Trusts

Choosing the right structures to protect assets and give your family lasting benefits

One of the most effective ways you can manage your estate planning is through setting up a trust. The structures into which you can transfer your assets can have lasting consequences for you and your family, so it is important that you obtain professional financial advice as the right structures can protect assets and give your family lasting benefits.

A trust is a legal arrangement where one or more trustees are made legally responsible for assets. The assets – such as land, money, buildings, shares or even antiques – are placed in trust for the benefit of one or more beneficiaries. They are not the sole domain of the super-rich. Trusts are incredibly useful and flexible devices that people employ for all sorts of different purposes, including Inheritance Tax planning.

Simplest form
In its simplest form, a trust is just a legal mechanism for separating the ownership of an asset into two parts: the ‘legal’ ownership (or title to the asset) on the one hand, and the ‘beneficial’ ownership on the other hand.

It is in the course of Inheritance Tax planning, though, that people are most likely to come face to face with trusts and seek to get an understanding of what they are and how they work. Their use is widespread and, despite some recent adverse changes in tax law, they remain an important tool in estate planning.

More flexibility
The trust is created when the settlor transfers assets to the trustees, who hold the assets in trust for the beneficiaries. The main reason a person would put assets into a trust rather than make an outright gift is that trusts offer far more flexibility than outright gifts.

The trustees are responsible for managing the trust and carrying out the wishes of the person who has put the assets into trust (the settlor). The settlor’s wishes for the trust are usually written in their Will or given in a legal document called the trust deed.

The purpose of a trust

Trusts may be set up for a number of reasons, for example:

•    To control and protect family assets
•    When someone is too young to handle their affairs
•    When someone can’t handle their affairs because they are incapacitated
•    To pass on money or property while you are still alive
•    To pass on money or assets when you die under the terms of your Will – known as a ‘Will trust’
•    Under the rules of inheritance that apply when someone dies without leaving a valid Will (England and Wales only)

There are several types of UK family trusts, and each type of trust may be taxed differently. There are other types of non-family trusts. These are set up for many reasons, for example, to operate as a charity or to provide a means for employers to create a pension scheme for their staff.

When you might have to pay Inheritance Tax on your trust

There are four main situations when Inheritance Tax may be due on trusts:

•    When assets are transferred – or settled – into a trust
•    When a trust reaches a ten-year anniversary of when it was set up
•    When assets are transferred out of a trust or the trust comes to an end
•    When someone dies and a trust is involved when sorting out their estate

Trust solutions for managing wealth
We can advise you on a range of different trust solutions, each designed with a particular purpose in mind.

Some types of trust are treated differently for Inheritance Tax purposes.

Bare trusts
These are where the assets in a trust are held in the name of a trustee but go directly to the beneficiary, who has a right to both the assets and income of the trust.
Transfers into a bare trust may also be exempt from Inheritance Tax, as long as the person making the transfer survives for seven years after making the transfer.

Interest in possession trusts
These are trusts where the beneficiary is entitled to trust income as it’s produced – this is called their ‘interest in possession’.
On assets transferred into this type of trust before 22 March 2006, there’s no Inheritance Tax to pay.
On assets transferred on or after 22 March 2006, the 10-yearly Inheritance Tax charge may be due.
During the life of the trust, there’s no Inheritance Tax to pay as long as the asset stays in the trust and remains the ‘interest’ of the beneficiary.

Between 22 March 2006 and 5 October 2008:

•    Beneficiaries of an interest in possession trust could pass on their interest in possession to other beneficiaries, like their children
•    This was called making a ‘transitional serial interest’
•    There’s no Inheritance Tax to pay in this situation

From 5 October 2008:

•    Beneficiaries of an interest in possession trust can’t pass their interest on as a transitional serial interest
•    If an interest is transferred after this date, there may be a charge of 20% and a 10-yearly Inheritance Tax charge will be payable unless it’s a disabled trust

If you inherit an interest in possession trust from someone who has died, there’s no Inheritance Tax at the 10 year anniversary. Instead, 40% tax will be due when you die.

Information is based on our current understanding of taxation legislation and regulations. Tax assumptions are subject to statutory change and the value of tax relief (if any) will depend upon your individual circumstances. The Financial Conduct Authority does not regulate Taxation and Trust Advice or Will Writing. The value of your investment can go down as well as up and you may not get back the full amount invested. Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor. The treatment of Trusts for tax purposes is the same throughout the United Kingdom. However, Scottish law on Trusts and the terms used in relation to Trusts in Scotland are different from the laws of England and Wales and Northern Ireland. This information does not constitute advice and should not be used as the basis of any financial decision, nor should it be treated as a recommendation for any product. Although endeavours have been made to provide accurate and timely information, Professional Practice Services cannot guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough review of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions.

Professional financial advice you can trust
Do you need someone to manage money for you – for example, to use it to help someone after your death, or to pay for your care later on? One way to do this is to put the money into a trust. To discuss your requirements, please contact us for more information – we look forward to hearing from you.

Call our friendly, knowledgeable team for a confidential, no obligation discussion:
01527 880345
 

Visit our Website at:
www.pps-vet.co.uk
 

Professional Practice Services is a Veterinary Business Consultancy and Independent Financial Advisory Firm. Professional Practice Services is authorised and regulated by the Financial Conduct Authority
The Financial Conduct Authority does not regulate finance, will writing, commercial lending, taxation or trust advice.
Article Reference: PPS062014.GM23

Growing your wealth over time

Choosing investment vehicles that match your feelings and preferences is the key

It may no longer be enough to simply preserve what you have today; you also have to build what you will need for tomorrow. When deciding whether to invest, it is important that any investment vehicle matches your feelings and preferences in relation to investment risk and return.

Market volatility in recent years may have left some investors feeling uncertain and many have stepped away from investing in the stock markets. But not all stocks and shares are the same. For those seeking long-term total returns, there still are some high-quality companies – at attractive prices – offering the potential to grow wealth over time.

Long-range financial goals
Diversification is a term that can be summed up with this phrase: ‘Don’t put all your eggs in one basket’. Diversification is a technique that reduces risk by allocating investments among various financial instruments, industries and other categories. It aims to maximise return by investing in different areas that would each react differently to the same event. Diversification is the most important component of reaching long-range financial goals while minimising risk.

Hence your asset allocation needs to be commensurate with your attitude to risk. Another key question to ask yourself is: ‘How comfortable would I be facing a short-term loss in order to have the opportunity to make long term gains?’ If your answer is that you are not prepared to take any risk whatsoever, then investing in the stock market is not for you.

Asset allocation
If you are going to invest, you need to be prepared to take some calculated risk in the hope of greater reward. Risk is an implicit aspect to investing: shares can fall, economic conditions can change and companies can experience varying trading fortunes.

The process of deciding what proportion of your investment portfolio should be invested in the different types of investment is called ‘asset allocation’.

Asset classes
The various asset classes come with different levels of risk (volatility of returns) and thus deliver different expected returns over the medium to long term. But, no one asset class always performs best over an investment period. Asset classes consist of a group of securities with varying degrees of risk.

There are three main asset classes:

•    Equities
•    Bonds (also referred to as fixed income)
•    Cash

Each asset class has different investment characteristics, for example, the level of risk and potential for delivering returns and performance in different market conditions

Equities
Equities (also known as ‘ordinary shares’, or ‘shares’) are issued by a public limited company and are traded on the stock market. When you invest in an equity, you buy a share in a company and become a shareholder. Equities have the potential to make you money in two ways: you can receive capital growth through increases in the share price, or you can receive income in the form of dividends. Neither of these is guaranteed, and there is always the risk that the share price will fall below the level at which you invested.

Bonds
Bonds, also referred to as fixed income securities, are issued by companies and governments as a way of raising money and are effectively an ‘I.O.U.’ Bonds provide a regular stream of income (which is normally a fixed amount) over a specified period of time and promise to return investors their capital on a set date in the future. Once bonds have been issued, they’re bought and sold between investors without the involvement of the issuer. Bonds are generally considered to offer stable returns and to be lower risk than equities – and hence deliver lower returns than equities.

Cash
Cash tends to be held within a bank account where interest can be gained. Alternatively, cash funds use their market power to get better rates of return on deposits than you would get in an ordinary bank account. They often invest in very short-term bonds known as ‘money market instruments’, which are essentially banks lending money to each other. In addition, cash funds can provide exposure to global currencies, which may not be easy to purchase on the open market and could be costly transactions.

Different characteristics for risk
These asset classes have different characteristics for risk. When you are young you may want to invest in assets with a higher potential for growth but greater risk, because you have the time to benefit from their long-term growth. As you get closer to retirement you may want to choose more conservative investments that are steadier in both risk and return.

There is a wide variety of different asset classes available to invest in and commensurate risks attached to each one. While these implicit risks cannot be avoided, they can be mitigated as part of the overall investment portfolio by diversifying.

Different ‘styles’ of investing
Some assets are said to be ‘negatively correlated’, for instance, bonds and property often behave in a contrarian way to equities by offering lower, but less volatile, returns. This provides a ‘safety net’ by diversifying many of the risks associated with reliance upon one particular asset. It is also important to diversify across different ‘styles’ of investing, such as growth or value investing, as well as across different sizes of companies, different sectors and different geographic regions.

Growth stocks are held as investors believe their value is likely to grow significantly over the long term, whereas value shares are held because they are regarded as being cheaper than the intrinsic worth of the companies in which they represent a stake. By mixing styles that can out- or under-perform under different economic conditions, the overall risk rating of the investment portfolio is reduced. Picking the right combination of these depends on your risk profile, so it’s essential to seek professional advice to ensure that your investment portfolio is commensurate with your attitude to investment risk.

A ‘paper loss’
The important thing to remember with investments is that even if your investment goes down, you will only actually make a loss if you cash it in at that time. When you see your investment value fall, this is known as a ‘paper loss’ as it is not a real loss until you sell.

If you are going to invest, you need to be prepared to take some risk and to see at least some fall in the value of your investment.

While all investments carry an element of risk, the amount of risk you take directly affects any potential returns and losses. Generally speaking, if there is less risk to your investment, your money will grow more slowly, and with more risk, your investment may fluctuate more.

Currency risk
You should also be aware of currency risk. Currencies (for example, sterling, euros, dollars and yen) move in relation to one another. If you are putting your money into investments in another country, then their value will move up and down in line with currency changes as well as the normal share price movements.
Another consideration is the risk of inflation. Inflation means that you will need more money in the future to buy the same things as now. When investing, therefore, beating inflation is an important aim. Investing in cash may not beat inflation over the long term.

Professional financial advice you can trust
Our goal is to help you grow your wealth even in difficult market conditions. The objective of our advisory approach is to ensure that you find the right financial solutions for your situation and to provide you with full access to our investment expertise. To discuss your requirements, please contact us.

Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of and reliefs from taxation are subject to change. Tax treatment is based on individual circumstances. The value of investments and the income from them can go down as well as up and investors may not get back the amount invested. This information does not constitute investment advice and should not be used as the basis of any investment decision, nor should it be treated as a recommendation for any investment. Although endeavours have been made to provide accurate and timely information, Professional Practice Services cannot guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough review of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions.

Call our friendly, knowledgeable team for a confidential, no obligation discussion:
01527 880345
 

Visit our Website at:
www.pps-vet.co.uk
 

Professional Practice Services is a Veterinary Business Consultancy and Independent Financial Advisory Firm. Professional Practice Services is authorised and regulated by the Financial Conduct Authority
The Financial Conduct Authority does not regulate finance, will writing, commercial lending, taxation or trust advice.