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the barrister

Personal Finance & Wealth Management Supplement

1 12:54 Page 1


ted Pension Plan (SIPP).

ation has changed and ÂŁ200,000 this tax year*, Investment Managers, e in personal relationships

and discover the


Supplement 2011

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Contents: 4

Financial planning for retirement – it’s not all bad news! By Bob Hair, Head of Financial Planning at Turcan Connell

VAT: Get it right By: Nick Brennan, Tax Partner at Citroen Wells Chartered Accountants


An investment style for all seasons Cash is going backwards. Saver’s returns continue to make grim reading with little prospect of interest rate rises this year. Danny Cox, Head of Advice at Hargreaves Lansdown, looks at the best options for investors during periods of low interest rates and high inflation.

The Future of Furnished Holiday Lettings


From cottages in the Cotswolds to ski chalets in Val d’Isère, Furnished Holiday Lettings (FHLs) have long attracted favourable tax treatment. Ben Grist of Dixon Wilson asks what the future holds for FHLs.

By Jason Butler Chartered Financial Planner and Investment Manager at City based Bloomsbury Financial Planning

So Why Do Barristers Change Accountants?

Your Portfolio’s Worst Enemies


By Matthew Aitchison, Principal and Chartered Financial Planner, Clear Vision Financial Planning

Looking forward to retirement? Mike Fosberry and Lanying Burley of Smith & Williamson investment management offer some personal financial planning tips for barristers


Avoid the HMRC Clampdown By Planning Your Tax Affairs Carefully By Mike Warburton, Tax Director at Grant Thornton UK LLP

Pensions Tax Changes: Escape route for high earners By John Lawson, Standard Life



The pension alternative

The following indicative discussions are based on real life conversations between Keens Shay Keens Limited Director ’Charles Little and Barrister Client’

19 23


Using trusts to minimise inheritance tax By Jason Butler,Chartered Financial Planner and Investment Manager, Bloomsbury Financial Planning


Financial planning for retirement – it’s not all bad news! By Bob Hair, Head of Financial Planning at Turcan Connell


ardly a day goes by

it to the top and it might take 15 to 20 years

the availability of pensions tax relief for higher



before this is apparent. With every passing

earners. An annual allowance of £50,000 is


year, the annual cost of building an adequate

available for tax-relieved savings and a lifetime

fund to retire with increases.

allowance of £1.5 million effectively caps the


more relating

pensions. With ageing populations


tax favoured fund that can be accumulated.


the world, high levels

There are of course no easy answers, but with

Given the fact that immediate income tax

of public sector employment and increasing

pragmatic financial planning, all things are

relief of up to 50% is available on pension

life expectancy, the financial crisis has finally

possible. There are typically three phases to

contributions, and the funds will grow free of

forced governments to deal with the poison

this journey – accumulation; consolidation and

tax until they are required; this makes for a

chalice which faces them in respect of the


compelling proposition. There is also some

cost of state pensions and of public sector

flexibility inherent in the system because up

pay and pensions. There have been mass

to three years of any unused allowance up to

demonstrations by civil servants in London,

£50,000 for each year can be carried forward

Paris, Madrid and other major cities as changes

and used to boost contributions in a particular

to pensions and cutbacks are announced.

year. This is useful for those with sporadic earnings, or those with incomes in excess of

Privately, few in the professions will have

£150,000 in the current tax year who would

great sympathy for those in the public sector

like to take advantage of the availability of

who enjoy gold plated pensions at the expense

50% tax relief in case the tax relief is removed

of the tax payer, particularly given the 50%

or the highest rate of tax is reduced, as George

top rate of income tax, however, there is

Osborne has implied.

also an awakening realisation of the need to regard financial planning for retirement with

Depending upon the circumstances, there

a greater sense of urgency and priority.

are many other complimentary strategies which can be adopted, such as Individual

The professions can have particular issues

Savings Accounts, (an annual allowance of

which influence their retirement planning.

£10,680 is available), collective investments

Typically, earnings are low in the early years

(such as trusts, OEICS and investment trusts), maximum investment plans, and so on. When

and build throughout professional life as reputation, experience and ultimately billing

1. Accumulation

pension allowances have been used up, such

power grow. As a result, there are always more

Pensions have long been regarded as being

tax efficient investments are a good way of

pressing short term needs for the monthly

the most appropriate financial instrument

building up funds, with a sound investment

stipend while a career is being built. It is of

for accumulation.

strategy of course.

course a paradox that the power of compound

legislation has become confusing for most

interest dictates that every £1 placed early in

despite the government attempt at “pension


a career is worth significantly more than one

simplification” which came into place in 2006.

may well suggest that they look beyond the

placed later, but of course the majority of the

The irony of pensions simplification is that

ordinary and start to consider more esoteric

professions leave it very late because that is

1,350 pages of legislation have been replaced

tax efficient investment schemes.

when they have surplus income available.

with almost 3,000.

past, Business Expansion Schemes (BES) and

In recent years, pension






In the

Enterprise Zone Trusts (EZT) have been used Expectation can also encourage many to put

More recently, new rules came into place in

to promote syndicated property investment in

off the inevitable, but not everyone can make

2011 which were designed to broadly restrict

regenerating areas, and the current version


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schemes can lead to up to 100% of the initial

and Head of Financial Planning at Turcan

commitment being recovered through tax

3. De-accumulation


relief, and are typically being used to launch

In retirement, rather than income being

specialist private client firm operating from

smart city centre hotels. A relatively new



Edinburgh, London, Guernsey and Geneva.

concept, these schemes will take eight to 10

income now needs to be provided by the

He has advised private clients on tax efficient

years to bear fruit and so can be suitable for

assets accumulated over a professional life.

retirement planning throughout his career.

use as part of a retirement plan.

On the presumption that they have been







properly organised through the consolidation In this accumulation phase, it is also possible

phase, a suitable investment strategy should

for Chambers to invest in property directly, by

be constructed which will have the potential

pooling individual pension funds together in

to provide enough of a total return to provide

order to buy the business premises.

a steady income throughout the retirement years. Pensions planning used to always be

Regardless of the strategy adopted, the key

predicated on the basis that an annuity would

is to start with the obvious tried and tested

be purchased at the end of the savings period,

financial solutions which are available, and

however it is much more common now for

to construct an appropriate financial plan that

retirement planning to be looked at as more

will help you to understand the quantum of the

of a holistic exercise where all assets, savings,

pot that needs to be accumulated and personal

pensions and investments will be put to work to

commitment from earnings required in order

achieve that singular objective – producing an

to achieve it!

adequate income and hopefully some capital growth to protect against rising inflation. At

2. Consolidation

this stage, further efficiencies can be adopted,

Having accumulated various assets which could

primarily around the equalisation of assets

be used for retirement planning, sometimes

between spouses if applicable, and, of course,

through a series of financial products which

a decision needs to be reached on lots of

were a “good idea at the time”, it is important

personal issues (such as country of residence)

in the years immediately preceding retirement

which will ultimately affect taxation.

to go through a consolidation phase, rather than realise any inadequacies after the wig

A successful de-accumulation strategy will

has been hung up for the last time.


be highly tax efficient, flexible and will make

consolidation stage is extremely important,

use of a range of wealth structures to avoid

because for most Barristers, the best years

legislative risk.

for earnings are late in the career, when

pensions are a good place to start, it would

experience and reputation are at their peak

be foolish to rely on pensions alone to provide

and time will be running out.

for one’s retirement. A successful retirement

In other words, although

planning exercise can be picked up at any At this stage, it is important to focus the

stage, but of course has the greatest possible

quantum which will be available and any

chance of success if it starts as early as

surplus can be put to good use over the


remaining years.

It is also important to

prepare for the next phase and make sure that

In general, the populace of the western nations

the assets available are efficiently organised

will have to work longer, save more, spend

in terms of the various wealth structures that

less, and stop relying on the State to provide.

they can be held in, and investment strategy.

Like most things in life, sensible planning can

Most sensible financial planners or wealth

avoid this general principal being applied to

managers will help consolidate assets where



personal finance & wealth management supplement the barrister 2011

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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VAT: Get it right By: Nick Brennan, Tax Partner at Citroen Wells Chartered Accountants


lthough VAT is in concept very simple – generally your liability is the VAT you have collected on fee receipts less the VAT you have incurred on expenses – there are many quirks which mean that it is easy to make inadvertent errors. These are some of the matters on which we have been consulted by chambers and barristers over the last year or so.

treatment must follow the main supply.

members’ Christmas parties.

Care needs to be taken to not confuse the above definition of disbursements, with “disbursements” as defined for VAT purposes, which broadly is a sum of money which is paid by an agent on behalf of their client for a supply which the client receives. In our experience it will be rare for a barrister to pay disbursements.

Entertaining of staff is allowable and where appropriate the input tax for an event should be apportioned pro rata between staff and others. Where staff attendance is for the purposes of helping to host the event rather than to be entertained, the whole of the input tax should be disallowed.

Registration limit

Place of supply rules for foreign clients

A barrister is required to be registered:

If the client belongs outside the EC then the supply is ‘outside the scope’ and VAT should not be charged.

(1) after the end of a month, if the value of taxable supplies (whether as a barrister or otherwise) in the period of one year then ending has exceeded the registration limit (currently £73,000); or (2) at any time if there are reasonable grounds for believing that the value of the taxable supplies within the next thirty days will exceed the registration limit (£73,000) If exceeding the VAT limit is merely a ‘spike’ in the normal pattern of earnings, an application can be made to HMRC for ‘exception from registration’. The application must be made within 30 days of the registration limit having been exceeded. HMRC have commenced an initiative focusing on unregistered businesses with turnovers above the £73,000 registration threshold, including the checking of the turnover as disclosed on self assessment returns with VAT registrations. Where registration is late, the barrister will be faced with having to fund the VAT due for the period from when registration should have taken place, without necessarily the right of recovery from his or her clients, along with interest charges for late settlement and possibly a penalty for failure to register on time. If the VAT levied on late registration cannot be recovered from the clients then the fees received are treated as VAT inclusive. If this is the case remember to look at adjusting for this in calculating your profits for income tax and class 4 NICs purposes.

