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Pros and Cons of Offshore/International Bonds

16 May
Most reasons to consider offshore/international bonds include:-
  • Simplicity
  • Price
  • Access
  • Risk profile
  • Fund choice
  • Currency
  • Future aspirations and objectives
  • Tax

The actual reasons are specific to the client/investor and care is needed as there are many alternative investment structures, which maybe more beneficial and suitable.

Taxation of the offshore bond

Single premium investment bonds are taxed under the chargeable event legislation, which means gains are assessed to income tax, rather than capital gains tax (CGT).

As the bond is invested with an offshore insurer it does not suffer any income tax or CGT within the fund except for any unreclaimable withholding tax which may have been applied.

Any gains, dividends, rent or interest are taxed at 0% within the fund.

Taxation of the bondholder

For individuals any chargeable event gains will be chargeable to tax at their appropriate rate (typically, your highest marginal rate including the gain created by the encashment :- 10%, 20%, 40% or 50%.* Trustees will pay tax at 50%.

Taxpayers can use their personal allowance and their highest marginal rate of between 10% and 50% tax bands when calculating overall tax liability. For trustees, the first £1,000 worth of chargeable event gains (assuming no other income) is taxed at 20%.

For highly personalised bonds it’s important to remember that for UK resident policyholders there is a deemed charge of 15% of the premium and the cumulative gains per annum.

Advantages of the offshore bond wrapper

  • Bonds are non-income producing assets so there are no annual tax returns for individuals or trustees (also true of onshore bonds where charges are typically lower).
  • Funds can be switched within the bond without giving rise to a CGT or income tax liability on the investor and with no tax reporting requirements (also true of onshore bonds where charges are typically lower).
  • Switches in and out of funds are not subject to the CGT 30 day rule so will not give rise to a taxable event (also true of onshore bonds where charges are typically lower).
  • Income received gross within the bond wrapper will only suffer income tax on future disposal (basic rate tax is deemed and payable under an onshore bond wrapper).
  • Tax liability is reduced proportionally for time spent as non-UK resident (this excludes normal holidays and is applicable to typically time living abroad).
  • The bond can be assigned by way of gift without giving rise to an income tax charge, although there might be inheritance tax (IHT) considerations (also true of on-shore bonds where charges are typically lower).
  • 5% tax deferred allowances on each premium paid can be taken each year for 20 years without incurring an immediate tax liability (also true of on-shore bonds where charges are typically lower).
  • For the purposes of age allowance, withdrawals within the 5% tax deferred allowance are not treated as income (also true of on-shore bonds where charges are typically lower).
  • Realised chargeable gains may benefit from slice relief which can reduce or remove any higher rate liability (also true of on-shore bonds where charges are typically lower).
  • Top-ups will benefit from top-slicing from inception (individuals only) – (also true of on-shore bonds where charges are typically lower).
  • Multiple lives assured on a whole of life contract can be used at outset to avoid a chargeable event on death of the policyholder, or where there is more than one policyholder, on the death of the last of them to die (also true of on-shore bonds where charges are typically lower). Alternatively, a redemption contract where no lives assured are required can be used (typically not available with an onshore bond).
  • Can be gifted into trust and assigned out of trust without giving rise to an income tax or CGT charge (also true of on-shore bonds where charges are typically lower).
  • Single premium investment bonds are not normally included where means testing is applied by a local authority for residential care (also true of on-shore bonds where charges are typically lower) but care is needed and further advice before assuming to be true.
  • Wide investment parameters (also true of on-shore bonds where charges are typically lower).
  • Ability to appoint third-party custodians and discretionary managers (also true of some onshore bonds where charges are typically lower).

Disadvantages of the offshore bond wrapper

  • On encashment, chargeable event gains can suffer tax up to 50%*.
  • As withdrawals from a bond are assessable to income tax, it’s not possible to use personal or trustee Capital Gains Tax (CGT) allowance to reduce gains.
  • Base cost of the investment is not devalued on death for income tax purposes (chargeable event gains are assessable against original investment and any subsequent additional premium paid).
  • Death of last of the lives assured on whole of life contracts will create a chargeable event (even if bondholders are still alive).
  • Chargeable event gains reduce any available age allowance based on the total gain, not sliced gain applicable where total income exceeds £22,900.
  • May not be suitable where ‘income’ interest exists inside a trust.
  • Investment losses cannot be offset elsewhere.
  • On death of the last of the lives assured, income tax and IHT may be due.

