TRUSTEE INVESTMENT PLANNING PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012 The reasons to incorporate trustee investment as part of your service delivery

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Slide 2 TRUSTEE INVESTMENT PLANNING Slide 3 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012 The reasons to incorporate trustee investment as part of your service delivery under adviser charging Trustee investment fundamentals Putting it into practice: Case study Slide 4 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012 These slides and the presentation in which they are used are put forward for general consideration only. They are based on fictitious persons. No action must be taken or refrained from based on their content. Accordingly, neither Technical Connection Limited nor any of its officers or employees can accept any responsibility for any loss arising of whatever nature to any person. Professional advice based on the facts of each case is essential. Slide 5 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012 WHY WILL CLIENTS PAY FOR ADVICE? (HOWEVER ITS DELIVERED) Recognition of the limits of their own knowledge The adviser has expertise that the consumer doesnt possess or cant get by googling The adviser makes them aware of the need/risk/opportunity Slide 6 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012 SO WHAT WILL THEY PAY FOR? Basically, what they perceive as difficult / complex EXPERTISE / TIMESAVING SO WHAT WILL THEY PAY FOR? Slide 7 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012 AND IF WE ARE TALKING ABOUT TAX . You cant have missed that its in the news Tax and tax planning polarises opinions Government committed to action So. Slide 8 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012 Whats going on? Tax Avoidance Slide 9 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012 A LOT! General anti-abuse rule (consultation) 50,000/25% income tax relief cap (consultation) Enhanced DOTAS :more advance information and negative publicity (Lifting the lid on tax avoidance) Continued HMRC success in tribunal/court cases Public opinion (Times campaign) Slide 10 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012 FINANCIAL PLANNING GAAR should not affect the centre ground of tax planning Opportunities to reinforce the power and effectiveness of acceptable financial planning for individuals, businesses and trustees Slide 11 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012 TRUSTEE INVESTMENT ADVICE: A PERFECT STORM? High degree of difficulty Adviser charge justifiable Relatively high trustee tax rates Trusts are an essential part of estate planning Slide 12 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012 TRUSTEE INVESTMENT ADVICE : A PERFECT STORM ? Trustees must take investment advice Solicitors and accountants rarely have the necessary financial planning skills Strong collaboration potential for advisers Slide 13 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012 TRUSTEE INVESTMENTS A GROWING MARKET TRUST STATISTICS 176,000 made S/A returns in 2009/10 Trust income 2,650m in 2009/10 900m 1,750m iip discretionary Income tax 750m in 2009/10 150m 600m iip discretionary Chargeable gains 2,045m in 2009/10 Slide 14 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012 BARRYS WILL TRUSTS Died on 17 May 2005 2 years prior to death gifted 20,000 to each of his four grandchildren Left -a widow -two children -four grandchildren - two great grandchildren Slide 15 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012 BARRYS ESTATE Jointly held property passes directly to Britney -house -contents Discretionary Will Trust for investments up to available nil rate band Life Interest Will Trust for balance of investments -life interest to Britney -capital to children in equal shares on Britneys death Slide 16 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012 UNDERSTANDING THE FUNDAMENTALS TRUSTEE ACT IMPERATIVES Slide 17 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012 TRUSTEES MUST TAKE INVESTMENT ADVICE Trustee Act 2000 Wide implied investment powers if not specifically provided Statutory investment criteria Applies to all trusts whenever created Slide 18 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012 STATUTORY INVESTMENT CRITERIA Diversification Suitability AND Obtain and consider proper advice Slide 19 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012 Advice of a person who the trustees reasonably believe to be qualified to give it by his (or her) Ability in + Practical experience of financial + other matters PROPER ADVICE Slide 20 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012 UNDERSTANDING THE FUNDAMENTALS TRUST TAXATION Slide 21 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012 TRUSTEE TAXATION Income Tax IIP (including Bare Trust) Income taxed on IIP beneficiary at marginal rate Slide 22 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012 TRUSTEE TAXATION Income Tax IIP (including Bare Trust) Income taxed on IIP beneficiary at marginal rate Discretionary Trust Income taxed on trustees at:- -Standard rate on first 1,000 - 42.5% on dividend income 50% on other income Slide 23 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012 TRUSTEE TAXATION Income tax other relevant points Income