Flexible Reversionary Trusts not affected by pre-budget anti-avoidance proposals

As well as freezing the inheritance tax (IHT) nil-rate band at £325,000 for 2010/11, Alastair Darling also announced draft legislation to prevent certain aggressive IHT avoidance schemes. You can download the press release and draft legislation.

The changes are designed to restrict schemes that escape the twenty percent IHT charge that is applied to the excess over the nil rate band (£325,000) on transfers into trust. For example a transfer of £1 million would incur a tax charge of £135,000. From 2006 this twenty percent charge applied to virtually all transfers into trust and there was obviously considerable appetite amongst the wealthy to continue to make large transfers into trust whilst avoiding any initial tax charge.

The changes specifically target schemes:

• Where an interest in a trust is purchased



• Where an individual retains a certain type of reversionary interest in a trust

The Financial Times erroneously reported that Flexible Reversionary Trusts (FRTs) were caught by the draft legislation. This is clearly not the case when you consider the type of planning targeted and consult the draft legislation.

The reversionary interest trusts that are being targeted are reversionary interests that create an interest in possession in the trust property after an initial period. Under a FRT an individual retains a reversionary interest which provides an absolute interest. The creation of a reversionary interest which provides an interest in possession had considerable advantages after the 2006 changes in trust taxation; paradoxically it was this new legislation that was intended to prevent large transfers into trusts which created the efficacy of the current reversionary interest schemes.

It was widely anticipated in tax planning circles that this sort of aggressive planning would be targeted by HMRC after they became aware of it – considering the sizeable sums involved. Unlike other tax planning schemes, IHT planning schemes do not have to be disclosed to HMRC under the Disclosure of Tax Avoidance Schemes (DOTAS) rules. However, where planning has already been disclosed to HMRC to gain an understanding of whether it is acceptable then this provides considerable reassurance to those contemplating the planning. This is why structures such as Discounted Gift Trusts and Flexible Reversionary Trusts remain popular as there has been considerable positive dialogue with HMRC over the years.

In contrast, those contemplating aggressive planning always enter into it with the spectre of retrospective legislation creating more problems than existed prior to implementing the planning. In this case it seems that there will not be any retrospective element but we will need to await the Finance Bill for confirmation.

You can read more about Flexible Reversioanry Trusts in one of my previous posts Using a Flexible Reversionary Trust to reduce inheritance tax whilst retaining access to capital.

Email Christian Ward Subscribe by RSS or Subscribe by Email

Christian Ward wins inheritance tax planning award at personal finance ‘Oscars’

Christian Ward, Managing Director of Collins Ward Capital Management Ltd, was awarded the coveted title of ‘Inheritance Tax Planner of the year’ at the 2009 Money Management Financial Planner of the year awards. The Money Management awards are in their twelfth year and have been dubbed ‘the Oscars of the personal finance industry’ by BBC Panorama.

The awards are a challenging test of a planner’s technical and practical skills and culminate in a gruelling interview conducted by the panel of judges.

At a gala awards event at the Dorchester Hotel on London’s Park Lane, in presenting the award to Christian, Janet Walford OBE, editor of Money Management magazine said: “I am delighted to see new entrants and repeat winners to this toughly fought area of financial advice. This year in particular the competition was extremely tough with a record number of entries and the highest quality of candidates. This latter point alone reflects the high and still growing standards of the personal finance community and show that these awards are won purely on talent”.

Christian comments that “This is the first year that I have entered the awards and I was surprised yet delighted to win the 2009 award. Inheritance tax planning is a specialism of mine, but forms one part of the overall wealth management service that I offer to clients. The Money Management awards are a test of true financial planning skill, requiring excellent technical knowledge as well as the ability to formulate practical solutions for client situations. I recommend all financial advisers and planners take the time to submit an entry and prove their ability against the peers. Making the finals is great affirmation that you really do know what you’re talking about”

You can read more about the 2009 award winners and view the case studies and winning entries on the Money Management website.