Recharged expenses and disbursements On the whole, the VAT treatment of recharged expenses, commonly referred to as disbursements, is that they are treated as ‘part and parcel’ of the barrister’s fee i.e. follows the main supply. Notwithstanding that an expense incurred may have been zero-rated, meaning that there is no input tax to reclaim, e.g. train and air travel, when it is recharged to a client the VAT


personal finance & wealth management supplement the barrister 2011

If the client is resident within the EC and receiving the supply in a business capacity it is outside the scope of VAT. Where VAT is not charged under these rules it is imperative that evidence be retained that the recipient receives the supply in a business capacity. This should be the client’s VAT number, which should be validated, or if not VAT registered, other suitable evidence appropriate in the circumstances. If the client is within the EC but is receiving the supply in a private capacity then UK VAT must be charged at the standard rate, currently 20%. It is imperative that you identify whom the client is when applying these rules. An important exception to the general rules above is in relation to land transactions. If the matter directly concerns land in the UK then the supply is taxable irrespective of the location of the client and VAT should be charged.

Chambers input tax reclaims and the effect of using the VAT flat rate scheme

If a chambers provides food and drink as part of a contractual arrangement the related input tax is allowable, e.g. fee paying seminars and conferences. It is now possible to reclaim input tax in relation to entertaining foreign clients at business meetings but generally not to the extent that there is any sort of corporate hospitality.

Late filing penalties Penalties may be levied if VAT returns and/or payments of VAT are made late. For the first default a surcharge liability notice is issued which is a warning not to default again during the one year from the period for which the tax was due: the ‘notice period’. If there is a further default during this period there is a penalty of 2% of the tax unpaid and the notice period is extended for another year. For a third or fourth default the penalty is 5% and 10% respectively with a 15% penalty for the fifth and subsequent defaults. If no tax is due there is no penalty but the notice period is extended and the rate for the next default goes up. A default can be avoided if it can be shown that there is a ‘reasonable excuse’.

Different chambers adopt different systems for charging and apportioning chambers expenditure in relation to VAT. There are three generally recognised methods.

A barrister having difficulty paying VAT should consider making an approach to the HMRC Business Payment Support Service to negotiate payment by instalments.

Where ‘Method 3’ – known as the ‘Combination Method’ - is used, care needs to be exercised to ensure that the chambers input tax claims are restricted in recognition of those members who use the VAT flat rate scheme. In our experience chambers may not always know which barristers use the flat rate scheme leading to over-claimed input tax which later has to be repaid to HMRC, together with interest and possibly, penalties.

It may be possible to mitigate or eliminate a surcharge by making a part payment because at the 2% and 5% rates HMRC do not issue a surcharge if it is less than £400.

Chambers entertainment expenses In general chambers cannot recover input VAT on the cost of entertaining. This includes parties, cocktail evenings, and

Tax point on change in VAT rates VAT on supplies made by members of the Bar is chargeable at the earliest of the time when the fee is received or the time when the barrister issues a VAT invoice (or the day when the barrister ceases to practice). VAT registered barristers will normally follow the normal practice of issuing a request for payment initially and thereby, postponing

accounting for the VAT until the fee is received. There is a rule that allows VAT to be charged at 17.5%, and in some cases 15%, rather than the current 20% rate that was introduced on 4 January 2011. Where the service was performed prior to the change in the VAT rate, the rule allows a barrister to use the rate that was in force when the work was done (or apportion the fee where the work done spanned the change in rate). This will be helpful if a client is unable to recover VAT.

Discontinuing at the Bar Technically, at the date the barrister ceases to practice (due to retirement or any other reason e.g. to take up full-time employment) output VAT is payable on all of the barrister’s work completed prior to that date. However HMRC are prepared to allow payment of the VAT as and when fees are received. This requires a ‘deferment’ election to be made and submitted to HMRC shortly after the retirement.

VAT on cars Input VAT is not recoverable unless the car is used exclusively for business purposes. It is almost impossible to satisfy this requirement, as invariably a barrister will use the car for travel to and from work and will have it insured for private motoring.

VAT flat rate scheme (‘FRS’) and turnover Subject to eligibility, the FRS allows a barrister to apply a flat rate percentage, currently 14.5%, instead of the standard rate of 20%, in calculating the VAT due to HMRC, with the right of recovery of input tax then precluded (save for capital expenditure greater than £2k). The flat rate is applied to the total value of supplies, including exempt supplies and recharged expenses, but not supplies outside the scope of VAT. A recent Tax Tribunal case held that bank deposit interest, even if held on a ‘business’ bank account, generally does not have to be included in turnover for this purpose. Despite input tax on the business purchase of a car not being reclaimable (as explained above) the exempt sale proceeds on a sale still have to be included in turnover for the purposes of the FRS calculation, which is easily overlooked. Consideration should be given to leaving the scheme to avoid the car proceeds being subject to VAT, where the VAT at stake warrants it. The same point applies to a ‘buy to let’ property income and the sale proceeds on the disposal of such a property. Although there

will be no connection with the practice, for VAT purposes it is the ‘person’ and not the business that is registered and, the property income and disposal proceeds should be included in turnover under the FRS. If such a property has already been sold, HMRC will normally agree to apply ‘proportionality’ and allow a retrospective withdrawal from the scheme. The problem is readily avoidable at the very outset by ensuring that the property is not owned solely by the barrister. Nick Brennan is a tax partner at Citroen Wells Chartered Accountants based in the West End. 020 7304 2022 or nick.brennan@citroenwells. Alternatively contact David Rodney or David Marks on 020 7304 2000 or barristers@ Devonshire House, 1 London, W1W 5DR



This article is for guidance only and professional advice should be obtained before acting on any information contained herein as no responsibility can be accepted by Citroen Wells for loss occasioned to any person as a result of action taken or refrained from in consequence of its contents.

KSK0001 Barrister Advert AW OL.indd 1

26/8/11 10:10:02

personal finance & wealth management supplement the barrister 2011


An investment style for all seasons Cash is going backwards. Saver’s returns continue to make grim reading with little prospect of interest rate rises this year. Danny Cox, Head of Advice at Hargreaves Lansdown, looks at the best options for investors during periods of low interest rates and high inflation.


hose who insist on retaining

Certificates, guaranteed to beat the rate of

Fig 1 compares equity income investing versus

excessive cash balances will

inflation over the year from investment. Check

equity growth investing over the last five


for their availability at

years and it is clear that income has under




illusion – the tendency to

performed growth. However, Fig.2 looks at

think of money in nominal,

To maintain and grow the real value of your

the longer term performance of 20 years.



wealth in the current climate I think you

This shows higher yielding equity income

In other words, the face value of money is

should take another look at the stock market

investments have significantly out-performed

mistaken for its purchasing power. And there

and specifically equity income investing.

growth investments.

Equity income has been somewhat out of

Fig. 2 FTSE 350 low yield v FTSE 350 high yield last 20 years (source: Lipper)



is no doubt, the purchasing power of cash savings is falling.

favour in recent years but I hesitate to say it is If you can eke out 3% gross interest on

about to make a comeback – it has never really

immediate access cash accounts you are doing

been away. Quite simply, no other investment

remarkably well. Against this, rising food and

has endured like equity income.

fuel prices are stoking retail price inflation (RPI) above 5% (source ONS: RPI April 2011).

At the risk of being called a sycophant, in the

Therefore, the value of you cash is going down

very first Hargreaves Lansdown newsletter,

in real terms.

written in October 1981, Peter Hargreaves highlighted two equity income funds. There








purchases and provide an emergency fund – 6 to 12 months’ worth of expenditure is common. Cash deposits also work well if you are nervous of markets or need your money back within 5 years; conventional thinking tells us stock market investments are for the long term. However, since cash rarely beats inflation, particularly after tax, it is important to hold cash but not too much and optimise the returns from your cash holdings. Shopping around for good deals is straight forward using price comparison websites. Fixed term bonds currently pay up to 5% gross over terms up to 5 years. However this return may look unattractive in a couple of years’ time if interest rates do take off. My preference is to not tie up cash for too long and probably no more than 2 years.

has never been a year since when we have not regularly had equity income at the top of our recommendations. Equity income provides the

This principle is echoed when you look at the

potential for not only a growing income but for

power of the compounding effect of reinvesting

some capital growth, giving investors a hedge


against the effects of inflation on their savings and investment capital. Whilst high growth

Today’s value of £100 invested at the end of

stocks may provide you with the greatest total

1899, without reinvesting income

return over some years, equity income wins over the longer term. This is shown in these

Nominal Real

two examples: equity income is represented by the FTSE 350 High Yield Index and growth

Equities £11,407

stocks represented by the FTSE 350 Lower





Yield Index. Today’s value of £100 invested at the end of

Fig. 1

1899, income reinvested gross

FTSE 350 low yield v FTSE 350 high yield last five years (source: Lipper)

Equities £1,486,860








Source: Barclays Equity Gilt Study 2011 You might be able to improve the net returns either by investing in your spouse’s name, if

Equity income is investing in the purest

they pay a lower rate of tax than you, or use

sense – investing in profitable companies

Cash ISA which provides tax-free interest.

which distribute their profits in the form of dividends. A company which is paying a

Beyond this the best inflation busting cash

good and rising dividend often communicates

investments are National Savings Index Linked

strong financial wellbeing, since dividends


personal finance & wealth management supplement the barrister 2011 2010

ultimately come from earnings and profit. The

this stage an equity income manager will often

have a wider stock selection universe helping

best companies will find ways to increase their

sell, looking to reinvest the proceeds in the

investors diversify - 90% of stocks yielding in

revenue over and above the rate of inflation,

next high yielding opportunity. This discipline

excess of 3% are based overseas.

or reduce their costs, significantly increasing

means the equity income manager often buys

their profits. As the dividend increases, the

shares when they are cheap (undervalued)

Traditionally, there have been two sticking

value (and therefore the price) of each share

and sell them when they are expensive

points when comparing equity income with

should also rise, so as well as a healthy level

(overvalued) - the best principles of buy low

the building society. Firstly, the initial yield

of income, investors could also benefit from

and sell high. It is this enforced discipline

obtained in the building society was superior

capital growth.

that can help an equity income investor avoid

to that from equity income. Today, with

holding on to stocks that become overpriced.

interest rates languishing at historic lows,

A good example of this dividend growth is

that objection no longer exists. Secondly,

Unilever, which has managed to improve its

The Invesco Perpetual Income Fund is a good

you may not like the thought of their capital

dividend year in, year out.

example of one of the best performing UK

fluctuating, as equity income does not include

funds over the last 20 years and the income,

the guarantee of capital provided with bank

as shown in Fig. 3 has quadrupled.

and building society deposit.

Fig. 3

Here, it is important to determine the right cash asset allocation and the importance of longer term, inflation-beating investment with the balance. Furthermore, for the nervous investor, the dividends from equity income provide a cushion from market falls: despite some cuts in dividends in the recent past, the equity income fund investor always achieves a positive return from the dividends, regardless of what happens to the capital value.

