View more on these topics

Be top of the reform

The proposals for reforming trust taxation represent an excellent opportunity for advisers to show their key clients and, perhaps more important, their key professional connections such as accountants and solicitors that they are up to date with developments relevant to financial planning in the upper end of the market.

They also offer broker consultants a chance to show competence and professionalism. IFAs who deal in upmarket business will value clear communication on the proposals and what they could mean for their market and, with this communication, broker consultants can practice the role of being the IFA&#39s business development partner.

As a business exercise, the broker consultant will need to invest time to secure the understanding necessary to deliver clear business-focused communication. The payback will be a strengthening of the relationship with the source of business for the product provider represented and, at a more immediately tangible level, an increase in the likelihood that trust-related business will be done via the consultant&#39s company. This assumes the provider has suitable products and trusts to deliver the necessary solutions.

What are the key issues on trust reform for IFAs? Here are five for you to consider.

•The rate of income and capital gains tax on trusts will increase to 40 per cent (and to 32.5 per cent for dividends) from April 6, 2004. This means trust income and gains will be taxed more heavily than at present.

This will not be the case where the trust is a settlor-interested trust (where income and gains are assessed on the settlor) or a trust under which income rights are vested in a beneficiary (when income will be assessed on the beneficiary) or a bare trust (under which capital gains and income are assessed on the beneficiary).

•A basic-rate band, possibly of £500, is proposed for trust income from discretionary and accumulation and maintenance trusts which are non-settlor-interested. This could mean the rate of tax suffered on income up to the basic-rate threshold will be more lightly taxed than at present.

Subject to investment considerations and the need for actual income, a low-yield growth-oriented investment strategy may be attractive from a tax viewpoint. If a yield of, say, 1 per cent were acceptable, then up to £50,000 of trust assets could be held and income on the investments would not exceed the proposed basic-rate band threshold. The trust capital could be greater and the band still not exceeded if the yield were lower.

If regular sums are to be paid by the trustees, say, to supplement income, then the withdrawal of capital (with gains, say, not exceeding the trustees&#39 annual exemption from CGT) followed by an advancement may be feasible.

•In light of a harsher rate of tax for trusts and a possibly wider settlor-interested definition, it may seem that life insurance-wrapped investments may be more tax-attractive. However, it has to be borne in mind that while tax will be deferred and administration simplified, the provisions for the taxation of gains made under life policies, for example, UK and offshore single-premium bonds, are already based on the widest possible settlor-interested definition.

As I have made clear in earlier articles, all policy gains while the settlor is alive and UK resident will be assessed on the settlor, regardless of the trust terms. The only exceptions are an absolute trust for the benefit of other than a minor beneficiary – a fairly rare phenomenon – and the situation where a chargeable event occurs after the death of the settlor but within the tax year in which the settlor died.

•As any new provisions such as the 40 per cent tax rate are likely to apply to all trusts regardless of when they were established, there will be a need to review existing trusts to see if there needs to be any adjustment to investment strategy.

One type of trust where this may be relevant will be funded unapproved retirement benefits schemes. The proposals for pension simplification will also prompt an urgent review of Furbs once it becomes clear that these provisions are to be implemented.

•Change to the inheritance tax treatment of trusts is not on the agenda. In cases where the income tax and CGT attraction of a trust lessens as a result of the trust tax rate increasing to 40 per cent (32.5 per cent for dividends), all concerned will need to weigh up the value of the IHT saving against this cost.

However, in assessing the options as to what can be done, aside from adjusting the investment strategy to minimise tax, it will be necessary to be fully aware of the trust provisions. For example, if the trust is IHT, income tax and CGT-effective, in that it avoids any assessment on the settlor, it will have been because, even under current rules, at least the settlor is excluded from all benefit. To avoid any income tax and CGT charge, the settlor&#39s spouse will have also been excluded. This will mean that, in many cases, affected trusts will not be able to wind up and distribute funds direct to the settlor.

Having an awareness and understanding of all the key proposals and what their implementation could mean will stand the IFA and broker consultant in good stead to communicate effectively on this subject and, as a result, do more profitable business.


Barclays banks on combination deal

Barclays is developing a proposition for customers approaching retirement that will combine the bank&#39s products with offers from third parties. It is looking into offering equity release, long-term care, investment planning and tax planning either through third parties or by itself. The project is in the early stages but Barclays says it could include a […]

Franklin Templeton – Templeton Global Emerging Markets Fund

Type: Oeic Aim: Growth by investing in emerging market equities Minimum investment: Lump sum £1,000, monthly £30 Investment split: 100% in emerging market equities Isa link: Yes Pep transfers: Yes Charges: Initial 5%, annual 1.75% Special offer: Initial charge reduced to 3% Offer period: Until April 30, 2004 Tel: 0800 305306

Commission culture exacerbated endowment crisis

Labour MP John McFall has blamed the financial services industry&#39s commission culture for exacerbating the endowment crisis and has called for a “more positive engagement” from the industry in tackling the problems created by mortgage endowment shortfalls. The Treasury select committee chairman has made the call following the publication of the committee&#39s report on restoring […]

A licence to skill

The Financial Services Skills Council is in the last stages of obtaining its licence as a qualified skills council, heading for a final meeting with its licence assessment panel on Wednesday this week. FSSC managing director Teresa Sayers is confident that the licence will be approved, granting the organisation a new status that comes with […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers. Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and thought leadership.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm