LG Investment News

Welcome to our latest issue of Lyon Griffiths’ Investment News.

We aim to communicate the key current topics in the world of financial advice and highlight the up and coming issues in an understandable and digestible format.

In this Edition:

  • New reporting rules for trusts
  • Meanwhile.. .
  • The value of on-shore trusts
  • Cash ISAs
  • Pension annual allowance
  • Inheritance tax receipts rise
  • Funding spouses' pensions
  • Childcare benefits


New reporting rules for trusts

As part of a new crackdown on money laundering, rules were introduced recently which require trustees to provide HM Revenue & Customs with detailed information about the assets held in trusts and the identities of trustees and beneficiaries.

The potential for the misuse of offshore trusts to avoid tax was highlighted in the Panama Papers affair in 2016, which embarrassed the then Prime Minister David Cameron.

The register in which the information will be held is available only to law enforcement agencies, but there is pressure from within the EU to permit public access.

It is not clear whether such an extension of the EU rules would apply to the UK post-Brexit, and this could be part of the Brexit negotiations. However, concerns have already been raised over the consequences of public disclosure for privacy, human rights and data protection.

The immediate concern is over the impact of the requirements on small family trusts,  whose trustees may be unfamiliar with HMRC reporting. The requirements will only be triggered if tax issues are involved, and this could be regarded as an additional argument for investing trust funds in investment bonds, which are already favoured for the investment of discretionary trust funds because, being structured as insurance policies, they produce no taxable income.

Meanwhile.. .

The Financial Times has reported that the number of UK wealth managers providing offshore investment services to their clients reduced by 20% between 2015 and 2016, though two-thirds of the major managers still offer such services.

It appears that the main reason for the decline is the increased sharing of information between tax authorities internationally. More than 100 jurisdictions now exchange data automatically, with the result that there is virtually nowhere in the world where individuals, trusts and companies can conduct financial activities without the knowledge of their host country.

The value of on-shore trusts

On-shore trusts were very popular for family wealth planning until 2006, when inheritance tax law was changed. Until that date, the only transfers of assets into trust which incurred a charge to tax were transfers into discretionary trusts, which give trustees the right to select the beneficiaries. Now, any transfer into trust other than a bare trust, which is tantamount to a direct gift, is a chargeable event.

However, no tax will be payable if the value of the transfer is less than the £325,000 'nil rate band' for IHT and the person setting up the trust survives for seven years after doing so. Tax will only be charged if the 'settlor' dies within the seven years.

This would allow grandparents each to put into trust money or financial assets worth £325,000, for example for their grandchildren's education. In addition, if they had not used their annual allowance of £3,000 for the previous two years, they could they could top up the £650,000 transfer by £6,000 each, producing a total gift into trust of £662,000.

With IHT at 40%, this could result in a saving of £ 164,800 compared with the situation if the assets transferred had remained in the grandparents' estates; and if they survived the gift by seven years, they could do the same again. There would of course be charges for administering a trust, which might amount to £3,000 per year, but the trustees might be able to claim income tax relief on this expenditure.

The greatest advantage would be gained from gifts into trust if these were made by grandparents, but it would be equally possible for parents to make the gifts, subject to the important caveat that they should not access the trust funds for the benefit of their children before the children reach the age of 18. To do so would result in a tax charge on the parents.

Tax advantages are not the only reason for setting up a trust. Importantly, trusts provide the means of protecting beneficiaries against themselves. Young beneficiaries have often been led astray when entrusted with money at a time when they are ill-equipped to make responsible financial decisions. Settlors may also wish to avoid the consequences of beneficiaries becoming involved in divorce squabbles

Cash ISAs

Cash lSAs have declined in popularity, not only in relation to stocks and shares ISAs, but also in relation to other forms of deposit. Interest rates have fallen and the attractions of cash lSAs have also been undermined by the introduction in April

2016 of the personal savings allowance ('PSA'), which permits basic rate taxpayers to receive up to £ 1,000 and higher rate taxpayers up to £500 savings interest each year tax-free.

