UK: Family Wealth Management - Personal Financial Planning, Tax And Investment 2012/13

Last Updated: 9 January 2013
Article by Smith & Williamson


A brave new world

With the end of an eventful 2012 fast approaching, it's not long now before the Retail Distribution Review (RDR) comes into force. The introduction of RDR from 1 January 2013 will hopefully create a fairer retail investment market. First muted as far back as 2006, RDR certainly shouldn't come as a shock to advisers and they should be ready to face the challenges. But ultimately, clients are the winners.

The Financial Services Authority came up with the idea of RDR as part of its wider consumer protection strategy aimed at ensuring that clients get a better deal, better protection and transparency when seeking financial advice. In a nutshell, RDR will mean that the way in which financial advisers get paid for their work will be very different in future. There are three key areas of change: replacing commission-based advice with fee-based advice, with the fee being agreed upfront with the client; improving professional standards; and providing truly independent advice covering products from across the whole market (with those offering restricted advice needing to be explicit about this).

With high-quality advice on retirement, pensions and investment planning more important than ever, the introduction of RDR is very timely. In this issue of Family wealth management, we look at some of these areas in more detail.

With the end of this tax year approaching, it's important to have a plan in place to manage your and your family's finances – but there are many tax-planning opportunities you can look into at any time of the year. It seems that austerity will be with us for some years to come as confirmed by George Osborne and we highlight some of the measures proposed in his Autumn Statement to try and balance expenditure and income in these testing times.

As the Government looks to claw back child benefit from 7 January 2013, we urge high earners to review their family finances carefully. Not only may you find yourself out of pocket as a result of the child benefit changes, they may also affect whether you qualify for the full state pension.

For those looking to supplement income in retirement, we consider the pros and cons of different types of equity release, aimed at unlocking the value of your home. With so many people now owning assets overseas, we also take a look at the impact of differing inheritance tax (IHT) regimes and the need to evaluate how these affect how your overall estate is taxed on death. And finally, among many other topical issues, we look at the complexities of quantitative easing and whether it has helped get the economy back into better shape.

Planning ahead

Your start-to-finish guide to the tax year-end

Many people wait until the end of the tax year to think about tax planning. Why leave it so late? These tips can be followed at any point in the tax year.

Spouses with little or no taxable income

If you're married and one of you has unused basic rate tax or even personal allowances, it's worth considering whether income-producing assets can be transferred and held in a more beneficial way. HM Revenue and Customs (HMRC) seems relaxed about the transfer of certain assets, like property and quoted investments, to a spouse, but remains uneasy when it comes to shares in private companies. Great care needs to be taken with the latter.

Taxable income between £100,000 and £116,210

If you have a total taxable income between £100,000 and £116,210 an effective tax saving of 60% is available if your income is brought below £100,000, for example, as a result of a gift aid payment or a pension contribution.

CGT annual exemption and losses

Capital gains tax (CGT) is a tax on gains arising on the disposal of assets, such as shares or buy-to-let properties, charged at 18% for basic rate and 28% for higher rate taxpayers. Both husband and wife have annual CGT allowances of £10,600 for 2012/2013 and this is another case of either 'use it or lose it'. If gains have accrued on family investments, it may be possible to use both exemptions by thinking ahead. At 28%, the annual exemption is worth nearly £3,000 (£6,000 for couples), so it's not to be sneezed at.

A simple way to use the exemptions is to sell successful investments and then repurchase the shares in an ISA, so that future gains will accrue tax-free.

CGT entrepreneurs' relief

In order to qualify for entrepreneurs' relief on the disposal of shares in an unquoted company, you must be an officer or employee for the 12 months prior to sale, and own at least 5% of the shares and voting rights for that time. This point can be easily overlooked and should be remembered if you're thinking about a sale.

Private residence election

Once a dwelling is regarded as your only or main residence, the last three years of ownership are exempt from tax. Where there are two or more residences available, it's possible to nominate which is to be treated as the main residence by making an election within two years of owning the second residence. A new two-year time limit starts whenever there is a new residence in the mix. This is a complicated area so be sure to take advice.

Tax-efficient investments

There are a number of government-backed schemes whereby investment can be highly tax efficient. The simplest is the ISA, but there are others, such as venture capital trusts (VCTs) and the enterprise investment scheme (EIS), which give a variety of tax reliefs. But remember that the value of investments can go down as well as up and that expert advice should be taken prior to committing your funds.