* Finance Act 2009 increased this to 50% for trusts and for individuals with income in excess of £150,000 from April 2010.

This article is based on interpretation of the law and HM Revenue & Customs practice as at July 2010. I believe this interpretation is correct, but cannot guarantee it. Tax relief and tax treatment of investment funds may change in the future.

This article provides a high level summary of the potential advantages and disadvantages of offshore bonds held by a UK-resident investor (excluding companies). I cannot accept any responsibility for action taken based on this or related articles, as this is solely for information purposes and is not advice nor recommendation.

My contact details are :- tel 029 2020 1241, email, twitter welshmoneywiz, linkedin Darren Nathan

VAT to be charged on Discretionary Management?

14 May

So,  with the European Court of Justice (ECJ) declaring discretionary services should be subject to VAT. Many will be effected by this, if it becomes legislation. Those effected with be anyone receiving discretionary management services, such as, through a Stock Broker, Discretionary Fund Manager, etc.

This announcement was in response to a question by the German high courts about Deutsche Bank’s VAT treatment of its discretionary services. The ECJ recommended all elements of Deutsche’s discretionary services – including initial charges – should be subject to VAT, backing a clarification by HMRC earlier this year.

HMRC has stressed that the statement from the ECJ is currently “just an opinion” and not a final decision. The final decision is expected to be made in Germany in the near future.

If this is the final outcome, there may be legal implications for the UK afterwards; and in this instance, the ECJ statement was “in-line” with the European Union’s taxation rules. On 29 February 2012, the HMRC issued guidance on fees and VAT preventing discretionary fund managers from NOT paying VAT in this manner. This is due to come into force in 2013 alongside the FSA’s RDR overhaul of financial advice.

Stock Broking and Discretionary Fund Management companies offer only a single packaged proposal and as such this is settled case-law that i.e. where a transaction comprises a bundle of elements, regard must be had to all the circumstances in order to determine whether there are two or more distinct supplies or one single supply.

Moreover, in certain circumstances, several formally distinct services which could be supplied separately must be considered to be a single transaction when they are not independent.

The advocate general concluded that the portfolio management services of the kind at issue “form a single supply for VAT purposes” and as such, these services do not fall within the exemption provided for on the common system of value added tax.

My contact details are :- tel 029 2020 1241, email, twitter welshmoneywiz, linkedin Darren Nathan

Taxation of Collectives within an Offshore Bond

14 May
Taxation of the collective investment when held as an asset of an offshore bond – income

Any income received (dividends or interest) within the offshore bond wrapper from the collective is deemed to be received gross. Withholding taxes may apply which may not be reclaimed.

The 10% notional tax credit issued alongside any UK dividend income cannot be reclaimed by the offshore bond provider or investor.

The income will remain in the fund, untaxed, until encashment from the bond by the investor.

Taxation of the collective investment when held as an asset of an offshore bond – capital gains

The collective would suffer no ongoing capital gains tax within the offshore bond.

Realised gains would be subject to tax when the investor encashes the bond.

Investment losses cannot be carried forward although any deficiency loss created on encashment may be available to offset any higher rate income tax suffered by the investor.

Switches made within the bond will not generate a tax charge.

Principally, where a collective is held within an offshore bond, the policyholder is only liable to tax when they encash the bond.

Encashment of the bond by the policyholder

On encashment, assuming a chargeable gain has been made, a chargeable event would occur and the investor would be liable to income tax on this gain at their HIGHEST MARGINAL RATE.* However, personal allowances and the 10% tax band** would be available where earned income levels were sufficiently low. A basic rate taxpayer would be liable to tax at 20%.

* Finance Act 2009 increased this to 50% for trusts and for individuals with income in excess of £150,000 from April 2010.
** Bond gains are deemed to be savings income.

This article is based on interpretation of the law and HM Revenue & Customs practice as at March 2010. I believe this interpretation to be correct, but cannot guarantee it and the Tax Relief and tax treatment of investment funds may change in the future.

