the lower of that average and £30,000.

Contributions paid, in the period 6 April

to 21 April 2009 inclusive, in excess of the

normal ongoing pattern also avoid the charge

(although they reduce or eliminate the special

£20,000 or £30,000 allowance for the rest

of the 2009/10 tax year, as do any normal

ongoing contributions paid during the year).

What can be done?

Whilst there are a number of things that can

be done to reduce the impact of these potential

changes, it is important to bear in mind that

there are several anti-avoidance provisions

intended to stop individuals planning their

way around the new rules. That said, there are

various tax planning ideas that will mitigate

the effect of the above changes, including the

following:

•Those with spouses whose incomes are less

than £150,000 might consider paying into a

pension scheme for their spouse. Relief is

currently available to the spouse at his or her

highest marginal rate. The maximum that may

be contributed with tax relief is determined by

the spouse’s relevant UK earnings;

•Those who exceed the £150,000 threshold

by a relatively small amount may find it

worthwhile making gift aid payments, as

these will be deducted in calculating relevant

income, and may therefore take them below

the threshold. Another option might be to

invest in a vehicle in which the income receipt

is deferred (e.g. deferred interest deposit

accounts). As the income is taxed on a receipts

basis, the deferral may prevent the individual’s

income exceeding the threshold in that year.

However, bear in mind the potential effect in

the year of receipt. There is a specific anti-

avoidance rule which counteracts schemes

designed to reduce income below £150,000. It

is not clear whether the steps outlined above

will be caught under this rule.

Summary

For high net worth individuals who are affected

by the increased tax rates and reduced pension

tax relief, the attraction of receiving returns as

capital rather than income is obvious, bearing

in mind the differential in tax rates of 50% and

18%. There is likely to be an increased focus

on investments yielding capital returns, such

as property. Structured investment products

yielding a return which is subject to capital

gains tax rather than income tax will become

highly sought after – although not always easy

to achieve in practice. The pension changes

are also likely to lead the affected individuals

to focus on whether their pension savings are

still efficient, or whether other investments

should be considered.

If you are planning to invest – don’t! Invest in Planning – and only then invest - but mind the Tank Top. It is a bit of a corny line – but nonetheless true. After all, when you think of our day to day work, most of us try to be as organised and efficient as we possibly can – yet when we go home something strange happens, especially with our personal finances. Compare this to when you are running a business - you wouldn’t even think of operating without being properly prepared - with a business plan, some financial projections and of course some basic targets. Then you would have probably also prepared some cash flows, a balance sheet and even an auditor to come in to check it all for you – perfectly organised; and yet when we shut our front door, any form of financial planning and organisation seems to go out of the window, and when asked about our own financial affairs most of us turn into dribbling idiots. Seemingly most of our financial decisions seem to get relegated to the latest best idea from a financial adviser or salesman, or alternatively being persuaded into joining in next fashionable financial fad. Whether it is because financial services are dull, possibly incomprehensible, or just that we have all got more interesting things to do at home, for some reason most of us don’t seem to bother planning. In fact what normally happens is that we then tend to collect a series of financial products over the years. These seem either to have been “a good idea at the time”, or were flogged to us by that persuasive salesman who caught us off-guard one day. Usually evidence of this “financial magpie” approach can be located in the third drawer down on the left hand side of your desk at home. The contents would in all likelihood include some old endowment policies, a pension scheme and some old ISAs and PEPs, along with some National Savings certificates and Premium Bonds. There is also often every chance that there will be some old share certificates and allocation papers for old demutualisations and privatisations and some ageing unit trusts probably invested in some bombed out technology fund. Also there might be a slight scratching sound in the back of the drawer, which upon further investigation turns out to be an old bent Krugerrand which you had bought for your grandson. The sum total of your family finances! Of course all our personal finance drawers will vary and some will in fact bring out quite an array, but they tend to all have one thing in common – none of them have any form of financial planning applied to them. As families we will all have different specific requirements but often similar needs. For example, we probably all have to consider everything from education fees to pensions and health care. However, we tend to address each only separately. The answer lies with the need for professional planning across all your family’s assets and liabilities. All our families are different across all the generations, but when linked together the strength of the family is far greater than the individuals who are just targets to be picked off the by the next salesman. So there is an important phrase for us all with our money – “If you are planning to invest – don’t! Invest in planning.” Now for the investment. Here again we have to avoid the fashion fads of the investment markets. Whether it has been internet “dot coms”, emerging markets, telecoms companies or even banks – they all appeared at their peak to be sure fire winners. This year’s fashion fad is next year’s tank-top It is easy to be drawn into the popular shares and investments of the time but more often than not these in fact turn out to be just bets on stocks, with all the investment discipline of a punt on the 2.30 at Newmarket. Good investment process and discipline is a continuous process of managing the risks we are willing to take against the potential returns we want to achieve. Too much risk and you can’t sleep at night: too little risk and your returns are likely to be meagre. A good discipline is to have a broad range of asset classes with everything from shares to bonds, commodities to property and foreign currencies to timber as well as many other classes and also spread around the globe. The reason for such diversification is to try and manage the volatility, and we can manage that then you are more likely to improve the predictability of your returns. It may sound somewhat duller than a punt on a share, but for your longer term investments dull but more predictable can be quite attractive. It’s not that you can’t have a punt or a bet, but only do it with money you are prepared to lose – and for me that does most certainly not include my pension. So first do your planning and only then apply your disciplined investment process across those asset classes and around the globe – that’s how to manage your finances and not lose the stuff. Justin A. Urquhart Stewart www.7im.co.uk [email protected] 020 7760 8777


There have been few shelters from the economic storm. The private investor has seen huge values wiped from their

ISAs, stock markets investments, pensions and with profits plans. It has been a miserable two years.

The four main asset classes have been savaged by the financial crisis: Between 1st August 2007 and the 1st March 2009 UK equities fell by 36%, corporate bonds by 12%, commercial property by 33% and the interest from the average deposit account to less than 0.5% (source: Lipper, FTSE All Share, Markit IBoxx sterling corporate index, IPD UK Property index).

At the time of writing. the UK stock market is more than 2,000 points lower than the peak it reached in January 2000. No wonder that the 2009 Barclays Equity Gilt study described the last ten years as the “lost decade” for equities.

The general consensus is that with public borrowing at record levels, tax revenue falling and unemployment rising, the economy is in real trouble. Taxes are already on the rise but against this doom and gloom there has been a sharp recovery in equities and bonds since March, including 11 consecutive days of growth in the FTSE 100.

Markets have rallied for several reasons:

• The threat of a total meltdown of the financial system seems over.

• With the threat passing, asset prices in sectors which had collapsed on the assumption that firms would go bust, suddenly looked very cheap once confidence in their long term survival was restored. Buyers moved in and prices recovered. For example, shares in Barclays have increased from the low at 51.20p to 306p, a rise of 600%. Shares in Taylor Wimpey have increased over a 1000% to 38.75p.• Businesses which had rapidly run down their supplies in

the face of falling demand had to start replenishing their store rooms leading to a boost to inventories in March and April.