Please remember past performance is not a guide to future returns and income is variable

Fundamentally equity income is a good long

and not guaranteed. It’s important to note the

term inflation beating solution - dividends

income yields shown above are historic and

protect against inflation. Well run companies

could be lower or higher in the future. Higher

are able to increase prices to cope with

rate taxpayers are subject to additional tax

inflationary pressures. Dividends are often

on the dividend yield unless held in an ISA

ahead of the rate of inflation and dividend

or SIPP. Source: Lipper Hindsight. Figures to

growth overtime supports share price rises.


Shelter these equity income funds in ISA and there is no further income tax or capital

This represents a total improvement in

In terms of stock selection, the Invesco

gains tax to pay (ISA limit ÂŁ10,680 2011/12,

income since 1990 of 642.4%. Source: Lipper


ÂŁ21,360 for a couple).



overweight in sectors such as pharmaceuticals

exclude any special dividends paid. The

and healthcare, with an exposure of almost

Danny Cox

numbers of shares in issue was restructured

26% of the fund, and tobacco with a weighting

Hargreaves Lansdown

twice during the period on this example, so

of nearly 19%. At the same time the fund is

we have calculated the amount of dividend

significantly underweight in financials such as

an investor would have received if they

banking and life insurance.








continuously held one share since 01/01/1990. Equity income used to be a UK play. Companies Thus an investor in 1990 is now obtaining

distributing profits in the form of dividends

an annual income considerably greater than

was almost entirely confined to the UK stock

that when they invested, and indeed the value

market. However, equity income is now global

of the income has more than kept pace with

with the number of companies worldwide who


recognise the benefits of attracting income investors with dividend pay outs increasing. It

Buy low sell high

therefore makes sense to include some global

As these types of companies attract investment,

equity income exposure in a portfolio.

the price is pushed up and the yield down. At

Global equity income managers naturally

personal finance & wealth management supplement the barrister 2011


The Future of Furnished Holiday Lettings From cottages in the Cotswolds to ski chalets in Val d’Isère, Furnished Holiday Lettings (FHLs) have long attracted favourable tax treatment. However, in recent years successive governments have attempted to scale back the tax benefits. Ben Grist of Dixon Wilson asks what the future holds for FHLs and how you can manage your tax exposure resulting from them.

F Background

announced several restrictive changes to the

would appear to have weathered the storm -


regime, the most significant one being that,

for the moment at least.


from 6 April 2011, losses incurred in the

Capital gains tax

destinations, have historically

course of letting an FHL could no longer be

Despite most attention being focussed on the

been subject to a unique and

offset against a landlord’s other income for

changes to the income tax treatment of FHLs,

generous tax regime. The

the year. Instead they could only be carried

from a capital gains tax perspective FHLs are






key difference between an

forward to offset against future profits from

still an attractive option. There are three main

FHL and a traditional rental property is that

the letting business. Further changes effective

reliefs available and these are particularly

the FHL is treated by HM Revenue & Customs

from 6 April 2012 relate to the qualifying

important as it is unlikely that a gain arising

(HMRC) as a trade for tax purposes. This

criteria which include:

from the sale of a holiday property will be

brings with it several income and capital tax

sheltered by main residence relief.

advantages such as the availability of capital

let for at least 210 days per year (up from 140

Any gain arising from the sale of an FHL

allowances, capital gains tax roll-over relief


should qualify for entrepreneurs’ relief on the

and business property relief for inheritance

tax purposes. However, despite these potential

110 days per year (up from 70 days)

business, rather than an investment.

advantages, obtaining these reliefs is still more

relief applies by reducing the rate of capital

difficult than many people realise.

more than 31 days

gains tax payable on the gain from 28% to just

In his final budget in March 2010 the then

The Government has argued that the changes

10%, subject to a lifetime allowance for gains



to the availability of losses will have little

of £10 million at this reduced rate.

his Government’s intention to abolish the

impact on the tourism industry and the

Another attractive relief for these properties is

favourable treatment of FHLs altogether.

availability of holiday properties because any

the ability to gift them to other individuals or to

This followed a move in 2009 to extend this

trade must be carried out on a commercial

settle them on trust without realising a capital

favourable tax treatment to properties located

basis with a view to a profit, and therefore

gains tax charge. This is particularly helpful

in the European Economic Area (EEA) in

loss relief is unlikely to be a factor in deciding

for anyone carrying out a wider inheritance

addition to those in the UK. It was noted at the

whether to let out a holiday home.

tax planning exercise. The gift of a non-FHL

time that this extension of the relief during a

However, the tourism industry is concerned

rental property to a family member, other than

period of fiscal belt-tightening may prompt the

that the more restrictive criteria will adversely

one’s spouse, would ordinarily realise either a

Government to abolish the relief altogether.

affect genuinely commercial holiday lettings,

capital gain or loss based on the market value

The announcement to abolish the relief was

especially those located in traditional summer

at the date of gift. However, for FHL properties,

met with considerable consternation from

holiday destinations.

They contend that,

hold-over relief can be claimed to defer any

representatives of Britain’s tourism industry

despite the best will in the world, the fact

gain arising until such time as the recipient

and tax professionals alike. They argued that

remains that there is little demand for cottages

subsequently disposes of the property.

the favourable treatment was justified as,

by the sea when it is snowing in February.

Finally, the availability of business asset

rather than being a tax break for the wealthy

The future of FHLs

roll-over relief also allows capital gains tax

on their investment properties,

it simply

So where does that leave holiday home

on the disposal of a property used for the

brought an anomalous treatment in line with

owners? Despite these changes there are still

purposes of a trade to be deferred, provided

that of comparable businesses such as bed

tax benefits from letting out these properties.

that the proceeds of the sale are reinvested in

and breakfasts or small hotel proprietors, and

Capital allowances, effectively depreciation

qualifying business assets, such as other FHLs

reduced the otherwise distorting effects of tax

for tax purposes, can still be claimed on

or other businesses.


furnishings and fittings purchased for use in

Inheritance tax

Recent changes

the holiday home. Furthermore, the availability

For inheritance tax purposes FHLs can, in


of the Annual Investment Allowance currently

some circumstances, attract 100% business

election last year the new Chancellor George

provides an immediate 100% tax deduction for

property relief (BPR), which has the effect of

Osbourne confirmed in his emergency budget

furnishings and fittings up to a maximum of

fully mitigating any inheritance tax charge on

in June 2010 that he would not continue

£100,000 per year although this limit is set to

either death or a transfer to a trust. However,

with his predecessor’s proposal to abolish

fall to £25,000 from 6 April 2012.

HMRC have recently begun taking a more

the favourable treatment of FHLs. However,

However, reliefs from the most expensive

robust stance when dealing with claims for

in his second budget in March this year he

taxes, capital gains tax and inheritance tax,

BPR on FHLs.







personal finance & wealth management supplement the barrister 2011

The property must be available for

The property must actually be let for No single let can be for a period of

basis that the property is an asset used in a This

Previously, the opinion of many advisors was

and fresh linen during the tenancy, and taking

concerning BPR have moved away from the

that as long as a business met the qualifying

an active interest in the holidaymakers’

principle of apportioning relief. Instead the

criteria as an FHL during the two years prior

activities (e.g. arranging local excursions).

courts have preferred to look at assets used

to a transfer, HMRC would allow the claim for

They will also expect to see a commensurate

in a business as a whole, asking the question

BPR. However, recent publications by HMRC

level of commerciality, which would be

of whether the asset is used wholly or mainly

indicate that such claims will now face far

evidenced by the preparation of accounts, use

for a trading activity. Until a BPR claim on an

greater scrutiny.

HMRC’s stated opinion is

of forecasting, active marketing and genuinely

FHL goes before the courts it is unlikely that

that for an FHL to qualify for BPR, the service

letting the property to third party customers

taxpayers will get any more certainty on this

provided by the landlord in the normal course

rather than just friends and family.


of business will have to go above and beyond

The position now seems to have shifted towards


those normally provided by a landlord. HMRC

an initial presumption that an FHL business

Our advice for those who have a second home

will expect to see an active involvement from

will not qualify as a trade and therefore will

which is rented out as an FHL is

the landlord in the operation of the business.

not qualify for BPR. Furthermore, even where

closely and critically at the business you are

The question of whether the business will

HMRC agree that the type of services and level

running and consider whether, based on the

qualify for BPR now focuses on whether the

of involvement of the landlord indicate that a

facts of your particular case, the operations

business is a trade rather than a property

trade is being carried out, HMRC would seek

can reasonably be called a trade, rather than

letting business. This distinction will depend

to apportion the activities between a trading

merely the holding of an investment. Consider

on both who is running the business, and the

element: the provision of ancillary services,

these issues and take professional advice now.

type and level of service provided.

and the non trading element: the rental

Perhaps rethink your business model – there

The normal services provided by a landlord

business. Clearly these ancillary services

may be simple steps which can be taken

will include the arrangement of new tenancies,

will only represent a small proportion of the

to strengthen a claim for BPR, which will

advertising, taking bookings, the provision of

business and therefore the proportion of the

potentially bring considerable inheritance tax

utilities and cleaning in-between tenancies.

property value where BPR can be claimed will

advantages in the future.

The provision of these services would not in

be small.

themselves indicate that the landlord was

While this interpretation of HMRC’s published

carrying out a trade. HMRC will now expect to

guidance would seem to preclude BPR for

Ben Grist –Partner at Dixon Wilson

see a service similar to that received in a small

FHLs in all but the most extreme cases, it

hotel, for example provision of meals, cleaning

is interesting to note that the recent cases

+44 (0)20 7680 8100

personal finance & wealth management supplement the barrister 2011

to look


The pension alternative Pension schemes can be established by overseas providers and, depending on how they are structured and where they are located, they offer UK resident individuals a range of useful tax planning benefits, flexibility over what the plan may invest in and how benefits can be provided, as well as an absence of reporting obligations to Her Majesty’s Revenue and Customs (HMRC). By Jason Butler Chartered Financial Planner and Investment Manager at City based Bloomsbury Financial Planning Overseas pensions have been around in one form or another for many

long as the QNUPS is not also a QROPS) and has been non UK resident

years, although certain changes to UK legislation early last year made

for five complete tax years.

them slightly more attractive to all types of UK residents. The type of overseas pension plan in which we are interested is known as a

Recent legislation on ‘disguised remuneration’ designed to kill off

qualifying non-UK pension scheme (QNUPS) which has not also been

certain employer-funded trusts may give rise to a tax charge on an

classed as a qualified recognised overseas pension scheme (QROPS),

employer where a QROPS contains a transfer of UK pension benefits

more of which later.

that were originally funded by employer contributions. For this reason many QNUPS providers have temporarily suspended transfers from

A correctly operated QNUPS (which is not also a QROPS) in the right

QROPS to QNUPS while the issue is clarified with HMRC.

jurisdiction allows virtually tax-free growth, virtually tax-free benefits and, like UK pensions, exemption from inheritance tax on any death

The second method of funding a QNUPS (which is not also classed

benefits arising. The table in figure 1 sets out the main taxation benefits

as a QROPS) and the one on which I want to focus now is by way of

of a typical European QNUPS compared with a UK pension plan for new

new contributions, whether from after tax income or capital or,


more interestingly, as a transfer of personal assets, investments or

Figure 1 – UK pension v typical European QNUPS

property. Unlike UK pension plans, because no tax relief is provided on contributions to a QNUPS, contributions are not subject to the annual allowance restrictions and neither do they require the member to have earnings to justify any personal contributions.

In theory there is NO LIMIT to the amount that you may contribute to a QNUPS, but my advice is to make sure that the level of contribution(s) is reasonable in relation to the target retirement fund that you are trying to accumulate and to your overall financial position. In my view (and that of various tax counsel) this is necessary to avoid any potential accusation by HMRC that the sole motive (or one of the main motives) was tax saving. Most tax experts agree that it would appear difficult to see how such a claim could be made by HMRC based on the current legislation, Data source: Bloomsbury

but perception is everything and HMRC has deep pockets!

Making contributions

If, for example, you have historically paid £250,000 annual contributions

A QNUPS can be funded in two ways. The first is by way of a transfer in

to your UK pension plan then it seems perfectly reasonable that you

of benefits from a QROPS. A QROPS is an overseas pension scheme that

continue those to your QNUPS. On the other hand, if you have not

is approved to receive transfers from UK registered pension schemes

made meaningful pension contributions for several years and can

and is subject to strict reporting requirements and certain other

demonstrate that the contribution necessary to ‘catch up’ missed


Most of these restrictions and reporting requirements

contributions to reach your target fund is, say, £800,000, then that

cease once the member has transferred their QROPS to a QNUPS (as

would be reasonable. as a single contribution. So whether or not


personal finance & wealth management supplement the barrister 2011

Where personal service matters Quilter is a specialist in bespoke wealth management services, with approximately £7.8 billion in funds under management, as at 30 June 2011. Our clients include private clients, charities, trustees, pension funds, corporate bodies and life companies and we work with a number of professional advisers including solicitors, barristers, accountants and IFAs. Quilter’s services Our Discretionary Portfolio Service is a tailored investment management service, which allows portfolios to be constructed to meet our clients’ investment objectives. The service is suitable for investments of more than £200,000. Our Managed Portfolio Service is available to clients with over £25,000 and invests solely in collective investments with seven different investment strategies to choose from.

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Our investment process Our investment process combines our strategic views — based largely on macro–economic input and valuation criteria — with recommended portfolio strategies to achieve consistency across clients with similar investment objectives and profiles. We understand that there is rarely a simple solution and recognise that, while our investment process needs to be disciplined, it must also be flexible. Our aim is to give imaginative but pragmatic advice. We have a research team which provides a comprehensive research capability to our investment managers. Our Chief Investment Officer has

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Who do I contact for further information? To discuss how Quilter can help you, please contact Emma Booth: t: 020 7662 6200 e: w:


Quilter is the trading name of Quilter & Co. Limited. A member of the London Stock Exchange and authorised and regulated by the Financial Services personal finance & wealth management supplement Authority. Quilter is a private limited company that is registered in England No. 01923571. The registered office is atthe 20barrister Bank Street, Canary Wharf, London E14 4AD. Quilter is a wholly owned subsidiary of Morgan Stanley Smith Barney. “Quilter” and the “Quilter” logo are registered Community Trade Marks and remain the exclusive property of Quilter & Co. Limited. You are prohibited from using the Quilter marks for any purpose without the prior written authority of Quilter.

you are caught by the pension funding restrictions or are near the

you become non-UK tax resident. These funds could, in theory, be

new lifetime allowance of £1.5m (from April 2012) and wish to make

used to make further QNUPS contributions if, for example, you have

additional ‘pension’ provision, a QNUPS could offer a useful alternative

insufficient liquid personal assets.

to UK pensions for new ‘contributions’.

The beauty of taking loans from the QNUPS is that you do not need to

Because QNUPS benefit from a UK inheritance tax (IHT) exemption,

prove non-UK residence or leave the UK in order to avoid the punitive

regardless of whether the funds arose from a transfer of UK tax-relieved

50% income tax rate on ‘income’. In addition, the loans taken to fund

pension funds or contributions of cash, investments or property, they

lifestyle would be fully deductible from your estate for IHT purposes

offer the potential for immediate IHT savings. Figure 2 summarises the

upon your death - a double benefit. I would, however, caution against

tax position of personally-owned assets compared with holding them

taking loans within a short period of time of either taking out the QNUPS

via a QNUPS.

plan or making substantial contributions, to avoid the possible charge that the arrangement is a tax avoidance vehicle and not a pension.

Figure 2 - Personally-owned assets v QNUPS

If for some reason you don’t want to take loans (although I can’t think of any reason why you wouldn’t), then you may take up to 25% of the fund as a tax-free lump sum and the remainder of the fund as a taxable income. Interestingly, as long as income is taken from a QNUPS which HAS NOT received a transfer of a QROPS (which itself received a transfer of UK pension benefits) it is classed as foreign pension income,

Data source: Bloomsbury

Investing the funds

and as a result only 90% of it is actually taxable in the UK. Thus if you pay tax at 50% or 40% then the effect rate you pay is 45% or 36% respectively.

The funds held within the QNUPS can grow tax-free, with the exception of non-reclaimable withholding tax on UK dividends or rental income

QNUPS can provide more cash

arising from UK property. Income arising from non-UK assets would

Figure 3 compares the benefits of making a contribution to a SIPP and a

usually grow completely tax-free. The fund would allow investment

European QNUPS which permits loans of 50% of fund value. If you pay

in a wide range of other investments including residential investment

£100,000 into your UK pension, with basic rate tax relief at source this

property, although some providers require property to be owned by a

would cost you £80,000 (notwithstanding any higher rate relief or any

company structure. Most QNUPS providers will not permit you or your

annual allowance tax charge that might apply) – so the alternative is to

immediate family to live in properties owned by your QNUPS.

pay £80,000 into a QNUPS. If we assume that over, say, 10 years or so,

Your QNUPS scheme may borrow to assist with purchasing property

the fund doubles in value, then the pension would be worth £200,000

assets and there are no limits other than what a commercial lender will

compared to the QNUPS being worth £160,000.

lend. Subject to normal prudent investment principles, there are no prescriptive rules about how much the scheme is permitted to invest in one asset. Although it is possible to hold your main residence within

Figure 3 – comparison of SIPP v European QNUPS contribution

a QNUPS it would be prudent to avoid doing so to avoid any possible assertion that the scheme was not being operated as a pension plan. So we can see a situation where someone who wishes to invest in investment properties, whether in the UK or overseas, could make contributions to their QNUPS which fall out of their estate immediately for IHT. The QNUPS would then purchase property, with or without borrowing, and accumulate the rental income with tax at nil in the case of overseas properties and a maximum of 20% on UK property. Any capital gains arising on subsequent disposal would be tax-free.

Taking the benefits The best way of taking benefits from a QNUPS is to take a loan or a series of loans on which interest is charged. The interest charged by the QNUPS removes further wealth from your personal estate for IHT purposes and is received by the QNUPS tax-free. As well as being taxefficient, loans allow you to have access to between 30-80% of the fund depending on jurisdictions. Access to 100% of the fund is possible if


personal finance & wealth management supplement the barrister 2011

Data source: Bloomsbury

Taking these assumed future values let’s now consider the cash position

and even more ‘advisers’ promoting overseas pensions generally

where you wish to take benefits. With the UK pension you would have

(particularly those based in overseas jurisdictions with less stringent

paid in £80,000 and can take £50,000 out (25% of the future value)

legislation than in the UK), who don’t appreciate the nuances of the UK

as a tax-free lump sum. With the QNUPS you would also have paid

tax legislation and rules. Expert tax and pensions advice backed by

in £80,000 but can take out £120,000 (£80,000 as a tax-free loan and

a proper financial plan to provide the context for QNUPS planning is

£40,000 tax free cash). Thus the QNUPS provides £70,000 more than

essential to avoid potential pitfalls.

the UK pension in this scenario. Let’s now consider future income and assume that you could draw, say, half of all the remaining funds as income in your lifetime. The total cash position for the UK pension would be the original tax-free lump sum of £50,000 plus half of the remaining fund of £150,000 as income,

Jason Butler is a Chartered Financial Planner and Investment Manager

taxed at your top rate. Assuming that you pay 40% tax in retirement,

at City based Bloomsbury Financial Planning. He has twenty years’

then you might reasonably expect to receive a further £45,000 net of

experience in advising successful individuals and their families on

tax. The total cash from the UK pension in this situation is, therefore,

wealth management strategies.

Jason can be contacted on email:


Tel: 020 7194 7830.

The total cash position for the QNUPS would be the original tax-free lump sum and loan of £120,000 plus half of the remaining fund of

Jason’s book ‘The Financial Times Guide to Wealth Management’

£40,000 as income, 90% of which is taxed at your top rate. Assuming

(Prentice Hall) is published in November and is available from Amazon

that you pay 40% tax in retirement then you might reasonably expect

and all major book retailers.

to receive a further £12,800 net of tax. The total cash from the QNUPS in this situation is therefore £132,800, which is £37,800 more than the UK pension. If you were to die after taking out tax-free cash and the residual fund were paid as a lump sum, the total cash position with the UK scheme would be £50,000 initial tax-free lump sum taken plus death benefit of £67,500 (£150,000 less 55% death tax), a total of £117,500. This compares to the QNUPS position which would be £40,000 initial tax-free cash and £80,000 tax-free loan plus the remaining net fund of £40,000, a total of £160,000. Thus the QNUPS would provide £42,500 more benefit than the UK scheme. If you were to die after age 75 having not taken any benefits, then the lump sum death benefit provided by the QNUPS is £70,000 better than the UK scheme as 55% tax is levied on the £200,000 UK death lump sum compared to nil on the £160,000 QNUPS death lump sum. In every scenario the QNUPS is considerably better than the UK pension, other than if a death lump sum is payable before age 75 and no benefits have been taken. In this scenario the UK scheme and QNUPS are the same. As explained earlier, the amendments to legislation last year specifically provided for overseas pension plans to be exempt from UK inheritance tax. Therefore, as long as the principal reason for establishing and contributing to the QNUPS is to provide retirement benefits and this is done on normal ‘commercial’ terms, this offers a potentially very attractive way of avoiding IHT, while still continuing to benefit from those assets. Against the backdrop of restrictions on

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UK pensions, what can be contributed to discretionary trusts, the need to either give up access to or use of assets or accept inflexible ‘reversionary’ interests of capital, in the right circumstances a QNUPS offers a much more flexible and tax-efficient wealth planning structure.