Subscribe by RSS or Subscribe by Email

Discounted gift trusts and loan trusts: What your financial adviser doesn’t tell you: Key information for potential investors

The enclosed eBook is a must read guide for any investor contemplating an investment into a discounted gift trust or loan trust. Find out what your financial adviser probably doesn’t even know!

The title of this post and attached eBook is somewhat controversial. I think the days of financial advisers deliberately misleading clients in order to sell endowments and other high commission paying products has passed. The increased take-up of advanced professional exams and a move to a fee-for-service remuneration structure has changed the nature of financial advice. However, this eBook guide highlights an area where one of JF Kennedy’s “myths” persists (see quotation at the top of the homepage).

Discounted gift trusts and loan trusts are often recommended to clients as a means to save inheritance tax, yet retain some form of access to capital or an ongoing income. There is no doubt that some advisers treat these solutions as a panacea for all client situations and recommend one where the other is not suitable. But is this just a case of having two options and advising the client to use the option which is least unsuitable? I am concerned that this is the reality for many advisers who, in JFK’s words, “enjoy the comfort of opinion without the discomfort of thought”. This guide dispels some of the many myths surrounding discounted gift trusts and loan trusts. It covers when these solutions should be utilised and highlights alternative solutions that are often unknown to many financial advisers, accountants and solicitors.

Finally, an apology to those advisers who have invested the time and resources and evaluated the various schemes in the marketplace before forming a considered opinion of which schemes are worthy of recommendation to clients. I salute these advisers and hope that one day this will be the norm in the financial advisory world.

You can download the eBook here.

Email Christian Ward Subscribe by RSS or Subscribe by Email

Premier cru or vin de table – ARCH cru fund suspensions

The recent suspension of the ARCH cru Investment funds on 13th March has received considerable comment in the IFA press. Investors are prevented from selling their holdings because of liquidity problems with the funds’ underlying investments. These underlying investments are predominantly Guernsey listed closed ended funds which themselves invest in unlisted private equity investments.

What has struck me from cru’s recent press releases is the following point from the release of 31 March as stated by Mark Ainscough, the cru Managing Director.

“cru Investment Management plc is retained to distribute the ARCH cru Fund range to UK Intermediaries. cru has played no part in the underlying investment process, this being the responsibility of ARCH Financial Products LLP. The legal responsibility and accountability to the Financial Services Authority rests with Capita Financial as Authorised Corporate Director and administrator.”

This statement confirms one of my main misgivings on the Arch Cru funds – exactly what does cru bring to the investment process. According to the MD of cru, absolutely nothing.

This is in contrast to their marketing material. The CF Arch cru Investment Funds brochure of February 2009 states:

"The CF ARCH cru Investment Funds are managed by ARCH Financial Products LLP and they also benefit from our direct input regarding asset allocation and underlying holdings."

In reality, cru was simply a marketing company who were paid handsomely to persuade IFAs to recommend the Arch cru funds to their clients. With the fund suspension cru have laid off all their staff.

The question which I asked myself when I first attended a cru presentation was; if the underlying investment concept was attractive, why not cut cru out of the loop and go straight to ARCH? Why pay for crus marketing efforts? I did in fact decide to utilise one of the ARCH Guernsey listed funds for an element of client portfolios.

cru receive a 0.9% per annum fee on the total value of the ARCH cru funds (in addition to a 2% initial fee). IFAs may also receive a 1% per annum renewal commission as well as a 4% initial fee. These commission levels are not low.

Paying for professional investment management is a necessary cost, but many investment related costs are unnecessary. Minimising costs is one of the most successful methods to improve your net investment returns. You should not pay for the privilege of having funds marketed to you. It begs the question, ‘why do investments need marketing?’ Surely good investment managers/advisers will proactively select the best investments rather than be swayed by fund company salesmen?