• The housing market fall seems to be slowing and in some areas may be bottoming out, although talk of another boom seems premature.

Since investors have suffered the pain they need to ensure that their investments and pensions are in the right place to profit from any recovery and get their plans back on track.Making the most of cash is important since virtually all cash investments, while secure, do not provide a real (above inflation) return after tax.

Holding a cushion of cash in readily accessible accounts is the bedrock of a good financial plan. Cash deposits should be held in the name of the spouse who pays the lowest rate of tax, saving up to 40% of the interest now and up to 50% from April 2010.

The Bank of England Base Rate is 0.5% (July 2009) and with no short term prospect of inflation, is likely to remain so until at least the next General Election. Banks and building societies continue to tempt investors with fixed interest rate deals, some

which pay 5% before tax. The next interest rate move will be upward so within five years, a 5% return on savings could look poor. In my view investors should not be fixing for more than 12 months.

Inflation will return, but not tomorrow. Rises in the cost of council tax, energy and commodities is painful in the pocket, but cannot be controlled by interest rates. True inflation is driven by wage rises, but average earnings are currently falling as employers cut wages or put staff on shorter hours. What is more, unemployment continues to rise. This suggests that inflation will not return for some time.

That said, keep an eye on National Savings Index Linked Certificates. There are two certificates, a 3 and a 5 year, with the tax free return being 1% above the rate of inflation as measured by the Retail Price Index (RPI). Even with RPI being zero or negative, the 1% tax free return is equivalent to 1.67% gross to a high rate tax payer.

Between spouses, £60,000 can be invested over two certificates and with new certificates introduced every 6 months, plus reinvestment options when they mature, this could be the start of a large, tax free and inflation proof cash holding. Index linked gilts are an alternative. However, new issues are always in demand from pension funds looking to match their liabilities and generally these are priced above par (their

Look for the silver liningInvesting during a time of low interest rates, low inflation, volatile stock markets and high taxation is a challenge. Government borrowing is at an all time high: recession and the credit crunch far from over. Danny Cox CFP, Head of Advice at Hargreaves Lansdown, looks for current investment opportunities and how to navigate through choppy waters.

3personal finance & wealth management supplement the barrister 2009

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nominal value).

Turning to higher risk investments such as shares and bonds, one strategy to capitalise from the recovery is to buy those stocks which have fallen significantly in value. This assumes that at some stage the share price will recover further, which is far from a given. Even with a recent 400% rise in value, the Royal Bank of Scotland share price remains a fraction of it’s 12 month high.

In the past, large companies have come out of recession quicker than smaller companies. Large companies are likely to have better capitalisation which will help them to weather the storm. However, this isn’t always the case and there have been some high profile, large company collapses (Lehman Brothers, Woolworths, Zavvi to name a few). Certainly the banks feature as being amongst our largest companies and perhaps they have the longest road to recovery.

You would also expect America to come out of recession first: the credit crunch’s obituary cannot be written until the US housing market bottoms, but ultimately the biggest growth stories in future are likely to continue to be in the emerging markets and infrastructure.

Investors have to decide how actively they want to manage their investments. Those

who take a real interest in their investments may feel confident making the key decisions themselves. Others will prefer someone to do it for them. Despite the FTSE 100 making no headway over the last 10 years there are many fund managers who have made good returns. Finding a fund manager who makes money when markets rise is easy. Finding those that consistently beat their peers, whatever is happening in the market is harder, but not impossible.

The relatively new kid on the investment block is the Absolute Return fund, designed to provide a positive return regardless of market conditions. Absolute Return funds are essentially hedge funds, but based onshore, fully regulated, and aimed at the average investor. Strategies vary from fund to fund and include short selling and using financial instruments such as options and derivatives.

Absolute return funds could be a long term solution for those who want a return above cash and inflation but without the risk of a standard equity fund. Absolute return could easily form a core holding in a portfolio, complemented by higher risk satellite funds.

Regardless of how the investment choices are made, investors must make as much use of tax allowances and tax breaks as they can. The gap between capital gains tax at 18% and the new super tax rate of 50% seems huge.

The new super tax rate, the erosion of personal allowance for those earning over £100,000 and increases to national insurance contribution rates could just be the start of further tax rises. It is widely predicted that VAT will increase above 17.5% in future.

Sheltering investments within an ISA is essential. A couple under 50 can shelter £14,400 and those over 50, £20,400 (after

6th October 2009) into an ISA per tax year, protecting investments from additional taxation. Returns from an ISA do not need to be detailed on a tax return. Considerable savings can also be made on initial and ongoing charges, by purchasing through a fund supermarket. Doing so can not only save money, but also make valuations easier and substantially reduce paperwork.

Pensions have been further complicated by this year’s

Budget. Higher rate tax relief on pensions is under threat and anyone earning more than £43,875 should make hay while the sun shines.

Those who have earned more than £150,000 since April 2007 can still pay large pension contributions and receive basic rate tax relief, but higher rate tax relief is restricted, broadly to either £20,000 or £30,000 - the exact amount depends on your recent contribution

history. The rules are complicated, the HL Guide to Saving Tax has more details www.H-L.co.uk/guides. This leads to building pension income in both spouse’s names being even more important. Pension income is ideal for the age-related personal allowance and basic rate tax relief is available even if the individual is a non- taxpayer.

Danny Cox is a Chartered Financial Planner and Head of Advice for Hargreaves Lansdown. Direct line: 0117 317 1638

Please note that the past performance of a fund is not necessarily a guide to future performance. Tax reliefs are subject to change and the values of these relief will depend on circumstances. This should not be viewed as advice or a recommendation to invest.

This is a financial promotion and is not intended as investment advice. Past performance is not a guide to future performance. The value of your investments, and the income from them, can fall as well as rise and you may not get back the original amount invested. The value of overseas securities will be influenced by fluctuations in exchange rates. The information contained in this advertisement should not be construed as a recommendation to buy or sell a security. Issued by Newton Investment Management Limited (Newton), The Bank of New York Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No. 1371973. Newton is authorised and regulated by the Financial Services Authority.

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It was no surprise to anyone that in the

April Budget the Chancellor announced an

increase in tax rates. Given the economic

situation some tax changes were anticipated,

however it did come as a surprise that the 50%

rate would apply from April 2010 to all those

with income over £150,000, whilst the capital

gains tax rate remains the same. At the same

time the Chancellor announced that personal

allowances would be reduced from April 2011

for those with income over £100,000. In effect

this means a marginal tax rate of some 60%

for those with income between £100,000 and

£105,000.

The obvious way of reducing the effective tax

rate is to try to incur capital gains tax rather

than income tax. This however is easier said

than done. There is a great deal of anti-

avoidance legislation devoted to preventing

exactly this, much of it dating back some thirty

years till the last time that the rate differential

was so great. For many the best solution

will be to take advantage of what legitimate

planning is available rather than trying to

convert income into capital.