assessed on settlor if settlor- interested trust ie:- settlor a beneficiary settlors spouse a beneficiary -not widow/widower 100 rule (on vested or distributed income) -Beneficiary is minor unmarried child of settlor -Gross income (or income on all gifts) exceeds 100 Slide 24 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012 DISCRETIONARY TRUST INCOME TAX DETAIL 2 STAGE PROCESS Slide 25 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012 DISCRETIONARY TRUST:TRUSTEE TAX Discretionary Trust - Income tax Income received Trustee income tax 50%/42.5% (if over 1,000) Discretionary Trust Slide 26 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012 INCOME DISTRIBUTION Discretionary Trust - Income tax Income received Trustee income tax 50%/42.5% (if over 1,000) Discretionary Trust Income distribution: trustees must have paid 50% income tax Income taxed on beneficiary as trust income Slide 27 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012 DISCRETIONARY TRUST INCOME TAX DETAIL STAGE 1: RECEIPT OF INCOME Slide 28 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012 THE DISCRETIONARY TRUST INCOME TAX TRAIL Interest Trustees receive 80 net interest 20 income tax already deducted Trustees pay extra 30 to HMRC Trustees are left with 50 net income Note: 1.Assumes other trust income absorbs 1,000 2.Applies even though settlor-interested trust 3.50%45% from 6.4.2013 Slide 29 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012 THE DISCRETIONARY TRUST INCOME TAX TRAIL Dividends: Trustees receive 80 net dividend 8.89 income tax deemed to have been paid Trustees pay extra 28.89 to HMRC Trustees are left with 51.11 net income Note: 1.Assumes other trust income absorbs 1,000 2.Applies even though settlor-interested trust 3.42.5%37.5% from 6.4.2013 Slide 30 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012 DISCRETIONARY TRUST INCOME TAX DETAIL STAGE 2: INCOME DISTRIBUTION Slide 31 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012 50% 40% 20% 0% Receives505050 50 Grossed-up100100100 100 Tax bill504020 0 (Pay) reclaim-1030 50 Net506080100 DISTRIBUTION OF SAVINGS INCOME (2012/13) Slide 32 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012 Income received by trustees 80 Income tax of 28.89 paid to HMRC by the trustees Income remaining 51.11 [88.89 grossed-up equivalent] [42.5% of 88.89 = 37.78 37.78 less tax credit of 8.89 so tax of 28.89 to pay] [80 less 28.89] DISTRIBUTION OF DIVIDENDS (2012/13) Slide 33 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012 Distribution to beneficiary 40 Trustees` extra tax on distribution 11.11 [80 available less 40.00 (ie. 50% of 80] [Total liability 40.00 less 28.89 already paid] Income received by trustees 80 Income tax of 28.89 paid to HMRC by the trustees Income remaining 51.11 [88.89 grossed-up equivalent] [42.5% of 88.89 = 37.78. 37.78 less tax credit of 8.89 so tax of 28.89 to pay] [80 less 28.89] Slide 34 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012 Net trust income80.00 Tax on dividend receipt28.89 Tax on income distribution11.11 40.00 Net to beneficiary40.00 Slide 35 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012 Beneficiary receives trust income 50%40%20%0% Receives40404040 Grossed-up80808080 Tax bill4032160 (Pay) reclaim- 82440 Net40486480 INCOME DISTRIBUTION OUT OF DIVIDEND INCOME Slide 36 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012 Beneficiary receives trust income 50%40%20%0% Receives40404040 Grossed-up80808080 Tax bill4032160 (Pay) reclaim- 82440 Net40486480 ORIGINAL GROSSED-UP INCOME 88.89 INCOME DISTRIBUTION OUT OF DIVIDEND INCOME Slide 37 PFS/SLIDES/TRUSTEE INVESTMENTS 10 2012 Slide 38 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012 A SOLUTION TO THE PROBLEM? - ADVANCEMENT OF CAPITAL Trustees invest for equity-based capital growth Use trustees annual CGT exemption to release capital and appoint Care over disguised dividend distributions - amounts and timing of accumulations/ advancements Must be power to advance in trust Buttax planning subject to investment suitability Slide 39 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012 SUPPLEMENTING INCOME WITH CAPITAL: DETAIL Assuming capital growth year-on-year of same amount as net dividend At bestAt worst Growth 80 80 Tax (exempt) - (@ 28%) 22.40 Net 80 57.60 Slide 40 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012 ANOTHER SOLUTION TO THE PROBLEM? Trustees in UK/Offshore bond No trustee taxation of income or gains No underlying investment constraints Trustees withdraw/encash (care which) Trustees advance capital Must be power to advance capital Slide 41 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012 TRUST CAPITAL TAXED AS INCOME? Original Revenue view - purpose of payment Brodies Will Trustees Stevenson -v- Wishart (1987) Don`t advance if in exercise of a specific direction to augment income under trust Slide 42 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012 TRUSTEES Capital Gains Tax Bare Trusts Beneficiary assessed: 10,600 A/E then 18%/28% as appropriate Slide 43 PFS/SLIDES/TRUSTEE INVESTMENTS (2) 11 2012 TRUSTEES Capital Gains Tax Bare TrustsAll other Trusts Beneficiary assessed: 10,600 A/E then 18%/28% as appropriate Trustees assessed: 5,300 A/E * then 28% * Pro rata reduction according to number of trusts created by the sa