 I do not accept any liability for any action taken or refrained from being taken on the basis of the information contained in this or any related article. With all tax planning, it must be reviewed on each person’s personal circumstabces and the information provided in this article is for information purposes and is not advice nor recommendation.
My contact details are :- tel 029 2020 1241, email, twitter welshmoneywiz, linkedin Darren Nathan

Change to Pensions – Protected Rights

10 May

From 6 April 2012, Protected Rights will no longer exist. A uniform approach to all benefits from money purchase pension savings (e.g. ocupational money purchase schemes, Personal Pensions, Group Personal Pension and Stakeholder Pensions) will apply. This will simplify the current regime for all money purchase pension schemes and the investments will become available in the same way as currently applies to non-protected rights.

This article considers the advice issues, both short and long-term, that this change brings to the current private savings market. The short-term issues focus on clients currently considering taking retirement income from pension savings that include a proportion of protected rights. Delaying crystallising these benefits until the new tax year may provide significant additional benefits. The key considerations are:-

Pension Commencement Lump Sum
As part of any retirement process a Pension Commencement Lump Sum (PCLS) is an important choice available to clients. Under current legislation, there is a limit of 25% for any PCLS arising from any protected rights investment. Money purchase occupational schemes and section 32 buy out policies often include protected rights within the investment. In this situation, depending upon the mix of protected rights and non-protected rights, full entitlement to a protected PCLS may not be achievable. Deferring any benefit crystallisation until 6 April 2012 or later could increase the PCLS available from those contracts.

Annuity provision
By delaying the purchase of an annuity from current protected rights investments male clients will avoid the need to buy an annuity using unisex, unistatus annuity rates. More importantly, where there is a surviving spouse or civil partner the need to provide a contingent income for that partner within the annuity can be avoided.

Capped income
On a similar vein, clients with protected rights held in Sectio 32 buy out policies cannot, under current legislation, have any income withdrawal from those plans. Delaying any benefit crystallisation event from such contracts, which includes the Section 32 buyout bond, until the new tax year, means full income withdrawal can become part of the client’s retirement income planning.

Flexible drawdown
This is not available for protected rights investments. From 6 April 2012 it will be available for all eligible clients on accounts which previously held such rights.

However, you must remember to balance the benefits of deferring crystallising benefits with the potential issues that continued falls in the markets, annuity rates and GAD rates may bring for the potential income for these clients.

Longer-term consolidation options and issues

In the past many directors and key employees of limited companies used occupational pensions to fund their retirement provision. Contracts such as small self-administered schemes and executive pension schemes were prominent in the pre 2006 era for such people.

However, these schemes could only usually accept contracted-in contributions and could not accept rebates for individuals wishing to contract out of the State Second Pension (S2P). This may have resulted in you having to use a personal pension to contract out.

The abolition of protected rights from 6 April 2012 means you should review your existing provisions. You can now  consolidate assets into one registered pension scheme considering other relevant changes in legislation that have taken place since A-Day (6 April 2004).

This may simply require moving the rebate-only personal pension into your occupational pension scheme. However, we will need to ensure the occupational scheme benefits still meets your long-term retirement provision and needs, given that most such schemes offer no alternative income to annuity purchase.

If you have protected pre A-Day tax-free cash of more than 25% within their fund, then any transfer needs careful analysis. The use of block transfers is essential to protect any existing higher protected tax-free cash rights. This will need the transfer of at least one other member of the occupational scheme at the same time. The transfers must go into a scheme that each individual has not been a member for more than 12 months, except if that arrangement only accepted previously contracted out rebates.

If this is not possible, or the occupational scheme is a one-member scheme, then the employer must wind-up the occupational scheme and benefits must transfer to a section 32 policy to provide the same taxfree cash protection. However, for simplicity, you may want to consolidate other arrangements into the occupational scheme before the wind-up, given that section 32 policies have not historically accepted added transfers once set up.

These changes in legislation will present new opportunities for consolidation of pension rights for future income planning and more effective investment management of your existing pension rights. This change, like so many, require appropriate financial advice and must be reviewed on a case by case basis. This is to help ensure you build a decent retirement income from existing and future pension savings.