Below are some of the steps that can be taken

to mitigate the income tax rate:-

•Equalisationofincomebetweenspouses

Since separate assessment of spouses was

introduced the most obvious tax planning has

involved equalising the income between the

spouses. The object is to ensure that both

spouses utilise their personal allowances at

the lower rates of tax. This is usually achieved

by transferring cash or other assets between

the spouses but it is important that these are

absolute gifts between them, you cannot just

transfer the income leaving the ownership of

the asset behind.

•GiftAid

Payments to charities under the gift aid

scheme reduce the tax payable at the higher

rates of tax. The change to a 50% rate will not

affect the charity but will mean a greater relief

for the individual and possibly reduce income

levels so that they fall below the 50% tax rate.

•SalarySacrifice

If you are an employee or you have employees

then it can be advantageous to sacrifice

salary in return for a non-cash benefit, often

a pension contribution. Such schemes are

becoming increasingly common but it is

important to remember that it does involve a

variation of the employment contract and thus

needs to be considered carefully.

• Change of year end for sole traders/

partnerships

If you are in business and have an accounting

year end, other than 5 April or 31 March, then

you could consider changing your year end

to that date. The benefit would be to remove

profits from the 50% rate of tax due next year,

to the current lower rate of 40%. In addition

the additional profits this year may be reduced

by any overlap relief that is available for set-

off against the profits.

The downside of this of course is that you will

be paying tax on profits a year earlier than you

would otherwise do.

•Pensions

If your income is between £150,000 and

£170,000 investments in a pension could be

very attractive. The gross investment of up to

£20,000 will qualify for 50% tax relief.

If you are about to start drawing benefits from

a personal pension, it is worth considering a

technique known as staggered vesting. Under

this arrangement part of your tax free cash

entitlement is taken each year rather than all

at once when you retire and treated as part of

your income. By such means you can reduce

the amount taken as pension subjected to tax.

This technique can be used whether you are

buying an annuity or electing for draw down

i.e. leaving the fund invested and drawing

income from the fund.

Investments

It is worth restating the old adage that you

should not let the tax tail wag the investment

dog. However, if it is possible to take advantage

of the capital gains tax rate of 18% then it

makes sense so to do. There are a number of

tax wrappers that enable a generation of tax

free or at least tax efficient income and these

are summarised below:

•ISA’s

It is possible to invest up to £7,200 each year

in an ISA where income and capital gains are

tax free. From 6 October 2009 those over 50

can invest £10,200 and from 6 April 2010 this

will apply to everyone. By making use of the

allowances each year, it is possible to build up

a significant tax free portfolio.

•InvestmentBonds

Investment bonds issued by insurance

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companies enable you to invest in a wide

range of assets. The bonds are tax efficient in

that the underlying funds are generally taxed

at no more than 20% on income gains. It is

possible to withdraw up to 5% per annum of

the original investment for up to 20 years with

no further tax liability. Any withdrawals in

excess of this will be liable to tax at the top

rate, less 20% in the year of encashment.

Thus it is possible to defer high rate tax for

20 years or more and by careful planning the

tax on the final encashment can be reduced or

avoided altogether.

These bonds can be arranged offshore and in

this case the funds do not suffer tax, however

they will not be able to recover any withholding

tax, for example on dividends. The same

tax deferred 5% per annum regime applies.

But on final encashment there is a potential

liability to basic as well as higher rate tax.

•UnitandInvestmentTrusts

Dividends from Unit and Investment Trusts

are treated in the same way as dividends

from shares – in other words there is a credit

to cover the basic rate tax liability but if you

are a 50% taxpayer the dividend will suffer a

total of 42.5% tax. There are, however, some

opportunities for avoiding tax on income.

Split capital and investment trust attracted

a poor press some years ago because of the

closely interrelated structure of some trusts

and their failure to perform. However, the

theory of these trusts is sound and those trusts

that are structured to generate no income but

capital gains could benefit from a renaissance.

Trusts investing in overseas equities do not generate

much by way of dividends, focussing on capital

growth instead. Unit and investment trusts are a

good way of investing in overseas stock markets.

•ZeroCouponBonds

A zero coupon bond is a fixed interest

investment or debt security bought at a price

lower than its face value with the face value

being repaid at the time of maturity. It does

not make periodic interest payments or

have so called coupons, hence the term zero

coupon bond. Investors earn return from the

compounded interest all paid at maturity plus

the difference between the discounted price of

the bond and its par or redemption value.

•NationalSavings

Many national savings products (but not

all) provide tax free returns. For example,

Premium Bonds, Fixed and Index-Linked

Saving Certificates. Furthermore they offer

high levels of security which is a bonus in

today’s market times. However, generally

the returns are poor. Having said that, if

one anticipates higher inflation in the future

then the index-linked certificates, which offer

inflation plus 1% per annum tax free could be

attractive.

Whilst the 50% tax rate could be a burden

therefore, there are a number of ways of

mitigating the effect, much will depend on the

circumstances of the individual. It is also of

course unknown whether this proposed tax

increase will go through as planned as there is

scope for a change of Government before April

2010. Even if there were to be a change in

Government it is not certain that the capital

gains tax rate would remain at 18% and this

needs to be borne in mind.

Anne Gregory-Jones

Haysmacintyre

Fairfax House

15 Fulwood Place

London

WC1V 6AY

T +44 (0) 20 7969 5500

W www.haysmacintyre.com

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HM Revenue & Customs (HMRC) announced in July that from 1 September 2009, a ‘new disclosure opportunity’ (NDO) will be offered to

help individuals bring their UK tax affairs up to date at a lower than usual cost. Clients may save money by using this scheme, but they

will need to act quickly as the registration period will close on 30 November 2009.

HMRC’s objectives

For many years HMRC has been refining its operations and tactics to collect as much tax as it can at the lowest possible cost. It now targets high

risk taxpayers or sectors with discrete projects and is well aware of the common misconception that income received outside the UK is never

taxable here.

In 2007, HMRC offered the Offshore Disclosure Facility (ODF). Any taxpayer with under declared tax was allowed to calculate the total amount due

and make an offer to HMRC in full and final settlement of all years up to 2005/06. Once HMRC accepted the offer a binding contract was created,

thereby closing off those years once and for all. The 10% penalty that had to be paid was also lower than could normally be achieved in many

cases – but HMRC was prepared to accept low penalties because the project meant it would collect a large amount of tax at very low cost.

While this was not a total amnesty - taxpayers had to add the 10% penalty and interest to the tax due – it was a simple, streamlined system to

achieve closure for errant taxpayers. Unfortunately for HMRC, far fewer people than expected came forward: the total additional tax collected was

only around £400m. In my view this was down to two factors:

1. The lack of publicity. There were no TV or press adverts and no national awareness campaign: the banks had to inform their customers. Since

the ODF I have come across several individuals that could have used it but who genuinely knew nothing about it.

2. Taxpayers were required to calculate and report up to 20 years of arrears: very few normal tax investigations cover such a long period, even if

the irregularities go back that far. The sheer scale of the task of calculating the relevant income from so long ago when records no longer exist was

simply far too daunting for many. Similarly, the scale of the payments required (possibly tax, interest and penalties for 20 years) was off-putting

to say the least – often wiping out most of the individual’s available capital.