IHT planning

Soaring house prices in recent years have pushed more and more people into the IHT trap, so it's not only the super-rich who are affected. Currently, IHT is charged at 40% on anything you leave over the nil-rate band threshold (currently £325,000) when you die. However in the case of spouses, any of the nil-rate band left over on the first death can be added to the nil-rate band on the second death.

A special tax rate of 36% applies where 10% of the net estate is left to charity. This may require some careful redrafting of your will, taking the opportunity to review the amount you leave and to whom.

The easiest way to reduce IHT is to make gifts to others while you are alive. You can gift £3,000 a year to other individuals (such as your children) and if you have not already done so, you can use the previous year's as well as the current year's allowance.

You can also make a one-off gift of £5,000 to your children and £2,500 to your grandchildren as wedding gifts. These gifts are completely tax-free. Most lifetime gifts are exempt provided the donor survives seven years from the date of the gift. Regular gifts made out of excess income are exempt, for example, a grandparent paying for a grandchild's school fees.

Pension planning

The annual allowance will reduce to £40,000 in April 2014, which reinforces the need to make regular contributions. However any unused allowance can be carried forward for three years, which does allow for some catching up, particularly as retirement approaches.

Child benefit changes

High earners need to think ahead

High earners are urged to review their family finances in the face of looming child benefit changes.

High earners will need to think very carefully about the impact of changes to child benefit, particularly if they earn between £50,000 and £60,000.

From 7 January 2013, the UK Government will start clawing back child benefit – by way of an extra tax charge – from those households where one parent earns more than £50,000.

Government plans to cut child benefits for better-off families have created an extremely complicated tax system. Child benefit will be withdrawn by 1% for every £100 that a parent's income exceeds £50,000, with all of the benefit being clawed back once income exceeds £60,000.

Minimising the impact

The effective tax charge for people earning between £50,000 to £60,000 will range from 52% (if the couple has one child) to 73% (if the couple has four children). So, in these cash-strapped times, it's important for families to review their finances and consider ways in which they might be able to minimise the impact. One option may be to put more money into a pension to bring taxable income below £50,000.

Where the high earner has a taxable income of over £60,000, it may be beneficial for the spouse to claim the benefit, but then 'elect' not to receive the cash. This means the higher earner won't have to fill out a self-assessment tax return – assuming they are not doing this already.

However, making an election will require serious thought. While the high earner will no longer be subject to a tax charge, spouses – who up till now had been receiving the benefit as tax-free cash – could find themselves out of pocket. So, family finances will need to be reviewed to address this situation.

Even if they're electing not to receive child benefit, stay-at-home parents looking after young children under 12 and whose partners have a taxable income exceeding £60,000 should continue to claim child benefit. Entitlement to the benefit will provide a NIC credit, which may be important in deciding whether they eventually qualify for the full retirement pension.

Alternative investments

Attractive tax relief for those with an appetite for risk

If you've already used your ISA allowance and are unable to make further pension contributions, it might be worth considering other investments that offer attractive levels of tax relief, especially when finalising your tax return.

These investments are not appropriate for everyone because of their higher-risk profile (often involving a significant risk of loss of capital), minimum holding periods and lack of liquidity. But, for experienced investors who are willing to accept these risks, these alternative investments can have a place as part of an overall strategic financial plan. At the higher end of the risk scale, there are three alternative investment vehicles that may be of interest to experienced investors.

1. Venture capital trusts

VCTs have had the support of the Treasury for many years. They provide capital to a number of small and expanding companies with the aim of growing businesses and generating profits for the VCT. You can invest up to £200,000 per tax year and benefit from 30% income tax relief, which is claimed via your self-assessment tax return. In addition, dividends are tax-free and there is no CGT if the VCT is sold. There is, however, a minimum holding period of five years to continue to benefit from the 30% tax relief.

Many providers will shortly be launching their offerings for the 2012/13 tax year and a mixture of structures will be available. This will include traditional private equity VCTs that aim to provide long-term capital growth and investor return through a stream of tax-free dividends over a number of years, as well as those VCTs classed as 'limited life' and intended to return funds to you once the minimum holding period has passed and the underlying assets of the VCT can be liquidated.

2. Enterprise investment scheme

EISs also invest in small businesses, but while a VCT is likely to have several investments, an EIS will traditionally invest in one company – increasing the odds of failure and subsequent risk to you.

Since the last tax year, EIS income tax relief has been aligned to VCT relief at 30% for investments of up to £1m – part or all of which can be carried back to the previous tax year. Interest from investors has increased over the last 12 months due to a shorter minimum holding period of three years and the ability to defer CGT. An EIS also benefits from business property relief after two years, which means the investment is exempt from IHT while it remains within this tax wrapper.

EIS offerings are not closely aligned to the end of the tax year and there are a variety of investment opportunities currently available. This includes structures that invest in television programmes with the aim of providing a profitable return in three to four years' time and a pub-based scheme managed by individuals who have previously demonstrated their ability to turnaround struggling hostelries and arrange profitable exits via a trade sale.

3. Seed enterprise investment scheme

Seed enterprise investment scheme (SEIS) offerings have now started to come to the market. To recap briefly, these are designed to provide finance to very early stage companies that would, under normal circumstances, find it difficult to raise finance through traditional methods.

Income tax relief is available at 50% (irrespective of marginal rate) on investments of up to a maximum annual subscription of £100,000. Shares must be held within a SEIS for a period of three years to continue to benefit from income tax relief. On eventual disposal, SEIS shares will be CGT exempt and any losses may be offset against income tax. Gains crystallised in the current tax year and subsequently re-invested in a SEIS will be CGT exempt.

The nature of underlying investments will vary considerably and it is likely that there will be opportunities to achieve investment diversification.

Seek advice

These types of investments may not be suitable or appropriate for everyone. While aiming to achieve the mitigation of tax they may carry a risk to capital. Specialist advice is therefore required.

Making gifts to your children

Minimising your IHT liability

Many parents and grandparents are keen to gift funds to their children to help them with school or university fees, or perhaps to get them onto the property ladder. Gifts of this nature are normally treated as potentially exempt transfers, meaning they are no longer liable to IHT after seven years.

Use of a bare trust

Gifts made to children under the age of 18 typically involve the use of a bare trust, whereby the trustee holds funds for the sole benefit of your child. The only potential drawback is that your child is fully entitled to the capital in the trust when they turn 18. As a result, many parents and grandparents shy away from these arrangements to avoid passing control of large amounts of capital to an 18-year-old.

Less favourable options

This conundrum was traditionally avoided through family trusts, which allowed trustees to distribute capital and income to beneficiaries at their discretion. Accumulation and maintenance trusts also proved popular for this purpose, as beneficiaries gained an entitlement to their share of income at 25, but no absolute right to the capital. These types of trust were reclassified as discretionary trusts and gifts into them are now treated as chargeable lifetime transfers. The potential tax charge on transfers and an unfavourable tax environment within discretionary trusts have led, rather predictably, to their waning popularity.

What is the best option?

A concept offering both control and the favourable tax treatment of a bare trust has evolved using investment bonds. Funds are placed into a bare trust and you agree maturity dates for each investment bond. While an absolute entitlement still arises at age 18, the bonds have no value until maturity and cannot be cashed in early. So, this could result in some bonds maturing in time to pay university fees, while others may be available when it's time to cover a deposit on a flat at age 25. The maturity dates must be set before your child turns 18.

Another area gaining popularity involves making gifts up to the nil-rate band (currently £325,000) every seven years. If you survive the seven-year relief period, the gift falls outside of the IHT net. You can accelerate this process by using your and your spouse's nil-rate band, allowing up to £650,000 to be removed from your estate every seven years. Over time this can remove significant sums. Taking out insurance cover can provide for any IHT liability that might arise should death occur during the seven-year taper-relief period.

Regularly using the nil-rate band in this way can be very effective in minimising the ultimate IHT charge, enabling you to pass capital on to your children in a tax-efficient way.

In better shape

With benchmark interest rates in the US, UK and the eurozone at close to zero and conventional monetary policy all but exhausted, central banks have resorted to flooding the financial system with liquidity through quantitative easing.

The global financial crisis that began in 2007 has forced policymakers to pursue unconventional methods to stem a number of potential threats, including a banking system meltdown and a European Government defaulting on its debt repayments. In addition, growth in the developed world remains low. It appears quantitative easing is the preferred method of stimulus for central banks either side of the Atlantic.

How does it work?

The collapse of Lehman Brothers sent shockwaves through the banking system in 2008, leading to widespread loss of confidence among banks and deep recessions in the developed world. Banks stopped lending to one other, restricting the supply of money in the economy and leaving households and businesses without access to credit. As the supply of money decreases, deflation sets in and the value of debt increases.

The Bank of England and the Federal Reserve reduced base rates to record lows in a bid to spur on lending and encourage spending in the economy. With interest rates close to zero during the peak of the financial crisis in 2008, the Bank of England and Federal Reserve began their first round of quantitative easing.

During this period the central banks expanded their balance sheets by using money created electronically on computer systems to purchase assets – usually government bonds – from banks and other financial institutions. In theory, banks and financial institutions can loan the funds they receive to the wider economy, boosting consumption and business investment, and increasing the money supply.