I have written this article based on interpretation of the law and HM Revenue & Customs practice as at February 2012. I believe this interpretation to be correct, but cannot guarantee it, Tax Relief and the tax treatment of investment funds may change in the future.
My contact details are :- tel 029 2020 1241, email, twitter welshmoneywiz, linkedin Darren Nathan

Markets Plummet – An Overview

10 May

We have seen markets plummet since the elections over last weekend, down to lows of 2012 as investors took flight from stocks at risk of being dragged down by troubles in the Eurozone. This sell-off  seems to have been triggered, at least in part, by fears that a planned coalition government in Greece will tear-up the austerity deal underpinning the country’s recent €240billion (£190billion) bail-out.

The FTSE 100 Index saw £26 Billion wiped off its value following a further slide of over 100 points. This is a third day running of major sell-offs across most stock markets following concerns over the future of the Eurozone.

Alexis Tsipras, whose Syriza party came a surprise second in Sunday’s poll, is insisting his country’s bailout deal with the EU and IMF is ‘null and void’.

As well as uncertainty over Greece, fears that Spain will need to bail out its banking sector caused that country’s 10-year bond yield to soar again above the ‘unsustainable’ 6% level. This is perilously close to the 7% interest rate on government borrowing that prompted Greece, Portugal and Ireland to seek bailouts.

Financial analysts said the current market turmoil was likely to continue. It appears unlikely that a Greek coalition would be formed considering the rhetoric from the various party leaders, so uncertainty was likely to reign for a while.

‘The worst case scenario for the EU is if Greece leaves the Eurozone and undertakes a disorderly default. It is difficult to see why the country would do this but then again it only takes one angry politician to change history – Greece is staring into the political and financial abyss. Whilst a less likely scenario, if it did happen it could have huge ramifications for the rest of Europe.

A default for Greece looks likely and a departure from the Euro in the next 18 months is expected – this scenario has in excess of 66% outcome expectation – good chance of happening. Greece would not be allowed to walk away from its debts and financial obligations, if it leaves the euro. The likely scenario would be it would be given a greater period of time to repay its debts. The sanctions against Greece, if it attempted to renege on its debts, does not bear thinking about.

These are grave concerns and the ramifications for the Eurozone, global economic prosperity and stock markets are huge.

Investing is about taking best advantage of the market cycle while avoiding the periods of market panic – I am pleased to say, we hold a defensive strategy across all my clients and so we have avoided the worse of the declines and are well placed to benefit from the market opportunities expected to be created by the current market turmoil.

My contact details are :- tel 029 2020 1241, email, twitter welshmoneywiz, linkedin Darren Nathan

Personal Pensions & SIPPs: Managing Your Money

9 May
So it’s fair to say that fixed income products are providing low returns, structures products offer the potential of better returns but it is hit-and-miss. This coupled with the rising cost of living mean pensioners and those approaching or planning for retirement can no longer shield themselves from risk if they want to live out retirement comfortably.
Pressure on your pocket from all sides means the traditional shift towards lower-risk assets during middle-age makes less sense and effective asset allocation is even more crucial. There was a time when during middle-age, as an investor, this was the period when you would be shifting away from risk to protect your capital. The rationale was, you were approached retirement and you needed growth but also needed to protect your capital. Now after four years of low growth, negligible returns on cash savings, the soaring cost of living, stagnant property prices and entirely new costs, such as university tuition fees, unemployed children, children who can’t afford to leave home – mean investors can no longer afford to slacken the pace and protect their capital. Middle-age was a different thing 10 years ago. People were aspiring to the idea of an early retirement – seriously expecting they could retire some time after the age of 55 but now, this is not really feasible for the majority. Those seriously planning for retirement are being hammered from all sides – so they need the returns to make those dreams possible – how can they de-risk?
The risk is, if you move solely into bonds are you just taking on a different type of risk? – all eggs in one basket and no guarantee that you won’t make a loss. The returns on cash savings does not keep up with inflation – so this approach only guarantees a loss in real terms. So, up the risk ladder we head with more volatility, just to sustain your pot in real terms hopefully, never mind grow it.This makes grim reading for off-the-peg pension investors, the majority of who will be in products that are doing exactly the opposite. They are either throttling back their exposure to equities in the traditional manner or ignoring the market and investing with a plan that nothing actually has changed and it will be alright in the end. I wonder if they noticed we had a near collapse of the banking system, free-trade as it was has changed possibly forever, global debt is at levels unrecorded in modern history, we are enforcing structured write-down of debt larger  than seen ever in history, including the periods during and after the Great Wars.For investors who are looking for proactive asset management – a quality personal pension or self invested personal pension (SIPP) may provide the structure and access to funds and assets to suit. Now is the time to think carefully about asset allocation. Admittedly, it’s a tough call and there’s quite a balancing act to perform here. Let’s say, you’ve got about 20 years of savings you don’t want to fritter away, but still have a 15- or 20-year time horizon and the ability to make a real difference to your retirement by taking on extra risk when suitable and also reducing that exposure when not.This is basically the only time that attitude to risk really matters – at all other times it’s pretty much overshadowed by time horizon and other situational factors.