NDO – different banks

Partly because of these problems and partly to focus on different financial institutions (the ODF concentrated on customers of the main high street

banks) HMRC decided to offer a second, and final, disclosure opportunity.

The NDO focuses on account holders of the hundreds of other banks operating in the UK. Again, the opportunity is not a true amnesty as penalties

and interest must be paid in addition to the arrears, but penalties will be limited to 10%. However, HMRC recognises that many individuals with

tax problems linked to offshore accounts may not have been fully aware of the ODF, so the NDO is open to all to use – although individuals that

HMRC wrote to about the ODF face 20% penalties if they use the NDO.

A final UK tax amnestyJohn Cassidy, partner at PKF, explains HMRC’s ‘new disclosure opportunity’


Who can use it? Any UK resident individual, company or trustee who has failed to declare overseas income and/or gains that are taxable in the UK

Unlike the ODF, HMRC do not intend to offer a similar facility to report UK income and gains that have not previously been declared with a guarantee of a 10% penalty rate.

What is covered? Those who use the NDO must report all matters wrongfully omitted from their tax returns in any of the prior 20 tax years.

This includes any UK or overseas income not reported and all taxes, including PAYE and VAT under-reported and must cover all legal persons with a liability, with separate scheme numbers and disclosures for the individual and any company or trust controlled by the individual.

What’s in it for your clients?

They can save money by owning up to past tax inaccuracies and putting them right at relatively low cost. Penalties under the new disclosure opportunity are shown below, but, if HMRC catches an individual at a later date, it could charge penalties of up to 100% of the tax due.

NDO penalty rates:20% of the tax due if the individual received a letter from HMRC regarding the previous ODF but chose not to disclose10% of the tax due if the individual did not receive such a letter 0% where the disclosable income is less than £1,000 0% on pre-death liabilities of a deceased taxpayer.

Getting up to date now means that clients will not have the worry and cost of a detailed tax investigation into years up to 2007/08 at some future date. The bare minimum penalty HMRC will agree to in such cases is expected to be 30%.

Also, it is much less likely that HMRC will prosecute the client or use its new powers to ‘name and shame’ the taxpayer publicly if the NDO is used.

However, the NDO should not be used where tax is underpaid as a result of an innocent error by the taxpayer: with appropriate advice and evidence of the error, matters can usually be put right without triggering penalties.

How will it work? Stage 1: a client or their agent applies for a registration number and HMRC will then make a disclosure pack available to them. The registration period runs from 1 September 2009 to 30 November 2009 or 1 October 2009 – 30 November 2009 if applying online. Anyone who currently has a disclosure to make should think carefully about the relative merits of coming forward now or waiting until the NDO starts. Stage 2: complete and submit the disclosure pack to HMRC. This will involve disclosing the income and gains not previously declared over the last 20 years and then calculating the amounts of tax, interest and penalties payable. In most cases, HMRC will expect a cheque for the full amount due when the disclosure pack is submitted. The completed pack must be submitted to HMRC by 31 January 2010 or 12 March 2010 if submitted online. Stage 3: HMRC reviews the disclosure. In ‘low risk’ cases, where the calculations are considered correct and complete, HMRC will send an acceptance letter out.

What if your clients don’t use the NDO?

HMRC may already have obtained details of individuals’ offshore assets from financial institutions - it already has rulings against a number of financial institutions requiring them to supply specific details for all UK based account holders and others are expected to follow suit.

This information is likely to be sufficient to enable HMRC to launch an investigation into each individual’s affairs. It also has significant new statutory powers (Schedule 36 Finance Act 2008) allowing it to supplement data from a bank by demanding documents and information from taxpayers and third parties.

Any subsequent investigation is likely to lead to large penalties - ignoring the NDO hoping not to be found is not a good idea.

What should clients do?The only sensible option for individuals, companies or trustees who have not fully declared their income in the past is to make a full voluntary disclosure to HMRC now. But anyone contemplating this approach should seek expert advice on how to do it in a way that keeps penalties and risks to a minimum whilst reducing exposure to further investigation and potential prosecution.

For a free initial consultation on the NDO for any of your clients, contact John Cassidy on 0207065 0455 or email [email protected].


It started with US subprime mortgages in 2007

- a year later the credit crunch had a tight grip

on the UK economy, with newspapers awash

with articles on how deep the recession is

biting. We have seen countless reports of

businesses failing, unemployment rising and

our savings suffering. But what will happen

to our pensions? How will an individual

be impacted on retirement as a result of

the current economic crisis? And how will

this impact on pension claims arising from

a personal injury/fatal accident? Lawyers

involved in pension claims need to be aware

of how the downturn in the economic climate

has, and will continue to, impact pension

claims.

Pensions are a long-term investment and it is

therefore assumed that any short-term ‘blips’

in the economy, and the impact to pension

funds, will be resolved by the time retirement

comes around. However, comments in the

press about the impact on pension funds

appear to be contradictory, ranging from

pension funds bearing the brunt of the credit

crunch losses to pension funds being one of

the few beneficiaries. These comments add to

the uncertainty of what has really happened

to pensions following the financial crisis

and whether they are accurate depends on

perspective and the type of pension scheme.

Defined benefit schemes

A defined benefit (“DB”) scheme is where the

benefits on retirement are largely provided by

an employer and the employee may or may not

make personal contributions into the scheme.

The benefits payable on retirement are pre-

defined by a formula set out in the scheme

rules which include the number of years’

service and final salary of each individual. It

is the responsibility of the employer to provide

individuals with annual pension benefits on

their retirement and the risk of investment is

borne by the employer.

DB schemes are becoming increasingly more

expensive to provide, due to a variety of factors

such as increased administrative costs, an

increase in life expectancy, and the valuation

of pension fund assets in a company’s accounts

(FRS17). The increase in costs has driven

the closure of many DB schemes to both new

and existing employees. In 2008 only 26% of

DB schemes were open to new and existing

members, compared to 35% in 20061.

Despite the reduction in DB schemes, the

financial crisis has led to some benefits

for employers providing these schemes.

Commonly, once in receipt of annual pension

benefits, an individual will receive an annual

increase in line with the Retail Price Index

(“RPI”)2. Therefore, the recent decline in

the RPI has led to employers’ future pension

liabilities reducing. Furthermore, the recent

increase in corporate bond yields, the returns

from which are off-set against pension

liabilities, has led to a reduction in the pension

deficit shown in the employer’s accounts. It is

the combination of these factors that have led

to pension funds being portrayed in the press

as the ‘beneficiaries’ of the credit crunch.

However, when looking at this from the DB

members’ perspective, those that are already

retired will see a marked reduction in the

annual increase they receive in their pension

benefits, resulting from the falling RPI.

For those who are yet to retire, and are

fortunate enough to retain DB scheme

membership, their pension benefits will be

secure by the formulaic rules of DB schemes

and any impact to their benefits will be limited

to the future performance of the RPI.

Defined contributions schemes

A defined contribution (“DC”) scheme can be

either an occupation scheme provided by an

employer, where contributions are made by

the employer and the individual, or a private

scheme where contributions are made by

the individual only. However, the risk of

investment is always borne by the individual.

