Last week, I looked at adviser charging in relation to the initial advice given to a settlor on setting up a trust, and the challenges of facilitating it through a financial product. This week, I am going to look at the challenges associated with meeting the cost of advice to trustees.
Any advice in relation to the trust and its investments given once it is established will be given to the trustees, who will ultimately be responsible for any adviser charge. The adviser should have a client agreement with the trustees. The tax implications of the adviser charge will, as usual, depend on how it is paid.
If there is a trustee bank account or cash account (say, on a platform) and the charge is paid from cash that has already suffered tax as trust income, there should be no further tax implications. This is by far the preferred solution. However, it must be remembered that any cash account from which the charge is paid should belong to the trustees, not the settlor.
Where the trustees are required to sell units/shares in a collective to pay the charge, this could give rise to a capital gains tax charge (or income tax charge if there is an encashment of units/shares of an offshore non-reporting fund).
Any CGT charge will be assessable on the trustees subject to the appropriate annual exemption (usually £5,500 in 2014/2015) and any losses available to offset against the gain. For a bare trust, the gain would be assessed on the beneficiary regardless of the identity of the settlor.
Where the trust comprises an investment bond and the adviser charge is met by trustees taking a part surrender/withdrawal, this could give rise to a chargeable event for income tax purposes if it causes the unused 5 per cent cumulative tax-deferred allowances to be exceeded.
In determining this it would, as usual, also be necessary to consider what other withdrawals were being taken under the bond, perhaps to pay or advance capital to beneficiaries or, in the case of a loan trust or a DGT, to make payments to the lender/settlor as appropriate.
In the case of a bare trust, any chargeable event gain is assessed on the beneficiaries subject to the parental settlor anti-avoidance rule where the gain exceeds £100 and the beneficiaries are the minor children, unmarried and not in a civil partnership, of the parental settlor.
In most other trust cases, any income tax liability on any such chargeable event gain will fall on the settlor if alive and a UK resident. The liability would be to higher/additional rate tax in the case of a UK bond but with no basic rate tax credit under an offshore bond. In such cases, the settlor has a statutory right to reclaim from the trustees any tax they have to pay. This could result in another chargeable event occurring as, if the settlor exercised this right, the trustees may need to make a further withdrawal to satisfy the reclaim.
In cases where there is a pre-existing need to take withdrawals to make payments to the settlor, such as in connection with a loan trust or discounted gift trust, chargeable event risk could increase for the trustees. This is because, under these plans (invested wholly in investment bonds), the trustees generally rely on the 5 per cent tax-deferred withdrawal allowance to repay any loan or to pay ‘income’ to the settlor without a tax liability at that time.
If, to avoid any chargeable event risk and/or to maintain the value of the settled property, the settlor met the trustees’ liability for the adviser charge, this would amount to a gift for inheritance tax purposes. It would also constitute added property for the purposes of calculating the periodic and exit charges under the trust.
All of what I have highlighted proves that, before deciding on the method of securing payment of the adviser charge (e.g. direct or through financial products), it is very important the tax consequences are fully considered.
Ideally, charges will be met from available cash funds (of the investor or, where appropriate, the trustees) without the need to take payments from financial products.
However, when paying adviser charges for advice given to an investor (including trustees) from financial products is necessary, ideally these would be facilitated without triggering a tax charge – at least not an immediate one.
Next week, I will look at the tax and other consequences in the relatively new situation where an adviser is appointed by a life company to advise on the investment funds underlying an investor’s policy.
Tony Wickenden is joint managing director at Technical Connection