The majority of your exposure should remain in equities but this is dependent on the market cycle, tolerance to risk, plans and aspirations (what return are we trying to achieve?) and chosen strategy – with exposure also to fixed income, property, fixed interest, structured products, alternative strategies and absolute return strategies.



International equities should include emerging markets such as China and India, not just the big developed nations such as the US, UK, Europe and Japan.

Many believe that China will drive stock market growth in the future, and it is tempting to pile into Chinese equities on that basis – but not everybody is convinced.

So if the Chinese miracle is more of a magic trick and the fragile recovery seen this year in UK equities isn’t to be trusted either, what choice does that leave investors who have money to put somewhere? 

A practical approach is necessary. You want to diversify as much as possible to shelter yourself from the extreme volatility we’re seeing. You can access a broad range of superior funds in different asset classes, equities, bonds and alternatives – that’s the beauty of a quality personal pensions and SIPPs.

My contact details are :- tel 029 2020 1241, email, twitter welshmoneywiz, linkedin Darren Nathan

UK’s Final Salary Pension Schemes Further In The Red

9 May

Company/Occupation Pension Schemes fall into two groups – Final Salary and Money Purchase.

Final Salary – pay a defined income at retirement based on a commitment from the company assuming it has the funds and are trading at your time of retirement. The Scheme Trustees do have the ability to change the terms assuming the majority of members do not block the changes.

Money Purchase – an annuity is purchased with your pension fund and the income is dependent on your fund accumulated and annuity rates.

This article relates to UK’s final salary pension schemes, which fell further into the red during April. The collective deficit is now nearly £216.8billion (across 6,432 schemes – an increase in deficit of almost £11billion). This is a massive increase on the deficit of just above £8billion at this time last year (but off the peak of £255billion recorded by the Pension Protection Fund in December 2011).


mature couple in the park


The soaring cost of paying for pensions has been blamed on the Bank of England’s quantitative easing programme (QE). Its £325billion asset buying has depressed the yield or return on government bonds (commonly called Gilts). Final salary pension schemes have to use gilts to provide a guaranteed return in order to meet their promises to scheme members. QE has made funding final salary scheme more expensive.

When comparing your retirement benefits ensure your funds are best placed to offer the best potential to retirement income. With the reduction in the Gilt Yield’s, in some circumstances, the Cash Equivalent Transfer Value has been enhanced to a value to consider a transfer to a personal pension or Section 32 pension regime. Each case must be reviewed on its’ own merits and the specific client and their personal views, goals, needs and aims.

The concept is  – due to the reduced Gilt Yields, the cash value of benefits increase and depending on the time to retirement, the client may see a better retirement income by moving to a personal regime.

This is just a concept and principle, professional advice is required to assess the personal situation. The purpose of this point is to highlight you have options and it may be worth investigating further. This article is for information only, and is not a recommendation and advice.

My contact details are :- tel 029 2020 1241, email, twitter welshmoneywiz, linkedin Darren Nathan



Post Death Estate & Tax Planning – Deeds Of Variation

6 May

The aim of this document is to explain how deeds of variation can be used to alter the position of a deceased person’s estate in the UK.


What is a deed of variation and when would it be used?

A deed of variation is a legal document which can be utilised where a person has received an asset via a Will (including a trust within the Will) or the intestacy rules, but the person would like to vary how they benefit or redirect who benefits from the asset. Providing the formalities of the deed are fulfilled then any entitlements given up will, in effect, be treated as having taken place on the donor’s death, ie effectively rewriting the Will.There are a number of reasons why a deed of variation may be used to redirect assets as described above, but primarily it is for tax planning opportunities.Example – Mr Jones dies and leaves a legacy of £200,000, to his son John Jones. John Jones is wealthy in his own right and has his own inheritance tax (IHT) issues. Therefore, John Jones executes a deed of variation redirecting the interest to his children through a Discretionary Trust. Assuming all formalities are adhered to, then for IHT purposes, it is as if the gift had been left directly to the Trust.
Who can execute a deed of variation?

Anyone who receives an asset via a Will or intestacy can execute a deed of variation providing they have mental capacity and are considered legally capable (ie they are age 18 in the UK). All parties who hold a beneficial interest in the asset that is to be redirected must be party to the agreement and all must agree.


Formalities of a deed of variation

For a deed of variation to be effective for Inheritance Tax (IHT) and Capital Gains Tax (CGT) purposes the following formalities need to be fulfilled:

  • The document must be in writing and executed as a deed.
  • The deed of variation must be executed within two years of death.
  • The deed should refer to the part of the Will or intestacy being varied and be signed by all those who would or might have benefited from the original provisions.
  • The deed should clearly state which inheritances are affected and how they are changing. This may be best achieved by setting out the original position and then the revision.
  • The deed should not be for consideration of money or money’s worth (ie in lieu of money or an asset which represents money).
  • The deed should contain a statement that ‘the variation is to have effect for either CGT only, IHT only or IHT and CGT as if the deceased had made it’. An example of the wording provided by HMRC is ‘the parties to this variation intend that the provisions of section 142 (1) Inheritance Tax Act 1984 and section 62(6) Taxation of Chargeable Gains Act 1992 shall apply’.
  • The deed should contain an exemption certificate for variations of stocks, shares or marketable securities. For example, ‘I/We certify that this instrument falls within category M in the schedule to the Stamp Duty (Exempt Instruments) regulations 1987.’


What if the property being varied has been changed?

If the asset that is subject to the deed of variation has changed, it is still possible to do a deed of variation.


Is it possible to create a trust within the deed of variation?

Yes. Generally such a trust would be a discretionary trust. Any variation into a trust made by a valid deed of variation for IHT purposes will have effect for IHT. Any person who executes such a variation will automatically become the trust settlor for income tax and CGT purposes but not IHT purposes.


When a deed is executed, do HMRC need to be informed?

Since 1 August 2002 it is only necessary to inform HMRC of a deed of variation if the tax position is changed by the variation.

If the tax liability is changed by the variation, a copy of the deed of variation along with a completed checklist, known as ‘IOV2 Instrument of variation’ should be sent to the Capital Taxes Office which dealt with the IHT account previously. HMRC also ask that their reference number or the full name of the deceased and the date of death is quoted in correspondence. The checklist is available from the HMRC website


When would deeds of variation be used?

1. Nil-rate band (NRB) planning

One of the main reasons for using a deed of variation prior to the UK Budget 2008 was to ensure that the NRB was used between spouses/civil partners*.

However, the Finance Act 2008 included legislation to allow the transfer of a deceased spouse’s or civil partner’s* unused NRB to the surviving spouse or civil partner, up to 100% of the current NRB at the time the survivor dies. This option to transfer a deceased spouse’s or civil partner’s unused NRB will be effective for death of the survivor on or after 9 October 2007.

2. Planning opportunities

It may still be appropriate to execute a deed of variation to mitigate IHT.

Additional points to consider – Double death variations

It is possible to vary assets in an estate once; however, if a husband and wife die within two years of each other, it is possible to effect a deed of variation in respect of both Wills.

Both the husband and wife’s executors along with the beneficiaries must be party to the deed for IHT purposes.

Deeds of variation and civil partners – all rights between husband and wife equally apply to registered civil partners as defined by the UK Civil Partnership Act 2004, since 2 December 2005.

Pre-owned assets tax – pre-owned assets tax (POAT) does not apply to deeds of variation because the settlor for IHT purposes is regarded as the deceased person.

Terms explained

Will – a Will is a legal document which allows an individual to detail how their assets are distributed following their death. It also names the person(s) who will be responsible for administering the distribution of the deceased’s estate. These people are known as the executors or legal personal representatives.
Intestate/intestacy – if you die in the UK without leaving a valid Will, ie intestate, the so-called rules of intestacy applicable in the jurisdiction to which you or your property are subject will dictate who benefits from your estate and to what extent. The rules of intestacy vary from one country, including England and Wales, Scotland and Northern Ireland, to another.

Estate – this covers all the assets that a person owns (or, in some cases, is treated as owning) at the time of their death, less their liabilities. Their estate may also include the value of any property they have given away if either the gift they have made is subject to conditions or restrictions, or they keep back some benefit for themselves.

Legal Personal Representative (LPR) – a general term used to describe both executors and administrators.

Executors – the persons appointed in the deceased’s Will to supervise the administration and distribution of the deceased’s estate in accordance with their last Will and testament.

Administrators – the persons appointed by the High Court to supervise the administration and distribution of the deceased’s estate in accordance with the intestacy rules applicable to the deceased’s domicile.

Beneficiary/Beneficiaries – the beneficiaries are the individuals or groups of people named under the trust. These are often children, or other family members. Depending upon the nature of the trust, it may also be possible to include future generations, such as grandchildren as yet unborn.

Discretionary trust – a discretionary trust is a trust where the assets are not held for the benefit of one or more named beneficiaries. There is simply a list of persons and bodies that may potentially benefit. The trustees then have complete discretion over who benefits and when they benefit as they see fit.

Nil-rate band (NRB) – the nil-rate band is not fixed and has, historically, increased year-on-year. Currently the first £325,000 (for the tax year 2010/11) in an individual’s estate is taxed at 0% for IHT purposes. This is known as the NRB. Any assets above the NRB may be liable to IHT at 40%.

Settlor – the settlor is the person who sets up the initial investment. You can be a settlor either on your own (as a single settlor) or with someone else, such as a spouse or civil partner (as joint settlors). The settlor(s) transfers the ownership of the assets to their chosen trustees. Some trusts need to be established by means of a loan where the settlor(s) lends the money to their trustees to invest.

Trustees – the trustees are the legal owner(s) of the assets, and manage the assets for the benefit of the beneficiaries. They are also responsible for dealing with the trust fund on the settlor’s death.


Following the changes introduced by the Finance Act 2008, allowing the transfer of unused NRBs between spouses/civil partners on death, it is likely that the use of deeds of variation will reduce. However, tax mitigation is not the only use of a deed of variation and it should still be considered as part of long-term financial planning.

* As defined by the Civil Partnership Act 2004.


 This information is based upon interpretation of the law. While we believe this interpretation to be correct, we cannot guarantee it and cannot accept any responsibility for any losses or liabilities arising from action taken as a result of the information contained in this article. This is the provision of information and not advice nor recommendation.

My contact details are tel 029 2020 1241, email, twitter welshmoneywiz, linkedin Darren Nathan

Tax Planning & The Rysaffe Principle

25 Apr


The Rysaffe Case is often referred to within trust planning. It demonstrates that there are various ways of using multiple trusts in order to achieve effective trust planning. 

The Rysaffe principle

The ‘Rysaffe principle’ relates to Rysaffe Trustee Co (CI) v Inland Revenue Commissioners* (2003) where a series of trusts were created on consecutive days. The principle being that by establishing a series of smaller trusts, rather than just one trust, you can reduce the impact of the 10-yearly periodic charge and exit penalty by benefiting from a Nil-Rate Band (NRB) to Inheritance Tax for each individual trust.

Background to the case

HMRC (H M Revenue & Customs) contended :-

‘That the making of all the settlements were associated operations and that therefore the settlor had made one composite settlement by an extended disposition.’

After an initial successful hearing both High Court and a unanimous Court of Appeal Judgement stated that Section 42 Inheritance Tax Act (IHTA) 1984 was to apply on the basis that the word ‘disposition’ had its ordinary meaning and was not to be extended to include a disposition by associated operations.

A key statement from Judge Park J, dealing with the associated operations point was as follows :-

‘All the parcels of shares were properly comprised in settlements for the purposes of Section 64. The associated operations provisions had nothing to do with that analysis. There were 10-yearly charges on all of the parcels of shares. It is (I assume) true that in aggregate the five 10-yearly charges would be lower than the single charge which would have applied if there had only been one settlement. But that is not a valid reason for artificially importing the associated operations provisions into the exercise and using them to impose the false hypothesis that there was only one settlement when in fact and in law there were five.’