Typically, individuals will invest in a mixture

of secure and more risky investments with

the hope that they will receive year-on-year

returns, building a pension fund which can be

used to purchase an annual annuity on their

retirement. However, the financial crisis has

had a dramatic impact on the stock exchange

and the value of securities. Many DC scheme

funds have dropped in value, thereby reducing

funds available for the purchase of an annuity,

and leading to press coverage that pension

funds are one of the many casualties of the

credit crunch.

In combination with reducing fund values,

individuals are finding it harder to maintain

contributions into their DC schemes due to

financial pressures and job losses. Research

carried out by Prudential last year found that

voluntary contributions into DC schemes

have almost halved3, which will contribute to

depressed DC pension funds on retirement.

Furthermore, the Budget earlier this year

announced that tax relief on pension

contributions for high earners will be reduced

from 2011 - which will also contribute to the

reduction in funds contributed into DC pension

schemes.

For DC members retiring in the next couple

of years, there will be limited opportunities

for them to recover from recent negative

returns and, on retirement, individuals will

receive a lower annual pension. Prudential’s

research tells us that those retiring in 2009

can expect to receive £884pa less than those

who retired in 20084. This situation will also

lead to individuals delaying retirement to try

and recoup lost fund values.

For DC members retiring in the future their

fund value is still uncertain and will be largely

driven by the investments of their scheme,

the future performance of the economy and

any contributions they are able to make.

Regardless of the type of pension scheme

an individual is a member of, they will be

impacted - the extent of this impact will

Pensions and the recessionBy Amanda Fyffe, ACA, MAE, Senior Manager, RGL Forensics


depend on the recovery of the economy, with

DC members retiring in the short term hit the

hardest.

State pension benefits

The State pension celebrates its centenary

this year after the introduction of Pension Day

on 1 January 1909. Over the years the State

pension has changed and the introduction of

SERPS, and later the State Second Pension

(“S2P”), has enabled people to ‘top up’ their

State pension to provide them with greater

benefits on retirement.

The rules governing the calculation of an

individual’s basic State pension are dependent

on the number of qualifying years a person has

built up during their working life. Currently,

the full basic State pension of £4,953 (2009/10)

is only payable with 44 qualifying years for

men (39 years for women).

Eligibility for the S2P and the value of

payments depends on a person’s earnings and

whether they are contracted out of the S2P.

However, there are proposals to reform the

S2P, abolishing the ability to contract out for

DC scheme members and introducing a flat

rate S2P. Furthermore, the Pensions Act 2008

puts into law an automatic enrolment in the

Personal Account scheme for eligible workers

from 2012. This scheme is aimed at those who

do not have access to an occupational pension

scheme and individuals are required to make

a minimum contribution of 4%5 to supplement

their State pension.

American Express announced that from 1 July

they are temporarily ceasing payments into

employee pension schemes until 1 January

2011 to cut costs. However, under the new

legislation employers will no longer be able

to adopt this cost cutting measure and will be

obligated to contribute 3% into individuals’

Personal Accounts unless employees elect to

opt out.

Aside from legislative reforms, many believe

the State pension, even including a S2P, does

not provide sufficient income for retirement

and should not be relied upon as a person’s sole

source of income after they stop working. But

what are the implications for the State pension

following the downturn in the economy?

The UK’s ageing population has been putting

pressure on the State purse for a number

of years, with the 2006 announcement to

increase State retirement age to 68 years from

2044 intending to ease the strain of future State

pension liabilities. However, the recession has

now added to this burden by causing a rise in

unemployment, with many high earners now

out of work. An increase in unemployment

results in a loss of National Insurance

contributions (“NIC”) and tax receipts for the

Treasury creating an even greater challenge

for the Government to provide for future State

pension costs.

For those who are eligible for the basic State

pension/S2P, the benefits received are largely

unaffected, regardless of the decline in the

economy. However, the decline in the RPI,

to which State pension benefit increases

are linked, will affect future annual pension

payments. Another repercussion of the

recession could be further reform or even the

demise of the State pension system altogether,

brought about by escalating administration

costs and future liabilities.

Impact for pension claims

In claims arising from a personal injury/fatal

accident, a loss of pension benefits can often

form a material proportion of an individual’s

claim. For claimants who are members of DB

schemes the calculation and quantification of

pension losses will remain largely unaffected

because of the formulaic approach of

calculating pension benefits from DB schemes.

However, claimants who are members of

DC schemes will suffer more since it is DC

pension funds that have been hit hardest by

the recession. Due to the uncertainty of when

the economy will recover, and the insecurity

of individuals being able to continue to make

pension contributions, the calculation of

expected future benefits from DC schemes is

speculative. To limit speculation, losses from

DC schemes can instead be quantified on the

basis of contributions that would have been

made into the scheme. In this way, claimants

are reimbursed their lost contributions,

leaving them free to invest the money, and

the speculation of future returns on those

contributions is removed.

For State pensions, the impact to personal

injury claims is less profound. Often there

is no loss of basic State pension as receipt of

other State benefits, such as incapacity benefit,

generally count towards an individual’s

qualifying years. However, if a claimant is

contracted into the S2P then there could be

a loss arising due to a reduction in earnings,

and consequently, a reduction in the NICs they

would have paid towards their S2P.

The calculation of State pension benefits is

intricate, requiring detailed records of life long

NICs made. Therefore, in personal injury/fatal

accident claims, where a loss of state pension

is anticipated or claimed, the most cost

effective and accurate method of calculating

the loss is to obtain pension forecasts from the

Department for Work & Pensions (The Pension

Service).

The recession has had a significant impact

on our pensions and the fallout will be felt for

several years to come. Consequently, Lawyers

will need to keep abreast of both economic

and legislative changes to ensure pension loss

claims accurately reflect the changing future of

pension funds and the State pension system.

1 Pension Protection Fund - The Purple Book

2008

2 Up to a maximum percentage

3 www.pru.co.uk

4 Ibid

5 In addition to 3% Employer contributions

and 1% tax relief from the Government

Amanda Fyffe, ACA, MAE

Senior Manager

RGL Forensics


The past two years have seen

exceptional economic turmoil that has

been reflected in a magnified form in

the behaviour of investment assets. Equities

have plunged then recovered, commercial

property has weakened, gold has broadly

maintained its dollar value but sterling has

fluctuated between $2 and $1.35=£1 over the

period.

The burden on high earners seeking to create

a personal portfolio that best reflects their

preferred balance of risk and reward, income

and capital gain has been further aggravated

by tax changes that make private pension

schemes less attractive.

Moreover, in the current climate of rising tax

rates and closer scrutiny from HM Revenue

& Customs - for example, by forcing banks

to disclose information on account holders -

the effect of taxation on investment returns is

climbing up the agenda.

The importance of diversification

This improves the balance of risk and

reward – provided that the assets chosen are

uncorrelated – and asset allocation, that is,

the weighting of the portfolio in various asset

classes, has demonstrated higher returns than

stock picking.

In our view, it is less important to pick the “best”

property fund than it is to decide whether to

be in property at all. For the purpose of this

article, we confine our investment universe

to equities, government securities, corporate

bonds, property, gold and certain alternative

investments such as hedge funds.

How does asset allocation work?

Asset allocators adopt a “top-down” approach

– the view from 30,000 ft – and the broad

brush questions they ask are along the lines of:

•Are economies expanding or contracting?

•Is inflation likely to rise or fall?

•Will interest rates rise or fall, and is credit

likely to become easier or harder to obtain?

To answer these questions, we look at surveys

of business, consumer and investor confidence,

manufacturing order books, trends in oil and

base metal prices and leading indicators, not

just in the UK but globally. The UK is not the

tail that wags the dog, but China may be,

and we pay particular attention to Chinese

consumer data, car sales, property prices,

oil imports and cement production. Having

done this, we form our views of how this will

influence the economic cycle, and then relate

it back to our expectations for the individual

asset classes.

What are the merits of each asset

class?

Equities clearly have the greatest exposure

to the global economy, and in general give the

highest returns but also the highest risk. Those

who wish a lower risk profile could consider

corporate bonds, since while the interest

rate is fixed, a recovering economy leads to

improving profits and hence improved interest

cover on a company’s borrowings. This in turn

reduces the risk of default and leads to higher

ratings.

Government bonds provide almost

complete safety in terms of the interest

payment and redemption price, but returns are

correspondingly lower, and any hint of a rise

in inflation leads to higher yield expectations

and hence a fall in bond prices. Index-linked

securities capitalise on inflation, and have

considerable tax benefits for those on high

incomes, but if inflation remains low, or goes

into negative territory they are unrewarding

investments.

Commercial property has a very different

cycle to that of equities, (on average seven

years vs four) given the time it takes to acquire

land, secure planning permission, finance

and anchor tenants and finally build and let.

The type and location of the property are also

crucial to its success and market valuation.

Many property companies are highly

leveraged, and with falling asset values, a

number risk breaching their covenants; others

will be unable to renew their borrowings when

they fall due. In both cases, this could perhaps

lead to forced sales at distressed prices.

Gold acts generally as a diversifier in

portfolios; it is the ultimate store of value,

rising as the dollar falls and acting as a haven

when investors fear that currencies will be

debased through printing money. Note that

physical gold can and does behave differently

from listed gold mines, which have additional

political, financial and operating risk, but

often pay dividends, whereas bullion does not.

At times of uncertainty, when investors cannot

see clearly the prospects for equities, hedge

funds, which capitalise on anomalies in

valuations of different equities or derivatives,

can provide superior returns, but so much

depends on the quality of management that it

is hard to generalise. Recent scandals, the lack

of transparency and marketability and their

diminished ability to borrow in current credit

conditions have diminished their appeal, and

possibly their performance.

Our view

So how do we at Smith & Williamson view the

investment universe at present?

Investment: getting it rightWhen deciding how to invest, the right asset allocation and an understanding of the tax im-plications are both crucial to success, argue Richard Cragg and Andrew Penman of Smith & Williamson, the investment management, tax and accountancy firm


Taking investment first, we see a second

half global economic recovery, propelled by

the delayed impact of the various stimulus

packages and the ending of destocking in

the manufacturing sector. This has been

anticipated by survey data and various leading

indicators and has driven the global equity

rally that began in March. Low interest rates

continue to provide support to equities by

driving cash out of bank and building society

deposits, but while technical patterns point to

further significant upside potential by the year

end, we see risk further ahead.

US and UK consumers have accumulated

unprecedented levels of household debt that

will have to be run down over many years,

while government taxation rises to reduce the

frightening budget deficits and to pay for the

bank bailouts. By mid-2010, the year-on-year

contribution from the stimulus packages and

inventory correction will have run its course

and Western economies could experience a

sudden loss of momentum that might unsettle

equity markets. Indeed, we expect several

years of sub-trend economic growth in the

West.

Excess capacity in both labour and equipment

should ensure that inflation stays low,

making index-linked securities somewhat

less attractive, and the combination of low

economic growth and tight credit means that

rental income and capital appreciation from

commercial property remains elusive. Property

investors take a long view, and significant

cash has been raised by funds seeking to buy

property from distressed sellers, although we

suspect that it is too early for such a strategy

to bring gains.

There are some bright spots in our universe

however – China and India – both of which

are likely to record strong economic growth

through 2010 thanks to their huge home

markets and comparatively low exposure to

world trade. The world’s economic centre of

gravity is shifting decisively away from the

over-indebted West to the cash-rich East, but

these economies are still under-represented

in global portfolios, and we recommend a

progressive reduction in portfolio exposure to

Western economies in favour of Asia (excluding

Japan). Overall, however, we expect portfolio

returns to be relatively modest for some years

from mid-2010.

Tax

The principal point to bear in mind is the

widening difference between income tax and

capital gains tax (CGT). At 40% and 18%

respectively investing for capital returns

seems very attractive. After next April, the

gap widens with the introduction of a 50%

income tax rate for incomes over £150,000

per annum. It has been widely speculated

that the CGT rate will also increase next April,

though it is not anticipated that this will match

the income tax rate.

Remember that dividends are taxed more

favourably than other income. Higher rate

taxpayers currently pay 25% tax on net

dividends received, versus a headline 40%

higher tax rate. These amounts increase to

36.11% and 50% respectively next April but

the difference remains.

While tax should never be an overriding issue

in investment decisions, it’s essential to be

aware of the tax implications of investment

decisions and how this can influence the

outcome. For example, .some investments

appear to yield capital returns but are taxed to

income, such as, relevant discounted securities

and hedge fund investments. However,

certain returns from shares subscribed in

Venture Capital Trusts (VCTs) and companies

qualifying under the Enterprise Investment

Scheme (EIS) may be exempt from tax

entirely – including potential exemption from

inheritance tax for EIS shares. Clearly, a good

working relationship between your investment

manager and tax adviser is essential.

The examples below indicate where it can be

possible shave a few thousand pounds off your

tax bill.

•Married couples. With the introduction of

the new 50% income tax rate it is vital that

portfolios should be balanced to ensure that

one spouse isn’t paying tax at 50% while the

other is at 40% - or even 20%.

• Capital gains tax. Individuals can make

gains of up to £10,100 per annum tax free. By

maximizing this annually you can gradually

increase the base cost of the portfolio, reducing

the amount of gains chargeable in future.

•Losses. Where losses have been, or will be

triggered these must be offset tax efficiently.

In some cases losses can be offset against

income instead of gains, which with such

divergent tax rates can be advantageous.

•IndividualSavingsAccounts. With an annual

investment allowance of £7,200 (increasing to

£10,200 from next April, or October for those

aged 50 and over) all investment returns are

tax free, and withdrawals can be made when

required. People who invested the maximum

annual amount in ISAs, and their predecessor,

the Personal Equity Plans, since their

introduction in 1986, may now be enjoying

tax-free returns on portfolios worth hundreds

of thousands of pounds.

•Tax efficient investments. The more high-

risk investor can consider the advantages of

investing in VCTs or EIS companies, where

certain income tax and capital gains tax reliefs

are available on investments of up to £200,000

and £500,000 per annum respectively.

For further information from Smith &

Williamson

Richard Cragg, global strategist,

[email protected]

tel 020 7131 4763

Andrew Penman, tax director,

[email protected]

tel 020 7131 4379

www.smith.williamson.co.uk


The budget introduced changes to income tax and national insurance (NI), and to the tax relief given on pension contributions for people

with higher income. The pension changes, in particular, may have an immediate impact as changes were effective from 22 April 2009, the

date of this year’s Budget.

Looking at the income tax position first, two changes come into effect from 6 April 2010. The first is the introduction of a new 50% upper rate of

tax which applies to any income in excess of £150,000. The second sees the gradual removal of the personal allowance – the first slice of a person’s

income, £6,475 in this tax year, which is not subject to income tax. This allowance starts to reduce when income reaches £100,000 and completely

disappears for those earning approximately £113,000 or more.

Further changes will flow through in April 2011 with all rates of NI increasing by 0.5%. For the self-employed, this means the primary rate of 8%

which is applied to a band of profits, currently between £5,715 and £43,875, will rise to 8.5%. And the upper rate of 1% for all profits in excess

of £43,875 will climb to 1.5%.

The cumulative effect of these changes will see taxes increase, particularly for those with higher incomes. As shown below, a self-employed

individual with a constant chargeable income of £200,000 will see their tax bill shoot up by around £8,500 between this tax year and 2011/12.

Another significant impact of the budget alters the traditional tax efficiency of pension contributions, for people with higher income. From April

2011, people with income of £180,000 or more will only receive basic rate tax relief on pension contributions. This is a major departure from the

current position where people get tax relief at their highest marginal rate, and will make pension saving less attractive in future for those who

are affected.

Making a major change from a future date opened up the potential for people to cram as much money as they could into their pension under the

existing rules. To prevent this happening, the Government brought in new rules from Budget day limiting the pension payments which can attract

higher rate tax relief between 22 April 2009 and 5 April 2011, for those people who have income of £150,000 or more. Just to be clear, the rules

don’t prevent large payments being made, they simply reduce the tax benefits.

The new rules are particularly complex and, in some situations, downright unfair. The first point to note is the income threshold. The rules

impact on those people who have income of £150,000 or more. This is a cliff-edge, so those with income of £149,999 or less are not affected, and

can continue making pension contributions in a very tax-efficient way. Crucially, income is not just earnings but comprises all taxable income,

including dividends and income from rental properties, investments and savings.

For those who do have income of £150,000 or more, higher rate tax relief will only be given on a certain level of pension payment. This amount

varies and is influenced by the frequency of pension payments before Budget day. If you paid regularly (this is defined as more frequently than

The UK has one of the most complex tax systems in the world and, following changes announced in this year’s Budget, the position is set to get even more confusingBy Andrew Tully, Senior Pensions Policy Manager, Standard Life

2009/10 2011/12

Chargeable Income £200,000 £200,000

Total National Insurance £4,739 £5,710

Personal allowance £6,475 NIL

Total income tax £69,930 £77,520

Take home income £125,331 £116,770

Reduction in take home income £8,561

This example is for illustrative purposes only and assumes all tax and NI thresholds remain at 2009/10 levels


quarterly) then you can continue to pay that amount, or £20,000 per year if greater, and receive higher rate tax relief on the whole payment.

Any contributions above this level will only receive tax relief at basic rate (20%), with the new tax charge being levied through an individual’s

self-assessment tax return. However, there is one exception to this. Where future contribution increases are ‘pre-determined’ – for example, if

payments go up in line with earnings - then higher rate tax relief will continue on that increased payment.

For those who paid irregularly - for example, people making single or annual pension payments - the £20,000 figure above may be replaced if the

average of the irregular payments made in the last three years is higher, although there is an upper limit of £30,000. For example, if you made

payments of £50,000 in 2006/07, £40,000 in 2007/08 and £60,000 in 2008/09, the average payment is £50,000. This is above the upper limit, so

you would receive higher rate tax relief on the first £30,000 of any pension payment in this tax year and in 2010/11. Extra care needs to be taken

if you made both regular and irregular payments, as the limits interact. People who weren’t paying any pension contributions in the recent past

will be able to pay up to £20,000 and receive higher rate relief.

The rules also cover any pension payments made by an employer. Let’s say Philip earns £200,000 and his employer paid a £50,000 pension

contribution last year. There would have been no cost to Philip – this was effectively ‘free’ money. If Philip’s employer paid it this year, and

assuming there was no past history of any pension contributions, Philip would face a tax charge of 20% on the payment above the £20,000

threshold. This means a tax bill of £6,000 (20% x £30,000) would be levied through his self-assessment return at the end of the year.

So what do all of these complex rules actually mean in practice? For those people with income below £150,000, pension planning can continue

as before. There is even an argument that it should be accelerated. If people expect their income to exceed £150,000 in future then paying into

pensions now, while higher rate tax relief is available, seems an obvious move. And now the link between pensions and higher rate tax relief has

been removed for some, it may be easier for a future government to extend these provisions to people with lower incomes. If you think this is likely,

or even possible, increasing current pension saving is the logical step.

For those people with income above £150,000, seeking financial advice is essential. There are some legitimate ways to manage income to bring it

below the £150,000 threshold. If you can’t achieve this, consideration should be given to paying in as much as attracts higher rate tax relief this

year and next, while this benefit is still available.

After 2011, pension saving will become less tax-efficient for those with income above £180,000. Advisers will be able to compare the ongoing

benefits of pension saving against other alternatives. Options such as Individual Savings Accounts, qualifying life policies, Venture Capital Trusts

(for those willing to take more risk), and offshore investments, may become more attractive.

While these changes will adversely affect some people, and the tax and NI increases will impact on many more, my overriding concern is the

continual tinkering of rules. Only three years after major pension simplification changes were introduced, the Government has introduced further

complexities which people will find hard to understand. It is a disappointing move which does nothing to encourage more saving. We need clear,

simple rules for the long-term to encourage more people to save and help address chronic under-saving in the UK.

Tax and legislation are liable to change. This information is based on Standard Life’s current understanding of law and HM Revenue & Custom’s

practice.

Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circumstances. No guarantees are given

regarding the effectiveness of any arrangements entered into on the basis of these comments.


Whilst many families wish to plan

to mitigate inheritance tax few

are willing to gift a substantial

proportion of their wealth during their lifetime.

Families are generally concerned about the

ability of their offspring to manage significant

wealth at a relatively early age. There is a

desire to work with the younger generations to

help them learn to manage the family money.

Until recently, family trusts offered the ideal

solution – the ability to gift assets into trust and

continue to control the family wealth until this

could be passed directly to the beneficiaries.

Inheritance tax (“IHT”) is a tax collected by the

UK Government on any transfer of assets to

an individual or to certain types of trust. It is

commonly levied on an individual’s estate on

death, but it can also be charged in respect of

certain gifts of assets during lifetime.