A word of caution. There are many QNUPS providers offering plans

* under current UK legislation

Authorised and Regulated by the Financial Services Authority

personal finance & wealth management supplement the barrister 2011


So Why Do Barristers Change Accountants? The following indicative discussions are based on real life conversations between Keens Shay Keens Limited Director, Charles Little and Barrister Clients Case Study 1

Case Study 3

C. I have got the accounts you sent me so why do you also want to come and see me to go through them? My previous accountant accountant never did?

CL. I have managed to agree with the HMRC that the VAT arrears of £6,750 can be repaid in two weekly installments on the very strict understanding that the VAT return to 31st December 2010 is submitted and paid on time.

CL. But C they are your accounts and I just need to make sure that everything is as it should be.

1 week later


Yes they seem ok, I had no idea I spent so much on travelling!


In the year 2009/10 I did not see an expense claim for fees paid in respect of your broadcasting work?


Well they started in June 09.

CL. In which case they have missed out fees of £3,750! C.

Can I still reclaim them?

CL. Yes, as we are before the deadline we can go back and amend the return. C.

What will that mean?

CL. A tax refund of £1,500….!

Case Study 2 B.

So you want me to pay £1,500 Plus VAT for your premier service where as I am currently paying £450 plus VAT?


Yes that is correct but please bear in mind that last year you paid £2,400 in VAT default charges. In last year’s accounts your old accountant did not claim for any train fares or car parking and you have not seen him in four years!

6 Months later B.

I ought to have switched to you a long time ago. Your advice that I should keep a daily record of my expenses has really highlighted what my actual spend is and boy have I overpaid tax!


But I can’t make a payment at all for the next 6 weeks as I have got school fees to pay!


Sorry....... after I have spent time negotiating with HMRC and having got them to suspend the planned visit to chambers next week ....... you are going to pay the school fees first?


I have to or the kids will be thrown out of the school within the next two weeks.

CL. What happened to the £6,000 you received from the Nottingham case? P.

That went to pay some of my outstanding tax, I owed Chambers £2,750 and my old accountant £700.

CL. You really have got to organise your finances and get your priorities sorted out. You have to appreciate that you are not earning the levels of income you were 2 years ago and this constant battle with what you owe must be affecting your work? P.

Yes you are absolutely right.


On the basis that your outgoings will seriously reduce from January next year then I think there is a possibility that I will be able to negotiate a longer term settlement with HMRC.

Charles Little is a Director at Keens Shay Keens Limited and supports Barristers across the UK. He can be contacted on 01234 301000 or by e-mail:


personal finance & wealth management supplement the barrister 2011

Your Portfolio’s Worst Enemies By Matthew Aitchison, Principal and Chartered Financial Planner, Clear Vision Financial Planning


nvestment is defined by the Oxford

effects of stock specific risk can be reduced

enough information and indicators out there

English Dictionary as “the action

through diversification. For example, if your

to suggest anything from a global meltdown to

or process of investing money for

entire portfolio is invested in one company

the next huge rally. This makes market timing

profit”. However, as with all things,

and that company loses a big contract and

nigh on impossible.

it is not quite so simple. Investing,

drops in share price, you will suffer a big loss

in every sense of the word, involves

on your portfolio value. However, if you hold

At best, a market timing strategy can decrease

exposing your assets to risks. These may

shares both in that same company alongside

your returns by missing out on the first part

include market risk, inflation risk and liquidity

other companies, the negative effect on your

of a rally. At worst, this strategy can lead to

risk. All of these are risks that exist everywhere

portfolio is potentially reduced.

huge losses when the wrong call is made. No-

and, as such, if you want to invest, you need

one knows which way the markets are going,

to be comfortable with being exposed to one



so you need a strategy that doesn’t rely on

or all of these risks in some form or another.

becomes more difficult to see when looking

someone guessing correctly using their crystal

at a portfolio’s fund construction. A lot of






However, there are aspects of a portfolio that

funds can hold similar stocks, especially when

can cause a huge amount of damage, but

they reside in the same sector. You can have

are able be controlled. These ‘enemies’ to a

a collection of 10 funds within your portfolio

portfolio are what we are going to focus on,

that makes it look diversified, but when you

as the key to investing is to recognise what

dig deeper you find that it is actually skewed

theses enemies are, and how we can avoid or

towards one sector of the market. This is why

minimise them.

it makes sense to know exactly what is in your

This falls under the same kind of heading as

portfolio, rather than just pick funds that have

market timing. The difference is that instead

performed well in the recent past.

of calling when markets will rise and fall, the

3. Stock Picking

focus is on finding specific companies that are ‘undervalued’ and are expected to rise

1. Lack of Diversification

substantially in the near term. Once again, we have the problem of calling when the share

We find that the world over, people chase

2, Market Timing

price will stop falling, and when it will start

stocks, themes, asset classes, trends and

rising. It sounds very much like speculation.

anything else they believe will make them a

The second aspect that can work against your

profit, but ultimately expose themselves to

portfolio is that of market timing. There is

Equally, in this day and age, information

an increased amount of risk by allowing the

often a belief that investors and their advisers

is available 24 hours a day, 7 days a week.

investment to be concentrated. However, this

can time their entry and exit from the market

Many people would suggest that actually we

breaks the first rule of investing... ‘not putting

in order to profit. There is nothing more

suffer from information overload. You can

all your eggs in one basket!’

encouraging than having someone who is

find out almost anything using the internet,

supremely confident that they know which

especially when it comes to public companies.





way the market is going. However should you

This leaves us with the problem that if the


pick up any financial supplement, it is most

same information is available to thousands

been shown through Nobel Prize winning

likely that there will be the latest guru telling

of investors and analysts, why is a stock not

economics to reduce risk. There are two

you the stock market is about to crash with

priced correctly? If the price is wrong today,

type of risk, systematic and unsystematic.

the next guru on the page after that telling you

how can one be sure the market will eventually

Systematic risk is the effect that market

why it is about to rally. Both have a compelling

arrive at the “correct” price in the future?

activity has on a portfolio. It is uncontrollable

argument backed up by facts and figures,

Is the market inefficient today but efficient

and you cannot remove it. Unsystematic

however, which way to follow? There are so

tomorrow, or is there a chance an investor will

risk is stock specific and is inherent in each

many conflicting views at any one time that

go to his grave as the only one who knows the

investment, and although unavoidable, the

it is pot luck as to who is correct. There is

right price?


holding and



personal finance & wealth management supplement the barrister 2011


Stock picking, like market timing sounds

promising extortionate returns, advice on

experience you can control and that make a

exciting and a route to riches, however, it is a

selling/buying stocks or access to the latest

real difference to your end result.

dangerous and erratic way of investing akin to

‘star’ fund manager.

gambling. This is more likely to work against your portfolio than for it.

4. High Fees

More than anything, a good investment When reading or listening to this marketing

strategy involves recognising the risks worth



taking, and the risks that work against your

remember that the writers of this marketing

investment goals. It is in this area that a

do not have the same goals and objectives as

knowledgeable and well qualified adviser

you or your portfolio. Their sole aim is to sell.

becomes invaluable.





Be it magazines, funds or services, they all The aspects that determine a portfolio’s return

have the goal of increasing sales. They are not

are capital growth and dividend income, less

trying to help you have a successful investing


expenses. The expenses can take the form

experience or hit your investment goals.


of transaction costs, annual management


charges, stock-broking fees, adviser fees as

The easiest method for them to sell to you is

well as entry and exit fees.

to appeal to the basic human trait of greed, by

Tel: 01234 851 797

offering incredible returns and/or downside

Mobile: 07854 769 815

High fees provide a much higher hurdle for

protection. However, with all marketing I tell


your portfolio to overcome if it is to provide a

my clients to bear in mind that if it seems

profit. If you invested £1,000,000 in a portfolio

too good to be true, it usually is, and that the

Clear Vision Financial Planning

and it gained a 6.5% return each year over 30

writers of this marketing are all trying to sell

6 Cherry Walk,

years, a portfolio with a 3% annual fee (i.e. a

something to someone. If there was really


3.5% compound annual return) would have a

someone out there who could predict the


final value of £2,806,794. A portfolio with a

next winning stock/manager or asset class,

MK42 7PB

2% annual fee (i.e. a 4.5% compound annual

the last thing they are likely to do is share the

return) would have a final value of £3,745,318


giving a benefit of £938,524. This view becomes more alarming when you look at fund fees in the UK. According to the

6. Emotions

Lipper UK Fund Charges Report January 2011, the average global equity fund charges

The sixth and final area we are focusing on is

1.66% per annum. When combined with the

the emotions of investors. This is the reason

fact that high stock turnover can add as much

that most investor’s fall foul of all of the above

as 1.8% per annum to this figure, we start to

enemies to portfolio returns. As human beings

see that some fund managers will have costs

we tend to let our emotions rule our life, which

of 3% plus per annum to surmount before

is counterproductive when investing in the

making a profit. This is a large hurdle to clear,

long term. Our emotions encourage us to dive

showing the importance of managing and

in to markets when they are doing well in a

reducing costs.

vain attempt to avoid missing a good run, and to bail out when they plunge in a misguided attempt to miss the worst of it. They also make us fearful of the short term when we should be

5. Flashy Marketing

focusing on the long term.

The fifth aspect that can work against the


generation of positive returns is that of flashy marketing. This is marketing from

Uncertainty is an integral part of investing.

investment fund houses, advisers and ‘expert’

Successful investing is not about making a

commentators. I lose count of the amount of

good call on a stock or timing the market, it is

articles, magazine covers and advertising

about focusing on the aspects of the investment


personal finance & wealth management supplement the barrister 2011

Looking forward to retirement? Mike Fosberry and Lanying Burley of Smith & Williamson investment management offer some personal financial planning tips for barristers


Would I be better off with a SIPP?

any barristers are too

all your eggs in one basket. You’ll need to

busy with their careers

think about your investment timescale for

to give financial and

retirement and any other financial objectives



and liabilities, such as school or university

become very popular in recent years because


they provide choice, flexibility and control.


the time and attention they deserve. As self-





They are also relatively inexpensive to manage

employed professionals, with earnings that

Having said this, pension planning will

and can easily be incorporated into your

can fluctuate widely from year to year, most

inevitably be a key part of any investment

overall asset management strategy.

barristers require an approach to investment

strategy. Saving via a pension is highly tax

that provides flexibility. They therefore face

efficient as you get tax relief at your highest

some relatively complex choices when it comes to planning for financial security in retirement.


without any liability to capital gains tax, while UK dividends are taxed at 10%, making

Effective wealth management, in its broadest sense,

marginal rate of tax. Pension funds grow



pension funds attractive investments.


What sets SIPPs apart from other pensions is that you retain control of the underlying investments. A SIPP is simply a wrapper and is not linked to underlying investments, of which a wide range is permitted. This makes it a bespoke investment that can cater for any preferences or investment restrictions.

encompassing all your assets, not simply a

It may sound obvious but it’s nonetheless

pension, and a well managed and diversified

important to remember that a pension is

You can also react to change in your own

set of investments, which is actively looked

designed to provide an income in retirement.

circumstances or to external events with a

after – rather than forgotten about. It also

Only 25% of a pension fund can be taken as

SIPP. As we’re all too aware, the financial

necessitates a comprehensive and tax efficient

cash and the remainder has to be used to

markets can move, so you may need to

approach to your financial affairs – both your

provide an income for life.

react quickly to market conditions or to take

short term needs and longer term retirement planning, as well as the wider financial needs of your family where appropriate. New limits on pension contributions have made it even more important to see your pension as just one element of a retirement

advantage of opportunities. A balance between saving into a pension to provide regular income

and non-pension

assets to provide additional capital and/or income is often a sensible financial planning approach.

SIPPs are often used to consolidate various personal




retirement annuity contracts) into a single wrapper. Various types of SIPP are available, but fee-based, as opposed to commission-

plan, which also needs to take account of

based, SIPPs have the benefit of transparency


How much should I put into my pension?

It’s also important to make best use of tax

There’s no straightforward answer. It depends

a discretionary fund manager who can

efficient shelters such as ISAs – now an

on a number of factors, such as your other

actively manage the pension portfolio and

important contributor to efficient saving – and

assets and how much income you would like

take advantage of opportunities and react to

efficient use of capital gains tax allowances and

in retirement. However, as rule of thumb, the

changes in market conditions.

income allowances (including those of your

percentage of your earnings you contribute

spouse and, if appropriate, children). There

into a pension should be roughly half your age

are a number of other tax saving investments

in order to build a pension of 50% of current

and savings vehicles that you can use,

earnings at retirement. In other words, at

depending on your personal circumstances

40 years old, you should contribute 20% of

In spite of the enduring benefits and popularity

and attitude to risk (see below).


of pensions, the much-publicised reductions

Do I need a pension?

The other critical factor in determining the

that, for many, pensions alone will no longer

level of pension contributions is investment

be enough to meet retirement aspirations.

your other assets, such as property and other

of charges. Most SIPPs allow for the appointment of

How will the changes to pension rules affect me?

in both annual and lifetime allowances mean

Sound financial planning is about finding

risk – both the level of risk you feel comfortable

the most suitable option for your particular

with, and how much risk is required to achieve

There is no promise that the new lifetime

circumstances and it’s important not to put

your target pension income.

allowance of £1.5m (applicable from tax

personal finance & wealth management supplement the barrister 2011


Key points to remember

year 2012/13) will be increased in line with

insurance policies that receive special tax

inflation. In today’s terms, this will generate

treatment. You can make 5% withdrawals

a pension of approximately £50k per annum,

without being taxed on underlying income and

Keep your financial planning as

with indexation, but in ten years’ time,

gains, as well as benefiting from ‘gross roll-up’

simple as possible.

assuming inflation at, say, 4% and broadly

of the underlying investment funds

Think about your pension as part of

an overall financial strategy.

Ensure flexibility to cope with

equivalent annuity rates, the pension you purchase will have reduced by over half in

VCTs and EIS

real terms.

changing needs and objectives.

These are at the higher end of the risk scale

Make the most of allowances and

and while they can form part of an overall

ensure tax efficiency.

strategy, should not be used in isolation. VCTs

Review your financial plan regularly.

Pensions alone will not provide adequate

(venture capital trusts) provide capital to small

Get someone with the right expertise

retirement income for many barristers. Some

and expanding companies with the aim of

to advise you.

additional or alternative retirement saving

growing the business and generating a profit

options are explored briefly below.

for the VCT. You can invest up to £200,000

Mike Fosberry is a Director and Head of

per tax year and benefit from 30% income tax

Financial Planning at Smith and Williamson

relief. In addition, dividends are tax-free and

Financial Services Ltd and Lanying Burley is

there is no CGT should the VCT be sold. There

an Investment Director at Smith & Williamson

You can accrue substantial portfolios over time

is, however, a minimum holding period of five

Invesment Management Ltd

in an ISA (individual savings account). Ideally,

years to qualify for the 30% tax relief.

Tel: 020 7131 4000

ISA to maximise tax-efficient saving, where

EIS (enterprise investment schemes) invest

appropriate – the new limit is £10,680 for this

in individual small businesses. Income tax

tax year – and they can be used as a source of

relief is now 30% for EIS investments up to

capital or income.

£500,000, with a minimum holding period of

What other savings options are there?


spouses should each open a Stocks and Shares

three years. This is due to increase to £1m and Cash ISAs, with a lower limit of £5,340 are

further changes are due to be introduced in


available to anyone over 16 provided they are

April 2012. EIS also enable you to defer CGT.

Alastair Clark at Myddleton Communications

UK residents, so consider investing on behalf





on 020 7689 5545

of youngsters.

National savings

The Government announced in the Budget

These include Premium Bonds, National

that it is launching new junior

Savings Certificates and Children’s Bonus

ISAs, which replace the Child Trust Fund,


although they will not benefit from

investments that can be cashed in when

Government contributions. These are expected

required. They are also Treasury-backed, so

Disclaimer By necessity, this article can only provide a short overview and it is essential to seek professional advice before applying its contents. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details

to be available from Autumn this year and

may be attractive to the risk-averse investor.

correct at time of writing.

Do I need professional advice?

Note to editors Smith & Williamson is an independent professional and financial services group employing around 1,500 people. The group is a leading provider of investment management, financial advisory and accountancy services to private clients, professional practices and mid-to-large corporates. The group operates from offices in London, Belfast, Birmingham, Bristol, Dublin, Glasgow, Guildford, Salisbury, Southampton and Worcester.





allow tax-free savings for children of all ages.

Qualifying investment plans Many barristers leave the management of their These are regular premium insurance policies,

financial affairs to the experts. Appointing

providing individuals with both

someone to take a rounded view and advise

an investment and life assurance element,

on your pension, general financial planning,

normally established for ten years.

tax and investments as a whole can have a

You select the underlying investment funds,

number of benefits, beyond simply saving

which are collectives managed by

time and admin. A managed portfolio can

fund management groups. This can be a

be designed to meet specific requirements.

useful tool for either funding liabilities such

Similarly, managing the assets of the family

as university fees or for topping up pension

as a whole, rather than in isolation, can bring

income in a tax efficient way.

further tax efficiency and add further value to the advice you receive. This usually requires

Offshore investment bonds These are single premium non-qualifying


personal finance & wealth management supplement the barrister 2011

a very personal service and ongoing advice

Smith & Williamson Investment Management LimitedAuthorised and regulated by the Financial Services Authority

to ensure your financial plan is regularly

Smith & Williamson Financial Services Limited Authorised and regulated by the Financial

reviewed to help meet the objectives set.

Services Authority

Avoid the HMRC Clampdown By Planning Your Tax Affairs Carefully By Mike Warburton, Tax Director at Grant Thornton UK LLP




Today the cash basis is only possible for

what is known as the ‘pension input period’. In


barristers in the first seven years of their

summary, it means that you can make a special

tough times with the

profession, when they probably need all

contribution this year over and above your



the fees they can generate. For those better

£50,000 allowance to the extent that pension

hard to reduce the size

established, there are two crunch points. Once

contributions fell below a notional £50,000

of the budget deficit.

your taxable income goes above £100,000,

allowance for each of the last three years. For

This is showing through in higher levels of

personal allowances are withdrawn at a rate

example, if you were contributing £30,000 for

taxation and reductions in public spending,

of £1 for every £2 excess income. This means

each of the last three tax years, you will be

some of which is being reflected in the returns

that between £100,000 and £114,950, the

entitled to make a contribution of £110,000 by

barristers can achieve for publically funded

effective income tax rate is 60%. Other things

5 April 2012 and claim full tax relief. After 5

work. From next year, students will have to

being equal, it’s a good idea to make sure

April 2012 the opportunity to carry forward

pay for their tuition and many parents will no

that you are not caught in this high marginal

any unused allowance from 2008/09 will be

doubt be asked to contribute. This may be at

tax band. The other crunch point comes at

lost. It is worth checking with your pension

a time when most of them are trying hard to

£150,000, where you now start to move into a

provider the detail of your pension input

build up sufficient wealth for their retirement,

50% tax rate. As I write, there are comforting

period because this might change the timing of

not made any easier by poor returns from the

noises coming from the Chancellor that he

your contribution. In addition, in some cases

Stock Market and dramatic falls in the annuity

does not see the 50% tax rate as being here

there is scope to further increase the pension

rate. Whichever way we look at it, there’s a

for the long term, and nor did his predecessor

contribution by electing to amend the pension

squeeze underway. Given this, it makes sense

Alistair Darling, but the rate is unlikely to go

input period, if the trustees permit it, which

to plan your tax affairs carefully.

during this Parliament. We therefore need

can bring in an additional year so that you

to plan on the basis that 50% tax rates are

can carry out the calculation over a five-year

probably here for a while.


and it was not uncommon to find successful

Clearly, one important aspect of tax planning is

While income tax rates have been increasing,

barristers holding several years’ unbilled work

to avoid these crunch points possibly through

corporation tax rates have been falling. For

pending a good time to bill it. Fortunately,

careful pension planning. The new pensions

those on higher incomes facing a 50% income

HMRC was aware when the law changed that

legislation is a vast improvement on the rules

tax rate (plus 2% National Insurance), a small

barristers could be faced with a great deal of

introduced by the last Government but it still

companies corporate tax rate of 20% looks like

extra work as they adjusted to the new system

represents a restriction on what many of us

a tax haven. Some of the larger professional

and the tax inspector’s manual recommends a

have become used to. The key changes are

firms have been changing their structures to

relatively light touch.

that top rate tax relief will be available on

take advantage of this by arranging for all

contributions of up to £50,000 per annum,

their facilities, including employment of staff

According to the Inland Rev Tax Manual

with no requirement to draw a pension at

and services, to be through a service company



age 75. This means that most will contribute

owned by the practice. To the extent that profits

instructed only to make enquiries if they are

as much as they can afford and will opt for

are retained in the service company, there is

worthwhile with reference to the resource

a pension drawdown arrangement. There is,

a potential 30% tax deferral on offer. It can

commitments required. The manuals also

however, an opportunity now available which

actually be rather better than that if you take

recognise that there may be no unique or

high earners may want to take advantage of.

advantage of the transfer pricing legislation.

right answer to the valuation of unbilled work.