The reality of the investment industry is that considerable sums are allocated to the marketing department. The marketing message is often directed at naïve investors and advisers who do not have the experience, investment knowledge or innate scepticism required to sort the wheat from the chaff. Few heavyweight private client advisers would have considered investing in the ARCH cru funds, but the cru message was mainly directed at smaller impressionable IFAs.

The cru brochure states:

“The key point for us is that private market investing can offer higher returns with less risk than public market investments.”

The idea that private market investments as an asset class can provide higher returns than their publicly listed equivalents seems illogical. Even if this were the case, one of the few immutable laws of economics and finance, is that returns go hand in hand with risk. The credit crunch has once again laid bare the fallacy that you can generate high returns with low risk. It may be possible to achieve this for short periods of time, but the relationship between risk and return invariably reverts to the long term norm.

A public market listing does not change the ‘value’ of an investment, but simply provides liquidity and a mechanism to effectively price investments in the real world. This real world valuation basis does not always tally with the valuations utilised by managers of unlisted securities. Liquidity issues are likely to disappear if the sellers are willing to accept a lower price – this is what public markets do, bring sellers and buyers together at the market price. This is a lesson that cru and IFAs utilising their funds are learning the hard way. There is no magic in private equity investments. This does not mean that they do not have a place in an investment portfolio, just that they should not compose the majority of a private client portfolio.

I sincerely hope that the ARCH cru fund suspension debacle is resolved in a satisfactory manner for the benefit of the fund investors, the people that matter. Whilst the suspension of the ARCH cru funds may not turn out to be disastrous for investors, it will surely prompt many IFAs to rethink their framework for making investment recommendations. Consumers would also be well advised to consult advisers whose remuneration is not set and paid for by the investment fund company that they recommend to clients.

Email Christian Ward Subscribe by RSS or Subscribe by Email

Are you relying on political aspirations for your estate planning?

Ken Clarke, the shadow business secretary, recently described the Conservative party proposal to raise the inheritance tax nil rate band to £1 million per person as “an aspiration” rather than a “priority” (read the transcript here). David Cameron swiftly countered with affirmation that “a promise is a promise”.

Whether the conservatives do gain power and raise the exempt level to £2 million for couples is speculation. However, many people are basing their estate planning on the hope that this will not only happen, but the new levels will survive future changes in government. Basing a long-term estate planning strategy on this course of events occurring is not without risk.

Mitigating IHT has always been a case of starting the planning process early and taking advantage of straightforward planning opportunities. The existence of the ‘potentially exempt transfer’ (PET) exemption, which allows gifts of unlimited amounts to escape IHT completely if the donor survives for seven years, is a particularly useful yet often underutilised opportunity.

Many people are loathed to make outright gifts of assets or capital for various reasons – concern about their own future financial security or fears that the beneficiaries will squander their newly received wealth. There are few planning solutions which are effective for IHT whilst ensuring the beneficiaries don’t receive any monies immediately and allowing potential access for the donor. The Flexible Reversionary Trust is the most useful mechanism to achieve these objectives. You can read a comparison of this planning with other alternatives in this Taxation Magazine article ‘A flexible friend'.

The Labour government introduced contentious new legislation in 2006 to curb transfers into trust. All transfers into trust were bought in line with the discretionary trust ‘relevant property regime’. Any transfer into trust in excess of the nil rate band (£312,000 for 2008/09) is subject to a 20% tax charge on any excess. However, this means that it is more important to start planning early, as each person can re-use their nil rate band every seven years. Using the Flexible Reversionary Trust you don’t have to relinquish access to the capital transferred and your beneficiaries do not have a right to receive the monies. Why gamble that the Tories will gain power, increase the nil rate band and future governments retain the raised levels when you can achieve the same result now with simple and uncontroversial planning?