Currently IHT is payable at a rate of 40% on

estates valued above a threshold: the “nil rate

band”, which for the current tax year is set at

£325,000.

The Finance Act 2006 contained substantial

measures to alter the treatment of trusts for

inheritance tax purposes. The most significant

of these changes included:

• An inheritance tax charge of 20%

on gifts into trust that exceeded the prevailing

inheritance tax nil rate band

• Every 10th anniversary, charge of

6% of the value of trust assets in excess of the

nil rate band

These changes affected those with a UK

domicile, or non domiciled individuals who

have lived in the UK for 17 out of the last 20 tax

years – resulting in them becoming ‘deemed

domiciled’ for inheritance tax purposes.

Gifts to trusts continue to be free of tax at

the point of transfer if the value is within the

nil rate band or business assets are being

transferred (certain business assets are

exempt from IHT after a minimum ownership

period of 2 years).

Inheritance tax traps

• The result, historically at least, of

rising property prices is that more people now

fall into the scope of IHT

• The only effective way to remove

assets from this tax is to give them away

during lifetime, a major problem when none

of us know for how long we will live, and in

particular, where the liability is caused by

the value of property that is used as a main

residence or second home.

• There are gift with reservation

of benefit rules. These mean that it is not

possible to give away assets whilst continuing

to benefit from them (as is possible in some

countries). For example, it is not possible to

give away the home and continue to live in it,

without paying a commercial rent to the new

owners (e.g. children).

By use of careful planning it is possible to

ensure that IHT is at least reduced if not

eliminated completely. It is worth being aware

of the exemptions from inheritance tax.

• Transfers between husband and wife

are exempt from inheritance tax, (although

this may not be the case where one spouse

has a non UK domicile)

• Each individual may make a gift of

£3,000 per annum which would immediately

fall outside of the estate for inheritance tax

purposes. This is known as the annual

exemption. If this has not been used before,

then it is possible also to make an additional

gift of the same amount in respect of the

previous year.

• There is an exemption in respect

of gifts in respect of marriage of a son or

daughter of £5,000

• There is a small gifts allowance – an

unlimited number of gifts of up to £250 may

be made

• Normal expenditure out of income is

not subject to inheritance tax. This is a grey

area, but generally as long as this expenditure

does not reduce an individual’s standard

of living this is exempt. As an example, the

funding of school fees for a grandchild might

fall into this category. It is also possible to

make regular payments into trust using this

exemption.

• It is possible to make gifts of

unlimited value, and as long as the donor

survives for seven years from the date of the

gift the value will fall outside of the taxable

estate. This is known as a Potentially Exempt

Transfer (“PET”)

• Finally, gifts to registered charities

and to political parties are not subject to

inheritance tax.

There are also investments that have

inheritance tax advantages. Shares in

unquoted trading companies (including those

listed on the Alternative Investment Market)

qualify for business property relief after two

years of ownership, which means that their

value is not included in the taxable estate.

Shares in companies that qualify for the

Enterprise Investment Scheme (EIS) fall into

this category, so combined with their income

and capital gains tax advantages, make them

amongst the most tax efficient investment

options. Investments in woodlands also have

IHT advantages.

An alternative: Family Limited Partnerships

A Family Limited Partnerships (FLPs) is an

alternative to a trust that allows the donor to

pass on to the next generation a proportion

Whose Wealth is it anyway?Planning to mitigate the effect of inheritance tax.By Christine Ross is Group Head of Financial Planning at SG Hambros Bank Limited

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of his assets whilst continuing to control that

part of the family’s wealth. A gift of assets

to a FLP is regarded as a potentially exempt

transfer, so there is no charge to IHT at that

point. The gift will be totally exempt from IHT

provided the donor survives a further 7 years.

What is a limited partnership?

A limited partnership is a specific type of

partnership. The partners will be ‘limited

partners’ and will have limited liability

in respect of the partnership’s activities.

However, one partner must act as the ‘general

partner’ who has unlimited liability and deals

with the management of the partnership

– in effect the ‘managing director’ of the

partnership.

A limited partnership effectively carries on

a business (in the case of FLPs the business

is usually that of investment of the family

wealth) and the general partner controls

the management of that business. Where

investments are managed for the partnership,

it will be necessary to appoint an appropriately

authorised investment manager in order to

comply with regulations laid down by the

Financial Services Authority. The limited

partners have no control over the decisions

regarding the management of the partnership.

Children may be limited partners. It is

preferable, but not essential, that children

have all attained age 18 at the time the

partnership is established. It is also

advantageous if a family is complete. If

more children are born, it would perhaps

be necessary for the partnership shares to

be re-worked to benefit the new arrival and

this may have tax consequences for the other

partners. The donor can be involved in the

management of the partnership through an

interest in the general partner. The general

partner is usually in the form of a separate

legal entity which must hold a small interest in

the partnership, e.g. 1%.

A partnership is transparent, so all income and

gains arising will be attributed to each partner

on a pro rata basis in accordance with their

percentage interest in the partnership. Many

families do not wish distributions to be made

in the early years, and in such cases it may

be possible to structure the partnership so

that access to the family wealth is restricted.

However, tax liabilities on partnership income

and gains will arise fall on each partner.

Therefore it may be possible simply to

distribute only sufficient for each partner to

meet their individual tax liabilities.

There are several variations with regard to

structuring the general partner, depending

upon the circumstances. However in order

for the planning to be effective, the parents or

grandparents who donated funds or property

to the FLP must be unable to benefit under

the FLP as a result of any interest held in the

general partner.

Careful structuring is important in order to

ensure the FLP reflects the donor’s wishes

and is optimum for both tax and practical

purposes.

Which asset classes might be suitable investments in an FLP?

The FLP can hold a wide variety of tangible and

intangible assets. However, it would not be

suitable for holding assets such as a property

which is used exclusively by members of the

family, e.g. a main residence or holiday home.

Conversely, an investment property that is

rented out could be a suitable investment.

The profits realised by the partnership can be

used to meet the personal expenditure of the

people who receive partnership shares, or it

can be reinvested in the business. The precise

tax consequences will depend on a number

of factors. A FLP can be part of a tailored

solution to meet a family’s needs.

The last resort

Finally, there is life assurance. Many

individuals wish to provide their beneficiaries

with a capital sum in order to fund the

inheritance tax liability.

The policy proceeds will be available to the

trust beneficiaries who may use this to pay the

tax liability. Having funds readily available

can provide greater choice to executors and

beneficiaries of an estate, especially where

consideration might have to be given to

the speedy sale of property in order to fund

the tax. Such a solution can simplify the

administration of an estate, therefore reducing

the associated costs.

Christine Ross is Group Head of Financial

Planning at SG Hambros Bank Limited



Fabrice CorreSG Private Banking

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Contacts:Andrew Costard - Tel.: +44 (0) 207 597 3034 - [email protected] Steel - Tel.: +44 (0) 2380 302 609 - [email protected] Hambros Bank Limited, Norfolk House, 31 St James’s Square, London, SW1Y 4JJ

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The barrister Financial Supplement 2009