Additionally, from a planner’s point of view it is worth considering Section 62 IHTA 1984 relating to ‘related settlements’. In summary for a trust to be a related settlement:

a) the settlor is the same in each case, and
b) the trusts commenced on the same day.

So, trusts created on different days do not fall within this definition.

Therefore, by creating a series of trusts on different days we can reduce the inheritance tax payable.

Example: Let us consider a £340,000 investment into a discretionary trust.

Scenario 1:

If £340,000 is made as a one-off payment into the trust and no previous chargeable lifetime transfers (CLTs) have been made in the last seven years, assuming the full NRB is available (and other exemptions have been used elsewhere) the tax liability at entry would be:

£340,000 gifted into trust
£325,000 (NRB for 2010/11)
£15,000 liable to tax at 20% (half the death IHT rate)
Initial charge = £3,000, assuming trustees pay the tax

Scenario 2:

£340,000 gifted into trust by creating three trusts each for £113,333 on separate days
£325,000 (NRB for 2010/11)
£15,000 liable to tax at 20% (half the death IHT rate)
Initial charge = £3,000, assuming trustees pay the tax

In this example the charge is the same for the one trust route as it is for using three separate trusts. However, by setting up three trusts the 10-yearly periodic charge is likely to be lower as can be seen by the following calculations.


10-yearly periodic charge

After ten years, if we assume that the trust fund has grown from £340,000 to £600,000 and the NRB is say £430,000 in 2020/21 and there have been no other previous CLTs other than those shown or any distributions made, then:

Assuming scenario 1, the 10-yearly periodic charge is £10,200

Compare this to the three trusts used in scenario two, assuming each of the individual trust funds have grown at the same rate and are each worth £200,000, the 10-yearly periodic charge is £Nil



The result in scenario 2, we have created a series of trusts where the 10-yearly periodic charges are now £0 and any future exits will also be taxed at this rate, compared to scenario one where there is tax to pay at the tenth anniversary and also on any future distributions of capital.

This article is based on current understanding and interpretation of the law and HMRC practice. The Tax Relief and the tax treatment of investment funds may change in the future.

My email address :-, twitter welshmoneywiz, linkedin Darren Nathan

HMRC Wins Film Investment Scheme Court Case

25 Apr

Over the years there have been schemes seen as aggressive by HMRC and their opinion being this is abuse of the legislation – to create an unfair tax benefit.

The purpose of saving tax is central but how we do this is the question.

This is just the first round – round 1 to HMRC. Although the implication is huge as if this case is not overturned at appeal then convention has been created. This could block all similar schemes in the future but for now this is just an opinion rather than fact. We will wait for the battle through the courts for the legal opinion and outcome.

With tax planning care must be taken as to the risks, aggressiveness and likelihood of success. In most financial/tax planning, my starting point are government backed arrangements and those where standards of practice are in place with HMRC i.e. non-contentious.

This case, with a HM Revenue & Customs court victory could see an end to film investment schemes set up to exploit generous tax reliefs.

This case involved a scheme called Eclipse 35. The scheme was funded by a £790m loan by Barclays to Eclipse 35 with the investors adding a further £50m. Eclipse 35 then paid £503m to Disney for the worldwide rights to two films, Enchanted and Underdog.

Eclipse 35 paid £44m in fees to the organisers of the scheme, Future Capital Partners before paying Barclays £293m for the first ten years of interest payments on its £790m loan.

Eclipse 35 then re-licensed the rights to the films back to Disney, anticipating a return of £1.022bn over 20 years before intending to claim tax relief of £117m from the Revenue for the £293m interest paid back to Barclays.

Disney was also paid £6m for its participation in the scheme.

HMRC argued the scheme was no more than a way of offering investors a large amount of tax relief rather than carrying out any trading or group business. The court was also told that all 40 Eclipse film schemes are being investigated by HMRC.

An Eclipse 35 spokesman said: “We maintain that this investment is very much a commercial opportunity. We are disappointed with the decision and intend to vigorously appeal it.”

Such vehicles have seen billions of pounds invested since 2004 and although rules around investment in them have been tightened, some schemes remain under HMRC inquiry.

We await the court proceedings.

Any concerns or issues around investment related tax planning, tax planning through investments or similar matters just ask :-

Email, tel (office) 029 2020 1241

Twitter welshmoneywiz, Linkedin Darren Nathan