Email Christian Ward Subscribe by RSS or Subscribe by Email

Avoiding Investment Torpedoes

Another day, another dollar …or should that read another day, another investment fraud exposed. On Tuesday the United States SEC froze the assets of Allen Stanford and three companies in his Stanford Financial Group. You can read the SEC press release here. Significant and sustained bear markets always expose the fraudsters and charlatans of the investment world. What is surprising in this current recessionary environment is the scale of the frauds perpetrated by such high profile public figures such as Bernard Madoff and Allen Stanford. Madoff was a former Chairman of the NASDAQ and Stanford courted the media with his cricket ‘benevolence’.

The details of these massive frauds will be picked over with a fine tooth comb over the coming months. What is immediately clear is that investors and particularly their professional advisers, should have heard the warning bells long before the frauds were finally exposed.

The regulators will never be able to prevent a determined fraudster from concealing their actions for a while, and investors should always understand that the best defence is to follow the well know maxim…caveat emptor, buyer beware. There is a simple test which I advise all investors to consider before following any investment advice or making an investment.

• Is there a sound theoretical basis for why an investment strategy will be successful going forward?


• Is there clear empirical evidence of how the investment strategy has performed historically?


• Can the concept be practically implemented to generate the theoretical returns available?

Surprisingly enough, few investment strategies pass all three tests. Making investment decisions within such a framework will also help investors filter out potential fraudsters and steer clear of schemes such as Stanford’s, which according to the SEC offered:

“…improbable and unsubstantiated high interest rates, supposedly earned through its unique investment strategy…”

Schemes that sound too good to be true invariably are.

Email Christian Ward Subscribe by RSS or Subscribe by Email

This is for information purposes only and you should always seek professional advice

Venture Capital Trusts - A lower risk investment opportunity

Tax advantaged investments such as Venture Capital Trusts (VCTs) are inevitably marketed in the run-up to the end of the tax year. Marketing material often focuses on the attractive tax incentives whilst playing down the high costs and high investment risks. Traditional venture capital investing is a very hit and miss affair, with the majority of good investment performance often coming from one or two incredibly successful start-up investments. Unfortunately these stars are often dragged down by the failure of the average venture capital investment. For this reason it is very hard to capture the average returns from the venture capture asset class as a whole. Most clients who want to access the higher expected returns from small companies, when compared to equity returns overall, would be better off gaining broad exposure to this market sector in a low cost diversified collective fund. You can view historical VCT performance here - VCT performance figures.

However, the VCT tax breaks can provide a good risk-adjusted investment opportunity when structured appropriately. VCT tax advantages for qualifying shares held for five years are as follows:

• 30% income tax relief on annual investments of up to £200,000 per person.



• Tax-free dividends.



• No capital gains tax within the VCT or on eventual disposal of VCT shares.

In the past I have not felt that many VCTs offered a compelling proposition. This year however, I think that the Triple Point TP5 VCT offers an excellent investment as it is geared to harvest the VCT tax breaks with the minimum amount of investment risk.

Triple Point TP5 will initially hold 100% of the trust assets in low risk fixed income investments, with this exposure reducing to approximately 30% within three years to meet the VCT qualifying rules. The reducing non-qualifying investments will be replaced by investments in companies whose revenues are guaranteed by contracts with financially sound counterparties, such as NHS and Local Government Authorities. The overall proposition is not one which will provide high returns, as it is structured to keep the risk of capital losses to a minimum. Most of the net returns available to investors will come through the tax relief gained at outset. You can read more about the structure of Triple Point TP5 and the potential returns here.

Triple Point themselves are unique in the marketplace and focus solely on this type of investment across various tax advantaged holding structures. They have an impressive line-up of tax and investment specialists who offer a far more compelling proposition than many of the ‘marketing’ driven investment companies.

The current economic climate does not really impact on the underlying investments, but low interest rates will reduce the headline returns as with other types of investment. Triple Point are aiming to raise £50 million, and this low risk structure will I think, prove very popular as investors search out any source of increasing their returns whilst avoiding equity market risk.

Email Christian Ward Subscribe by RSS or Subscribe by Email

This is for information purposes only and you should always seek professional advice