Buying large amounts of government bonds and other high-quality debt issued by private companies causes their price to increase and for the yield (or the interest the issuer pays) to fall due to the inverse relationship between price and yield. Yields on UK gilts and US treasuries have fallen to record lows.

Quantitative easing in action

By June 2010, government treasuries, bank debt and mortgage-backed securities held by the Federal Reserve had reached a peak of US$2.1trn. Two years later, the Bank of England announced its decision to increase the total amount of quantitative easing to £375bn. And in the eurozone, the European Central Bank has implemented forms of quantitative easing by offering unlimited loans to European banks at very low interest rates through its long-term refinancing operation.

The risks

One of the major risks of increasing the supply of money is inflation. Inflation erodes the value of money, impacting savers and reducing spending power for consumers – although this has yet to happen. Inflation in the UK and US has actually fallen since both central banks launched their second round of quantitative easing in mid-2011.

Has it worked?

The true impact of quantitative easing is still open to debate. While the first round of quantitative easing successfully helped to avoid a collapse of the global banking system and provided a boost to equity markets, it remains to be seen whether there has been any real positive impact on the wider economy. Lending remains at low levels and banks continue to bear the scars of the 2008 financial crisis. In the UK, many blame quantitative easing for the record levels of company pension scheme deficits. By purchasing large amounts of gilts, the Bank of England has increased prices and reduced the yield or income schemes needed to meet liabilities.

On balance, it appears the positives of quantitative easing have outweighed the negatives and there is a consensus that the global economy would be in far worse shape without it.

What was in the Chancellor's box of tricks?

A summary of the announcements made by George Osborne in his Autumn Statement.

Income tax

The personal tax allowance is to go up an extra £235 from April 2013 taking us closer to the target of £10,000 more quickly than originally planned. This time higher rate taxpayers will get some of the benefit, but only £47 for a full year. The threshold increases of 1% will be less than inflation and therefore it's likely that many taxpayers will end up paying higher rate tax because of the impact of 'fiscal drag'.

The proposal to cap income tax reliefs at the greater of £50,000 or 25% of an individual's income is to go ahead. The cap is expected to drive a number of sole traders and partnerships to incorporate as companies where those restrictions do not apply.


A new plan to enable individuals to invest in AIM companies via their ISAs sounds interesting, but as always, the decision needs to be made for the right investment reasons. The increase in the limit for ISA investment is welcome and there seems to be a move to encourage individuals to take advantage of their ISA entitlements to counter-balance the reduction in pension reliefs.


Reduction in tax relief on pensions investment to £40,000 will hit middle as well as higher earners combined with the proposed reduction in the pension lifetime allowance from £1.5m to £1.25m. It will particularly affect people in the run-up to retirement who try to boost their pension savings. This could be particularly cruel for people in their fifties and sixties who are going to face a double whammy of rock-bottom annuity rates and reductions in pension tax relief. There will be particular issues for members of defined benefit schemes.

New employee shareholder status

The Government is going ahead with plans to introduce a new employee shareholder status that will give staff a stake in their firms and give firms greater choice about the contracts they can offer. It has already announced that it will exempt gains on up to £50,000 of shares acquired by employee shareholders from CGT. However employees are likely to incur income tax and NIC in respect of the shares allocated to them and the Government has said it is now considering various options to reduce those income tax and NIC liabilities. One possibility is for employee shareholders to be deemed to have paid £2,000 for shares they receive, which would mean that the first £2,000 of shares received under the new status would be free from income tax and NICs.

Tax avoidance

HMRC has been allocated extra funds to tackle evasion and avoidance. It will be setting up a new centre of excellence, and a comprehensive evasion strategy will be published in spring 2013. The Government will also increase HMRC's resources to tackle personal tax evasion and avoidance of IHT using offshore trusts, bank accounts and other entities.

Simpler tax for small businesses

A simpler income tax scheme for small unincorporated businesses will be introduced for the tax year 2013/14 to allow eligible self employed individuals and partnerships to calculate their profits on the basis of the cash that passes through their business. They will generally not have to distinguish between revenue and capital expenditure.

Investment outlook

Political leadership in the spotlight

Uncertainty about the global economy should begin to lift, with the US election and China's new political leadership marking an important new phase for financial markets.

