Last week, I looked at the subject of providers paying advisers on a client’s behalf. I would like to start this week with a quick summary of our current understanding of the tax position in these circumstances.
Remember, I am considering payment for advice given to a client. Pure protection plans are excluded from this consideration as commission can still be paid on these.
The tax implications with regards to individually-owned investments are relatively straightforward. I have outlined the details in the table below.
When it comes to investments held in trust, however, the position is more complicated.
It is necessary to consider the position in relation to the charge for initial advice (the responsibility of the settlor) and the charge for ongoing advice (usually the responsibility of the trustees).
Consideration will be restricted to investment bonds and collectives, in both cases onshore and offshore.
Let’s look first at adviser charges in relation to the initial advice given to the settlor on setting up a trust.
It is assumed that, in all cases, the adviser gives advice to the settlor and so it is the settlor who is responsible for paying any adviser charge in relation to the investment made subject to trust.
The tax repercussions depend on the circumstances. Three situations can arise:
- If the settlor pays the adviser charge from their own fund, this will not give rise to any adverse legal or tax consequences in relation to the product or otherwise. Arguably, this is the preferred and, by far, simplest option.
- If the provider deducts the adviser charge, either before the investment is made and before it is transferred into trust, or from the investment before it is transferred into trust (so, in either case, the value of the sum settled is documented as a value net of the adviser charge), there should be no problem. Naturally, if the adviser charge is paid from the product (even though it has not yet been transferred into trust), that payment would amount to a disposal or withdrawal dependent on the nature of the product.
- If the provider deducts the adviser charge, for initial advice to the settlor, from the investment and pays it over to the adviser when the investment is held in trust, two important issues need to be considered…
The first is that, legally, the charge is unlikely to be permitted, as the trust is likely to contain a clause prohibiting any benefit to the settlor, which the meeting of the liability will constitute. If, despite this, the charge is met by the trustees from the product, there will, as well as a breach of trust, be a de facto reservation of benefit. This is clearly something to be avoided and could be prevented by the trust specifically permitting such a payment to be made with the trust being settled with that carved-out right (to meet the settlor’s adviser charge) in favour of the settlor incorporated into the terms. Any amendment to a standard, settled trust form will involve some legal work and cost. If this is done, the amount of the gift will be reduced by the value of the retained right to have the charge met from the trust. This method seems, however, to be a little high on “complexity cost” and low on benefit.
Second, for loan trusts and discounted gift trusts, it may be possible to characterise the payment of the settlor’s adviser charge (with appropriate documentary evidence) from the product as a loan repayment (under the loan trust) or as part of the settlor’s retained right to “income” under the DGT. Both of these issues require further detailed consideration and, again, could be accused of being relatively high on “complexity cost” and low on benefit.
Most would agree the simplest and cleanest route in relation to the payment of the charge for initial advice would be for the settlor to pay for the advice given to them directly and out of their own funds.
Next week, I will look at the challenges associated with meeting the cost of advice to trustees.
Tony Wickenden is joint managing director at Technical Connection