The new rules have introduced an opportunity

These are rules originally introduced to

The key requirement is that whatever basis

to carry forward any unused allowances from


is adopted, it should be followed consistently.

the three previous tax years. This is based on

for profits to accrue in low tax jurisdictions


can we


In the good old days, before the rules changed in 1999, barristers operated on the cash basis




personal finance & wealth management supplement the barrister 2011




overseas rather than in the UK. Due to a

of the single personal allowance, currently

relative to those in employment, has remained

change introduced by the last government,

£7,475 and possibly higher depending on your

fairly static at 25%. Over the next 30 years

however, transfer pricing now applies to UK

own tax rate . Don’t forget to keep a record of

commencing this year, however, that ratio will

entities as well as international operations. To

business telephone calls and business travel,

progressively rise to 45% as the baby boomers

take an example, suppose you have a service

which are equally allowable.

move into retirement, they live longer and the

company with operating costs of £100,000

working population declines. This has to be

a year which re-charges that amount at cost

Apart from pension planning, we should all be

paid for and the Government cannot afford to

to the practice. In this case, the profits are

trying to save up for our retirement because

do so. We have to take responsibility for our

not retained in the company but available to

with people living longer and the State having

own financial future and plan ahead.

the practice. For tax purposes, however, the

less to spend, we are going to be on our own

service company should be treated as making

financially. The first rule is to take advantage

a profit equivalent to the normal mark-up

of any tax efficient structures available such as

that an arm’s length service company might

individual savings accounts. A contribution of

expect to charge, perhaps 5% of the cost.

the maximum £10,680 each year can build up

That notional uplift would then attract a tax

to a sizeable sum over a longer term. Over and

liability at 20% in the company of £1,000, but

above that, make sure that savings are in the

through a compensating adjustment in the

hands of the spouse with the lowest tax rates.

tax computation for the practice, there is an

Remember that transfers between spouses

income tax saving of 50% or £2,500. So an

do not attract capital gains tax (assuming

overall tax saving of £1,500. In traditional

the spouses are not separated). Many people

arrangements, this may not have been cost

invest through single premium insurance

effective when dealing with a single barrister

policies, often referred to as bonds. These

but under the new structures involving

offer the attraction of deferring higher rate tax

partnerships, it becomes more viable.

liabilities until the policies are encashed and in the intervening period, you can take up to

So much for the wealthy end of the market,

5% each year from the original investment and

but what about 40% or possibly only 20%

treat it as a return of capital. When encashed,

tax payers still struggling to get by? Some

a complex top slicing calculation comes into

basic tax planning opportunities still arise.

play but this relief can be maximised if the

For example, many barristers spend part of

policies are assigned to your spouse who might

their time working from home rather than in

be a basic rate taxpayer. Also, remember that

chambers, often with a part of their home set

the annual capital gains exemption of £10,600

aside for the purpose. In these circumstances,

is available to each spouse so investing in

you may be entitled to claim a proportion of

capital growth assets, such as unit trusts and

your home expenditure including mortgage

investment trusts, can also make sense if

interest, rent, repairs and utility bills as a

you are cautious about a direct stock market

business expense. As long as there are no

investment and prefer a pooled fund.

rooms used exclusively for business purposes, it should not affect your claim in due course for principle private residence relief on the

Historians may look back at the last 45 years

sale of the property. Some barristers employ

as a golden period for the UK and indeed most

their spouses to carry out duties such as

western economies. 20 years after the war, the

secretarial work and there is no reason why

economy had recovered and the baby boomers

this cannot be paid for as long as it is at a

were joining the employment market at a

normal commercial rate. If your spouse is

time when employment levels were relatively

not otherwise receiving taxable income, this

high. Over the last 45 years, the dependency

would be cost-effective both up to the amount

ratio, that is the ratio of the retired population


personal finance & wealth management supplement the barrister 2011

Pensions Tax Changes: Escape route for high earners By John Lawson, Standard Life


eople with large existing

Reduced lifetime allowance

However, those who face the greatest test are members of defined benefit schemes. An

pension funds, or accrued still

The lifetime allowance was introduced in 2006

annual pension increase of £3,125 uses up


to cap the maximum pension fund that can be

the full annual allowance. Any excess is taxed

contributions face a number

built up over a lifetime. Initially, this stood

at the highest marginal income tax rate, so is

of difficulties resulting from

at £1.5m but increased steadily to £1.8m in

best avoided. Those most likely to fall foul of

the April 2011 pension tax rules changes and

2010/11 where it has since remained. That

this limit are people who receive a large salary

those still to come in April 2012. Thankfully,

is all about to change. From 6th April 2012,

increase – for example, on promotion – or

there are a number of escape routes, but first,

the lifetime allowance will reduce back to its

high earners, where only a modest increase in

let’s have a recap of the rule changes.

original starting figure of £1.5m.

earnings can tip them over.

Reduced annual allowance

Those whose pensions are already worth






more than £1.5m, or who think their benefits Up until 6th April 2011, Britain was a divided nation when it came to pension tax relief. The previous government had put in place rules to limit tax relief to 20% for those with

will exceed £1.5m by the time they retire, can claim ‘fixed protection’, giving them a protected lifetime allowance of £1.8m. This is subject to two main conditions:

(although there were transitional reliefs for some). Those with taxable income under £130,000 could pay their whole income into


It is only available to those who did

not claim ‘primary protection’ or ‘enhanced protection’






changed in 2006.

wanted to.

accruing new pension. In this case, an employee might seek alternative compensation from their employer.

fixed protection and a lifetime allowance of £1.8m? As noted above, fixed protection is not available to those who claimed one of the two forms of

a pension as a personal contribution if they 2)

out of the pension scheme in order to stop

Current fund less than £1.5m – should I claim

taxable income of more than £130,000 paying more than £20,000 a year into their pension

There are several solutions including opting

No more pension must be built up on

or after 6th April 2012.

lifetime allowance protection in 2006. And no new contributions can be paid after 5th April 2012. However, fixed protection does give the

The new coalition government did away

Keeping within the annual allowance

claimant a lifetime allowance of £1.8m.

for a reduced annual allowance of £50,000

Keeping within the annual allowance may

Those under 55 should project their fund

a year. Although this figure was substantially

sound easier than it actually is. Pension

values forward to age 55 (the earliest age

less than the £255,000 annual allowance in

contributions paid in an ‘input period’ ending

pension benefits can be taken) or their

place before these changes, a new rule allows

in a tax year count towards the annual

retirement age. If these are substantially above

unused pension tax relief from the previous

allowance in that tax year, not contributions

£1.5m, they may want to think about claiming

three tax years to be carried forward. For

paid in the tax year itself. Input periods run

fixed protection. For the remainder of the

people in defined benefit schemes, the annual

for 12 months and usually start when you

current tax year, they may also want to think

contribution is 16 times the increase over

take out a pension. If the pension was taken

about maximising their pension contributions,

the year, after adjusting for inflation, for

out on 6th June, the input period would run

with the proviso that the projected fund at

measurement against the £50,000 allowance.

from 6th June to 5th June the next year. This

retirement should not exceed £1.8m.

with plans to make the £130,000 divide permanent, and instead legislated recently

could mean that someone who paid £50,000 Most importantly, pension contributions still

into their pension on say 7th June 2010, has

Those over age 55, or who will reach that age

attract relief at the highest marginal rate of

used up their annual allowance for 2011/12

by 5th April 2012, can have the best of both

income tax. These changes to the annual

because the input period ends in the 2011/12

worlds. If they take their pension benefits now,

allowance took effect on 6th April 2011.

tax year.

they ‘crystallise’ a proportion of the current

personal finance & wealth management supplement the barrister 2011


lifetime allowance, leaving the remaining

I have primary protection; do I need to

I have enhanced protection, am I

percentage (of the reduced £1.5m allowance)

worry about these changes?

affected by these changes?

that they can secure most of the advantage of

People who had pensions worth more than

People with enhanced protection have no

the current £1.8m allowance and pay further

the lifetime allowance on 6th April 2006 could

lifetime allowance at all, provided that they did

contributions after 5th April 2012.

claim primary protection. This meant that

not pay any contributions into their pension or

they were given a personal lifetime allowance

accrue benefits after 5th April 2006. Although

An example may help. Dominic is aged 56 and

that matched the proportion by which their

those with enhanced protection cannot claim

has a fund of £1.3m. He expects this to grow

pensions exceeded £1.5m on 5th April 2006.

fixed protection, enhanced protection is more

For example, someone with a fund of £1.6m on

generous anyway.

to be taken after 5th April 2012. This means

to £1.7m by his planned retirement age of 60. Dominic had also planned to keep paying £50,000 a year into his pension over the next four years. Even though Dominic’s benefits are ‘accessed’ at age 56 it is possible to allow these benefits to grow free of tax until his retirement at age 60.

5th April 2006 would have a personal lifetime allowance of 106.67% of the standard lifetime allowance. They could also continue paying contributions or accruing more pension after April 2006. Although people with primary protection their personal lifetime allowance percentage

a lifetime allowance of £1.8m. As his fund

relative to the current limit of £1.8m rather

is not likely to exceed £1.8m by the time he

than the new £1.5m one. On the face of it, this

takes benefits, he will not face a tax charge for

means that there is no change; however, some

exceeding the lifetime allowance. However, by

may see their tax-free lump sum reduce.





proportion of their fund as tax-free cash that matched the same proportion at 5th April and tax-free cash of £500,000, they would get 31.25% of their current fund as tax-free cash.

In summary These changes to pension tax rules reflect the government’s desire to scale back the cost of pension tax relief. But with careful planning,

claiming fixed protection now, Dominic can’t pay any further contributions.


2006. For example, if they had a fund of £1.6m

cannot claim fixed protection, they retain If Dominic claims fixed protection, he will get


it is possible to reduce or eradicate the impact As well as claiming primary protection after 6th April 2006, it was possible to claim

on your own personal situation. However, many of the remedies require quick action so

As an alternative, Dominic could take the


tax-free lump sum from his current fund

exceeded one quarter of the then lifetime

and leave the rest untouched. This would

allowance of £1.5m. This meant that if your

use up or ‘crystallise’ 72.22% of the current

tax-free cash exceeded £375,000, you could

Tax and legislation are liable to change.

lifetime allowance, leaving him with 27.78%,

claim protection. This tax-free cash protection

This information is based on Standard Life’s

or £416,700, of the new lifetime allowance

remains in place.

current understanding of law and HM Revenue






still available. This would allow him to keep

make sure you speak to a qualified financial adviser soon.