Political uncertainty, combined with mixed corporate earnings and poor company earnings guidance (in the last quarter, many companies have announced that they expect their earnings to be lower in the coming year), has meant that markets have generally been choppy and range-bound for a while, awaiting a new sense of direction. Although the US election kept the eurozone off the front pages for a few weeks, the deteriorating economic backdrop in Europe and continued political brinkmanship may yet return to worry investors, despite the attractive valuations of many European stocks. With the impact of liquidity injections by central banks waning, investors may be looking to the US and China to provide evidence of a renewed impetus to global economic growth. Bond prices have meanwhile slipped back, in anticipation of such a modest improvement.

UK economy given a boost

The 1% rise in GDP in the third quarter exceeded expectations and helped lift the UK economy out of a technical recession. While the figures come as a welcome change of pace, most of the gain in output is attributable to temporary factors. It is too early to be sure that this marks the start of a decisive uptick in growth. The Olympic Games gave a boost to services, with the number of people employed in the UK rising to the highest level since records began in 1971. The sharp contrast between the trends in employment growth and the level of output in the economy puzzles economists and policymakers. While employment has reached record levels, according to the Office for National Statistics, productivity remains around 4% below pre-recession levels, limiting the growth potential of the economy.

The question for the Monetary Policy Committee (MPC) is what to do next. Minutes from the most recent MPC meeting show the focus of discussion has shifted to whether further quantitative easing in its current form will do any good. Although inflation has fallen to just above the Bank of England's 2% target level, energy price increases announced recently are likely to curb the impact on disposable incomes. Early reports suggest that the Funding for Lending Scheme launched in June is beginning to yield positive results in the mortgage market, but the MPC may be forced to implement even more unconventional policies if it is to reach the wider economy. The FTSE 100 stock market index is highly skewed towards the mining and energy sectors, which have proved vulnerable to the continued global slowdown. Investors have been finding better value in companies further down the market cap scale. Both midcap and small cap shares have comfortably outperformed the FTSE 100 index over the past three months.

US economy affected by political uncertainty

Recent data shows that the US economy continues to improve. Third quarter GDP grew at a healthier annualised rate of 2% with a solid pick-up in consumption growth. There are signs that the improvements in the labour and housing markets are beginning to feed through into consumer confidence, which has risen to a five-year high. Yet confidence among US corporations remains low and the absence of 'animal spirits' is continuing to limit the economy's potential to grow. While corporate earnings have generally held up well, expectations remain subdued. A number of prominent US companies have offered poor forward earnings guidance, hindering equity market performance.

Given the uncertain growth outlook, more analyst downgrades are expected in the final quarter. Provided that the President and Congress can reach an early deal to resolve the looming 'fiscal cliff' with an agreement on new tax and spending measures, investment prospects can only improve. The US remains ahead of the rest of the developed world in the reduction of debt levels after the credit excesses of the pre-recession period. Another uncertainty concerns the future of Ben Bernanke, the chairman of the Federal Reserve (Fed), and architect of its successive programmes of quantitative easing. That uncertainty should be resolved now the election results are known.

Economic climate continues to deteriorate in Europe

The European Central Bank's promise to do "whatever it takes" to keep the euro in existence, has so far succeeded in restoring its credibility as an effective force for fighting the disintegration of the single currency. Sentiment towards the region has improved, with US money market funds increasing their European exposure and bond yields in Spain and Italy, all declining to more manageable levels. The ECB's plan to purchase government debt under its Outright Monetary Transaction (OMT) programme has succeeded in reducing borrowing costs for the peripheral countries without the need for actual purchases to be made.

However the economic climate continues to deteriorate, as the region slips further into recession, compounding the pressure on government finances. While company earnings forecasts have been downgraded to reflect the lower growth environment; they appear to already factor in investor expectations, with quality European companies with emerging market exposure trading at large premiums to firms that operate within the eurozone itself.

The greatest danger for the eurozone remains political. An official request from Spain for a bailout remains probable, despite the government's resistance to agreeing further reforms and austerity measures that are the necessary prerequisite for a combined bailout and ECB bond purchases. The Greek Government meanwhile faces a critical test in forcing through yet another round of unpopular cuts and tax increases, to justify its request for the latest round of bailout funding from other eurozone states. The Greek economy continues to contract at an alarming rate.

Asia's runaway currency

The Japanese economy could be heading for its own fiscal cliff, as a political gridlock threatens to dry up the funds needed to finance the government's budget deficit this year. A bill, that if passed will allow the Japanese Government to borrow around $480bn will be supported by opposition parties only on the condition that Prime Minister, Yoshihiko Noda, calls a general election. Appetite for Japanese equities remains low, with the yen continuing to appreciate against all major currencies, impacting the countries large export firms. Honda, one of Japan's largest companies, has cut its annual profits forecast as demand and growth in the global economy remains low. Although the Bank of Japan has implemented further monetary stimulus, including the proposal to offer unlimited loans to banks at low interest rates in a bid to boost credit demand, reigning in the runaway currency is the most urgent priority for policymakers.

The continued slowdown of the world's second largest economy was confirmed when China's third quarter GDP growth fell to 7.4%. Although this was the seventh consecutive quarterly decline in growth, a recent increase in key domestic economic indicators at least holds out the prospect that the third quarter marked the bottom of the slump. Industrial production, retail sales and fixed asset investment all exceeded expectations in September and point to a modest recovery in the coming months. Clarity about the direction of the Chinese economy should improve after the planned change-over in leadership this month. The focus of the new ruling group of the Chinese Communist Party is to continue the transition from an export-driven to consumption-led economy, without triggering social unrest. Chinese equity markets remain attractively valued should growth rates stabilise or improve. If the new leadership succeeds in implementing financial market reforms and reducing corruption, it could produce greater flows of money into Chinese equities both domestically and from overseas.

Unlocking the value of your home

Your home can be a huge untapped asset in retirement and equity release can help fund a more comfortable lifestyle. But which type is best?

Equity release has a mixed reputation following a number of mis-selling scandals. But in today's more regulated environment, it's becoming an increasingly popular option for older homeowners as a means of raising income and/ or capital. Equity release schemes can be helpful in certain circumstances, but are not suitable for everyone. It is important to consider all other ways you could meet your financial needs before proceeding with an equity release scheme.

Equity release isn't just an option for those who are looking to supplement income in retirement. People are choosing to release equity from their homes for many other reasons, such as supporting grandchildren through university, assisting with house purchases or making home improvements. Equity release is only available to those over a certain age, typically 55.

There are two main types of equity release: lifetime mortgages and home reversion schemes.

Lifetime mortgages

A lifetime mortgage is repayable only on death once the property is sold. It allows you to release equity from your home, with the accumulated interest usually rolled up in the loan. The amount available depends on your age and the value of your property.


Many lifetime mortgages have the advantage of offering a 'no negative equity guarantee', i.e. if the capital plus interest exceeds the proceeds from the sale of the property, the lender will write off the excess. The plans generally promise that homeowners can stay in their home until they die or move into long-term care. No legal ownership is lost through a lifetime mortgage, you benefit from any increase in value on the property, the loan is tax-free and you don't have to make monthly repayments.


The major disadvantage of a lifetime mortgage is the interest cost. Interest is generally rolled up and added to the original loan and only becomes payable on the sale of the property. Over the course of 25 years (the average life expectancy for a 60-year-old female according to the Office of National Statistics) an initial advance of £100,000, will escalate to over £429,000 assuming interest was rolled up at 6% per annum, with the risk that all of your equity in the property could be eroded by this roll-up of interest, leaving you with little or nothing to pass on to the beneficiaries of your will. Particular care needs to be exercised by younger borrowers, as there is a risk of greater potential debt.

While a lifetime mortgage is deducted from your estate when calculating IHT, the fact that you will have taken money out of your asset by way of equity release means that the value of your estate, and therefore the amount available to leave as your inheritance, will be lower.

Lifetime mortgage options

The introduction of schemes which allow 'drawdown' (the ability to release capital in tranches as and when required) and those that allow either partial repayments or the cost of interest to be paid on an ongoing basis, all help to counteract the impact of interest roll-up. These schemes allow greater flexibility to manage the rate at which interest accumulates.

Home reversion schemes

With a home reversion scheme, rather than mortgaging your property, you sell part or all of the property to a home reversion provider in return for a lump sum, regular income or both.


Unlike a lifetime mortgage, there is certainty as to how much will be left in your estate. The value you receive for the proportion of ownership relinquished is discounted to reflect the fact that it may be a number of years before the property is sold. Poor health and old age will result in a bigger lump sum. There is no interest to pay on the lump sum and there are no monthly repayments. You can benefit from an increase in property prices unless you sell 100% of the property.


If you sell 100% of your property there will be nothing left to leave as inheritance and you won't receive the full value of your home. If you're retiring early, you'll receive a lower percentage of the value of your property due to longer life expectancy. The schemes don't usually allow you to move home if you want to at a later date.

Shining bright

Gold in demand

The price of gold has risen for the past 11 years. What is the future for the precious metal famously described by economist John Maynard Keynes as a "barbarous relic"?

The price of gold has gone up by 10.5% so far this year (as at 15 November 2012). Over the past five and ten years, it has risen by an impressive 116% and 439% respectively, leaving the returns from bonds, equities and other financial assets far behind.

There are a number of reasons for gold's popularity. One is its perceived stable value in a period marked by prolonged economic uncertainty, a severe global financial crisis and wholesale currency devaluation. Faith in traditional forms of money and savings has diminished as a result. Another key factor has been the decline in interest rates. With risk-free assets such as cash and government bonds no longer producing an income greater than inflation, the opportunity cost of holding gold is no longer the disincentive it was previously.

A solid option

While inflation remains subdued, real interest rates – which measure the purchasing power of money after taking account of inflation – have been falling steadily. In many countries they are now negative. Led by the Federal Reserve in the US, central banks around the world have been easing monetary conditions in an attempt to keep economic growth going in the wake of the global financial crisis. This has prompted many investors to hunt for assets they perceive unlikely to lose value in the event of renewed inflation or currency collapses. Being indestructible, gold is a sought-after option.

Limited supply

The appeal of gold is compounded by the fact that the supply is finite. The total volume of gold at the end of 2011 was 171,300 tonnes, according to the World Gold Council. With the equity and bond markets substantially larger by comparison, it only needs a small proportion of the investment community to start buying gold for this to have a noticeable impact on the market price. Central banks have been among the biggest net purchasers of gold in the last few years.

Investor demand comfortably exceeds the annual increase in new supplies of gold. Production typically fluctuates between just 4,000 and 5,000 tonnes a year and it takes many years for new mines to start producing.

Some investors also value gold for its role as a useful source of portfolio diversification. A recent study by the World Gold Council showed how, over the past 25 years, owning gold has mitigated portfolio losses during periods of market turbulence.

The future

How long the rise in gold prices can continue will depend largely on developments in the global economy and investor reaction. The biggest risk is a rise in interest rates. Any easing in financial and economic uncertainty will also reduce the appeal of gold as an investment. Investor sentiment has played an important part in the rise of gold but, equally, a resurgence of confidence could send it falling. However, this doesn't look likely any time soon.

The value of investments and the income from them may fall as well as rise and investors may not receive back the original amount invested. Past performance is not a guide to future performance. The price of gold may be subject to sudden, unexpected and substantial fluctuations that may lead to significant declines in the values of any shares concerned and therefore the value of investments in this commodity.

IHT and overseas assets

Domicile not residence status is key

With so many people now owning assets overseas, it is important to consider how these will be taxed on death to ensure your estate is in order.

'Domicile' is a fascinating legal concept. It connects a person with the legal system of a particular territory and is different from citizenship and residence.

Put simply, everyone acquires a domicile of origin at birth and this stays with them throughout their life. However, it is possible to acquire a domicile of choice in another country where you might live. This domicile of choice will be lost if you cease to live in that country and no longer intend to reside there permanently or indefinitely. In such circumstances, you will revert to your domicile of origin unless you acquire a new domicile of choice.

A special rule

For IHT purposes only, there is a special rule in the UK known as the concept of deemed domicile. This means you are treated as domiciled in the UK at the time of a transfer if you were domiciled in the UK within the three years immediately before the transfer or if you have been resident in the UK for at least 17 of the last 20 income tax years of assessment, ending with the year the chargeable transfer is made.

The treatment of offshore assets

If you are domiciled or deemed domiciled in the UK, you are liable to IHT on all your assets including, for example, your holiday home in France and your shares in a company based in Spain, regardless of where you are located.


The IHT position in France will depend on whether or not the beneficiary is resident there. If the beneficiary is resident in France then all of the deceased's worldwide assets will be liable to French IHT. However, if the beneficiary lives outside of France then only the assets located in France will come within the scope of French IHT. So, in both cases, IHT liability may arise in both the UK and France – although the UK/France double taxation treaty allows credit to be given in the UK for tax paid in France.


Spain has its own form of IHT, referred to as ISD, which is a tax that the recipient pays on inheritance and gifts. The tax is only due if the recipient is resident in Spain or the asset being inherited or gifted is located in Spain. Where a UK company owns property, ISD is not payable on the death of a company shareholder.

Allowances are available depending on your relationship with the deceased or donor. The Spanish State rules apply in the first instance, but these can vary depending on the relevant Autonomous Community rules being met. The Spanish State rules always apply to non-residents with assets in Spain and there is no spousal exemption available under these rules.

There is no double taxation agreement between Spain and the UK, although any succession tax paid in Spain can be deducted from any UK IHT liability arising on the same asset.