The PSA applies to income from banks and building societies, annuities, government and company bonds and unit and investment trusts and is additional to the personal allowance and the starting rate for savings.

The personal allowance (this year £11,500), is available to all taxpayers and exempts from tax all types of income, while the starting rate for savings permits up to £5,000 of savings Income to be received tax-free  in cases where the taxpayer’s total income not exceed £16,500. The allowance reduces by £1 for every £1 of income above £16,500, so that it ceases to be available to people whose total income exceeds £21,500.

With interest rates at current low levels, deposits and investments of reasonably significant levels will produce interest which can be received tax-free as a result of the PSA. lnterest of 1.2% p.a. would generate income on £83,333 which would be covered by the allowance, and for a higher rate taxpayer the corresponding figure would be £41,667.

The prospect is for interest rates to increase, which could tilt the advantage back in favour of cash ISAs, particularly for higher rate taxpayers. However, it might be unwise to lock into fixed-term lSAs at current rates.

Pension annual allowance

The Finance Bill 2017 confirms that the so-called Money Purchase Annual Allowance ('MPAA') has been reduced from £ 10,000 to £4,000 p.a. with retrospective effect from 6 April 2017.

The MPAA limits the pension contribution on which people who have drawn income benefits from their personal or other "money purchase' pension arrangements are able to claim tax relief.

The change stems from government concerns that pension holders might be recycling their savings and claiming tax relief twice on the same contribution.

Inheritance tax receipts rise

Exceptionally high levels of stamp duty are reported to be discouraging house sales and in particular discouraging older people from down-sizing. Stamp duty on the sale of a £2 million home will amount to £143,000 and on a £600,000 home to £20,000.

The government is also benefiting from increased receipts from inheritance tax which result from older people hanging onto their high-value homes.  For the first time ever, IHT receipts have exceeded £5 billion, which represents a 9% increase over the previous year and is the highest they have been since the early 1980s.

It is estimated that residential property accounts for one third of the typical estate on which inheritance tax is payable.

Funding spouses' pensions

MPAA aside, reductions in both the annual pension contribution allowance and the lifetime allowance have curtailed the use of pensions as a savings medium. However, there may be an opportunity to pay contributions to the scheme of a spouse or civil partner or co-habitee.

The person benefiting from the third party contribution will receive tax relief against their total earnings up to £40,000 p.a. and up to £3,600 if they have no earnings. If the contribution is made on behalf of the scheme member it will be regarded as a gift for the purposes of inheritance tax (though exemptions are often available). But if cash is given to enable a spouse or civil partner to pay their own contribution, this will constitute an exempt transfer for IHT.

Childcare benefits

In order to assist parents of young children to stay in the jobs market, the government has established a scheme which enables the parents to buy childcare vouchers which benefit from tax relief in the form of 'salary sacrifice'. However, this scheme is not available to the self-employed and provides only up to 15 hours' childcare or education per year.

From September, the 15 hour limit is to be increased to 30 hours, but this will be subject to the parents meeting income criteria: both parents must earn at least £120 per week and less than £100,000 annually; and HMRC requires confirmation of eligibility every three months. It should also be noted that not all childcare providers have signed-up to the scheme.

Two additional schemes are now being introduced which offer other options. In May 2017 a tax-free Childcare Account became available, which is basically an on-line savings account to which the government contributes, and which is used to pay for approved childcare. For every £8 paid by the parent, the government pays an additional £2, up to a maximum of £2,000 p.a. per child.

The second scheme, which will follow in September, enables parents of three and four-year old children to apply for 30 hours of free childcare or education worth about £5,000 per year per child.

Both these schemes can be accessed at the same time and are available through HMRC's Childcare Choices site www.ctov.uklsearch?4=childcare+chOices and a helpline is available on 0300 123 4097. However, reservations have been expressed about the complexity of the process for claiming benefits.

 Past performance is not a guide to the future. We would always stress that the value of an investment as well as any income derived can go down as well as up. This document does not constitute personal advice; please contact us if you wish to discuss the suitability of any of the investments outlined.