& Customs practice.

paying in £50,000 a year for the next four

People who have primary protection but no

years and even with good growth, he should

tax-free cash protection, get one-quarter of the

Tax rates and reliefs may be altered. The

be able to take the benefits arising from these

standard lifetime allowance as tax-free cash.

value of tax reliefs to the investor depends on

four contributions without paying a lifetime

That means if they take their tax-free cash

their financial circumstances. No guarantees

allowance tax charge.

before 6th April 2012, they will get £450,000

are given regarding the effectiveness of any

but if they take it after this date, they will only

arrangements entered into on the basis of

get £375,000.

these comments.

tax advice around the Lifetime Allowance for

Mr Young continued, “Taking your pension

For further information, please contact:

high net worth invdividuals, “With carefully

benefits now could mean you qualify for as

John Lawson

timed planning, it is possible to have your cake

much as £75,000 extra tax-free cash. However,

Direct: 0131 245 7548

and eat it. There are a number of tripwires that

time is of the essence, so those looking to take

Mobile: 07712486752

need to be negotiated so speak to a financial

advantage of these rule changes should act

adviser first.”


According to Douglas Young of RSM Tenon, a financial adviser who specialises in pensions


personal finance & wealth management supplement the barrister 2011


Using trusts to minimise inheritance tax By Jason Butler, Chartered Financial Planner and Investment Manager, Bloomsbury Financial Planning


f you own assets worth more than the nil rate band (currently

pension scheme.

a maximum of £325,000 per person or £650,000 for married couples or civil partners) on death and these are not treated

As stated previously, if you do not derive any benefit from the gifted

as exempt from inheritance tax (IHT), a rate of 40% IHT will

amount and survive for at least seven years afterwards, the gift will fall

be payable on the excess.

out of your estate and no further IHT will be payable. For this reason it makes sense to gift as much as you can, up to the maximum of the NRB,

As a general rule you can give away any amount of your estate during

to a trust every seven years if you can afford to do so.

your lifetime to individuals or bare/absolute trusts and as long as you derive no use or benefit from the gifted amount and survive for at least

You may well be put off making gifts in your lifetime because you want

seven years afterwards, the gift will fall outside your estate for IHT

to retain access to the capital or income for your own needs. There

purposes. This type of gift is known as a potentially exempt transfer

are however a number of ways to make gifts which are either exempt


from IHT immediately or over several years but which also allow you to retain some benefit without offending the rule that states you may not

Where you want to make gifts now but don’t want to make a decision on

benefit from the gifted asset. What follows is a brief description of some

who gets what and when until some time in the future, a discretionary

of the more widely used trust arrangements that enable you to retain

trust is ideal. Trustees usually have wide powers to invest, distribute,

access to capital or income.

lend assets or borrow, depending on the needs of the beneficiaries. Although the trustees (which will usually include yourself) have the discretion to decide how benefits are provided, you can provide them with a side letter setting out guidelines that you would like them to take into account.

Although such guidance doesn’t bind them, it

can provide a useful reference point where trustees are faced with competing demands or difficult decisions. Making lifetime gifts to a discretionary trust is also useful when giving assets directly to your chosen beneficiaries would exacerbate their own IHT position or where there is a concern about the beneficiary getting divorced or becoming bankrupt.

Gifts to most types of trusts (other than bare/absolute trusts) are chargeable lifetime transfers (CLTs) and as such attract an immediate tax charge of 20% of the amount of the gift over the available nil rate band (NRB) and the annual exemption (s). No immediate IHT charge will apply on gifts to a trust which:

• are within the available nil rate band (currently £325,000) every seven years;

Discounted gift trust A discounted gift trust (DGT) allows you to give away capital which then qualifies for an immediate IHT saving. However, you have to agree a fixed amount of ‘income’ that the trust will pay you throughout your lifetime and it is not possible to vary or stop this amount. As such, it is important that you spend such ‘income’ otherwise the arrangement won’t be as IHT-efficient as possible. The DGT can be established as either a bare or a discretionary trust. The former is treated as a PET whereas the latter is treated as a CLT.

The amount of immediate IHT saving, which is prescribed by Her Majesty’s Revenue and Customs (HMRC) and subject to medical underwriting by an insurance company, is obtained by applying a discount to the amount that is gifted to the trust. The discount will vary depending on your age and the amount of income taken with the highest discount given to younger ages taking a high income. The following table shows the percentage discounts for a range of ages assuming annual withdrawals of 5% of the gifted amount and normal life expectancy.

• are within the annual gift exemption of £3,000 (plus £3,000 for the

For example, a female aged 70 in good health could make a gross gift

previous year if not used);

to the DGT of £665,847, which would then be discounted to £325,000

• meet the test for gifts out of surplus income;

immediately based on the discount factor of 51%.

• are exempt assets such as unquoted business shares or agricultural

gift of £325,000 is the amount that would be treated as a PET or CLT,

property which have been owned for at least two years; or

depending on whether a bare or discretionary trust is used. In the

• are derived from the death benefits from a UK or qualifying overseas

case of a DGT established on a discretionary trust basis, this therefore personal finance & wealth management supplement the barrister 2011

The discounted


permits a much higher amount of gift than would otherwise be the case

Reversionary trust

with a standard gift, without causing an immediate 20% tax charge.

Although the general rule is that you can’t give an asset away and then benefit from it (the ‘gift with reservation’ rule), there is a little known

Figure 1 - Illustrative IHT reductions on discounted gift trusts

exception that applies to what is known as a ‘reversionary trust’. This is achieved by creating a discretionary form of a reversionary trust from

Source: Canada Life International, assumes acceptance on normal terms

the gift of the current value, death benefit or extension benefits of a single premium investment based ‘life’ policy (although the underlying investment could be an investment fund if desired), but you benefit from the trust by way of regular maturities (reversions) of the policy.

As long as the initial gift to the reversionary trust is within the nil rate band (currently £325,000) there will be no immediate charge to IHT. If you are married or in a civil partnership you could gift up to £650,000 to the reversionary trust if neither of you has made gifts to a discretionary trust in the previous seven years. The growth on the trust fund accrues outside your estate from day two and as long as you live for seven years, the original gift will fall out of your estate for IHT

The loan trust You could set up a trust (discretionary is usually best) for a nominal amount (say £10) and then loan capital, usually interest-free, to the trustees to invest as appropriate. Any future growth generated by the invested trust capital will arise outside your estate and also outside those of any of the beneficiaries if it is a discretionary trust. For IHT purposes this allows you to freeze the value of the loaned capital, which

purposes. The amount and frequency of ‘reversions’ must be selected at the outset and will fall back into your estate, for IHT purposes, if not spent. However (and this is the clever part) if you don’t want to receive a reversion of the trust capital, you can disclaim this by advising the trustees before the reversion date and they will defer it to a later date. The act of ‘disclaiming’ the reversion is not treated as a further gift and as such does not fall into your estate.

remains in your estate, and retain access to it by way of repayments on terms that you agree with the trustees. Every ten years a periodic tax charge (a maximum of 6%) is calculated on the value in excess of the

Figure 3 – The reversionary trust

available IHT nil rate band but after deducting any outstanding loan due to you.

Figure 2 – Loan trust Source: Bloomsbury

Source: Canada Life International

Combining a loan and reversionary trust If you have substantial assets but only want to make a small commitment to estate planning initially, protect your estate from IHT gradually and preserve maximum flexibility for the rest of your life, you could consider combining a gift and loan trust and a reversionary trust. This involves first creating a trust (usually discretionary) with a modest gift, say £10,


personal finance & wealth management supplement the barrister 2011

and then loaning capital to it. You can draw down the loan at any

Figure 5 – Loan and reversionary trust values over 28 years

time and as such retain full access to that capital, although any growth arising occurs outside of your estate immediately. This stops your IHT liability from increasing and allows the loan trust to pursue higher investment returns for the benefit of your wider family. Shortly after creating the loan trust, you then gift £325,000 (or whatever your available nil rate band is) to a reversionary interest trust and set this up to provide yearly optional ‘income’ by way of regular maturities. Any growth arises outside of your estate immediately and as long as you live for seven years then the gift will also fall out of your estate for IHT purposes. You then repeat this process every seven years, creating additional reversionary trusts equal to the nil rate band, funded from repayments of your loan from the first loan trust, while being able to benefit from the regular but optional ‘income’ reversions from the

Source: Canada Life International

reversionary trust.

A word of caution So in the case of someone with £1.5m of capital, £1.2m would be lent

Using trusts and other structures to hold family wealth can help to

to the first loan trust and £300,000 (i.e. below the current nil rate band)

avoid IHT and a range of other hostile creditors and also provide proper

would then be gifted to the reversionary trust. Assuming that every

oversight of those assets so that they can be preserved within the family

seven years the loan repayments from the loan trust are used to make a

for their use. However, it is essential to make sure that decisions about

new £300,000 gift to the reversionary trust, everything should be outside

the use of trusts are made within the context of your overall wealth

the estate after 35 years while providing the individual with access to

plan. In addition you need to ensure that you have any trust correctly

the £1.5m during that period through a mixture of loan repayments and

drafted, choose your trustees very carefully and be certain that they are

regular reversions of capital. A married couple would achieve this in

aware of their responsibilities and duties.

less than 21 years due to the higher nil rate band permitting higher gifts to the reversionary trust.

Finally, take personalised professional advice on the establishment, management and investment of trust assets.

Figure 4 – Combining a Loan and Reversionary Trust

At the very least you

need to ensure that the trustees know what they are doing and are well supported in the ongoing management and operation of the trust. That way your family will reap the rewards of good planning without a drama!

Jason Butler is a Chartered Financial Planner and Investment Manager at City based Bloomsbury Financial Planning. He has twenty years’ Source; Canada Life International

Based on an assumed 6% pa investment return, net of tax and charges, the amount held outside the estate would amount to nearly £8m! In addition, because in this scenario there would be five separate settlements the periodic (ten-yearly) charge is also minimised.

experience in advising successful individuals and their families on wealth management strategies.

Jason can be contacted on email:

Tel: 020 7194 7830.

Jason’s book ‘The Financial Times Guide to Wealth Management’ (Prentice Hall) is published in November and is available from Amazon and all major book retailers.

personal finance & wealth management supplement the barrister 2011


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