Non-UK domiciled

If you are not domiciled or deemed domiciled in the UK, you will be liable to UK IHT on assets located there. Again, it may be possible to obtain double tax relief if the property in question is taxed in another country.

Where an asset is legally situated is of importance for IHT purposes because assets sited outside the UK will be excluded property for a non-domiciled individual and the location of the asset will determine whether double tax relief is due. Land is usually classed as immovable property and governed by the law of the country where it is situated.

Varying outcomes

The IHT systems in different countries, even within Europe, are vastly different. There are many combinations of possible outcomes depending on where the deceased or donor is domiciled, whether or not they are resident in another country and the location of the assets concerned. So, it may be worthwhile seeking professional advice to determine how your estate will be taxed and to ensure all your affairs are in order.

Putting a stop to artificial tax schemes

General anti-abuse rules get closer

With the new general anti-abuse rules set to take effect next year, we look at the road to their introduction.

For many years, successive governments have been playing 'catch-up', attempting to plug gaps in tax legislation after they have appeared. In some cases, the law was changed quickly. In others, the courts were asked to consider whether the legislation was defective and the matter took several years to resolve.

Plugging the gaps

In recent years there have been a number of targeted anti-avoidance rules aimed at closing specific loopholes. However, with the economic downturn the present Government decided to take action and ensure that tax legislation works "as parliament intended", even if the drafting is unclear.

The Government set up a study group, led by eminent QC Graham Aaronson, to consider ways of preventing 'tax leakage'. In November 2011, the study group published its report recommending the introduction of a general anti-abuse rule (GAAR), designed to counteract tax advantages arising from abusive tax-avoidance arrangements. The Government accepted these proposals and a consultation was carried out in the summer of 2012.

The GAAR will be supplemented by HMRC guidance and the opinions of an advisory panel. The new rules are due to take effect for arrangements entered into after the 2013 Finance Act receives Royal Assent.

The purpose of GAAR

The GAAR is designed to catch 'abusive' and 'egregious' tax planning. The Government hopes that it will put an end to contrived and artificial schemes solely designed to obtain a tax saving.

The GAAR is not intended to catch what the initial report described as the "centre ground of tax planning" although to what extent this is achievable will only become apparent when the rules have been in operation for some time and HMRC, taxpayers, their advisers and the courts have an agreed understanding of its interpretation.

Pensions alert

Don't lose your enhanced or fixed protection

Following the introduction of NEST (National Employers Savings Trust) employers must now enrol their employees into NEST or an alternative pension scheme under auto-enrolment rules. The exact date of enrolment depends on the number of employees in a business. Large employers are required to auto-enrol employees now, while smaller firms may not have to take any action before 2017/18.

If you are registered for enhanced or fixed pension protection, when you are auto enrolled into a scheme, you must opt out of the scheme within 30 days or your protection will be lost. You will also need to keep this under review because the regulations require employees to be auto enrolled at least every three years – so you will have to remember to opt out at each future auto-enrolment date. This does not affect you if you have 'primary' protection only.

Award-winning services

Continued success for Smith & Williamson

Three's a charm for Smith & Williamson Investment Management

Smith & Williamson Investment Management has been named 'Best Large Firm' for the third consecutive year by Citywire and 'Asset Management Firm of the Year for High Net Worths' by Spears. The firm also topped Citywire's Steady Growth Portfolio category while being shortlisted in two further categories.

"We are absolutely delighted to have won these awards, which recognise the strength and consistency of our investment approach across a broad range of categories," said Peter Fernandes, head of private client investment management at Smith & Williamson.

Finalists for the STEP Private Client Awards 2012/13

Smith & Williamson has also been shortlisted as a finalist for the STEP Private Client Awards 2012/13 in two categories: 'Accountancy Team of the Year,' which it won in 2009, and 'Investment Team of the Year,' which it won in 2009/10 and 2010/11.

Recognition for private client tax stars

Joss Dalrymple among 50 Most Influential

Joss Dalrymple, Smith & Williamson's national head of private client tax services, has been named in Private Client Practitioner's 50 Most Influential list for the second year running.

The list celebrates "the movers and shakers within the UK private client advisory professions".

Joss, who specialises in advising landed estates, farms, high-net-worth individuals and their families, said: "I am absolutely delighted with this recognition and to be in such illustrious company."

Young guns make the grade

Associate director Toby Tallon and manager Helen John, who also work in the private client tax team, have been recognised in Tax Journal's 40 under 40 list.

Both Toby and Helen advise high net worth individuals and are key members of Smith & Williamson's professional practices team. Toby also co-leads the firm's barristers' initiative.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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