Accountants Jailed in £100m Investment Swindle – Lessons for Investors
The recent conviction of two accountants who masterminded a £100 million scam yet again proves the old adage that ‘if it seems too good to be true, it probably is’.
The two men, Alan White and Shinder Gangar, were partners in the accounting firm of Dobb, White and Co., which had offices in Leicester and Nottingham. They preyed on the greed and naivety of clients who were promised massive returns of up to 160 per cent per annum on their investments and were told, falsely, that celebrities such as Andrew Lloyd Webber and David Frost had invested in the scheme. As is normal in such frauds, there were no investments at all, the ‘interest’ on the early investments being financed by the money invested by later victims of the scam.
Some clients had invested six-figure sums in the scheme. It is not yet known how much, if any, of their investments will be recovered. The conviction followed a three year investigation by the Serious Fraud Office.
Says <<CONTACT DETAILS>>, “Anyone offering investment returns well above market rates, especially if they claim that these are risk-free, should be treated with extreme suspicion. Investment advice should never be taken from anyone not authorised to give it by the Financial Services Authority (FSA). It is straightforward to check out a firm’s credentials. Also, remember that anyone can call themselves an ‘accountant’ – even people with no qualifications at all.”
It is an offence to give investment advice for gain unless authorised to do so by the FSA, which has a consumer protection website at
http://www.moneymadeclear.fsa.gov.uk/. As well as listing registered firms, it also provides a list of unauthorised firms currently known to be targeting UK investors. The Law Society is a designated professional body for the purposes of the Financial Services and Markets Act 2000.
Partner Note
Reported in Accountancy Age, 22 February 2008
Cohabitation and Estates
When one member of a cohabiting couple dies, it can come as an unpleasant surprise to the bereaved partner to discover that not all of their late partner’s estate will pass to them in the absence of a will. It is only when this happens that many people become aware that there is no such thing in law as a ‘common law’ spouse, so it is important that people living together give thought to protecting their position by the means currently available to them.
Where there are assets which are jointly held (as ‘joint tenants’ in legal terminology), these will pass by survivorship to the other partner. Property held jointly and joint bank accounts are normally held in this way. Also, if there is a life assurance policy or there are pension benefits payable to a nominated person, then the surviving partner will receive these if they are the named beneficiary.
Once such assets have been dealt with, however, the rules of intestacy apply if there is no will. An intestate estate passes (with a rather complex formula regarding its division depending on the size of the estate) to the relatives of the deceased. This will normally leave the deceased’s partner with nothing.
However, the law does allow a claim for provision to be made from the estate of the deceased by dependents if they are persons for whom the intestate person might reasonably have been expected to make provision.
A surviving cohabitee can make a claim if the deceased died intestate or failed to provide for them in the will if:
- they were maintained by the deceased in whole or in part immediately before the death of the deceased; or
- for two years prior to the death of the deceased they lived in the same household as the deceased as if they were the husband, wife or civil partner of the deceased.
In such cases the court may be requested to make ‘reasonable provision’ for the applicant. There are a series of guidelines which have been set to ensure that the provision made is fair bearing in mind the size of the estate and the circumstances of those with an interest in it.
The court’s powers to divide the estate are considerable and can include making orders for periodical payments or lump sums or the transfer of specific property to the claimant. However, it should be remembered that transfers on death to a cohabitee do not qualify for the ‘spouse’ exemption from Inheritance Tax which applies to transfers to a spouse or civil partner.
Says <<CONTACT DETAILS>>, “With nearly 2.5 million people cohabiting in the UK, issues arising following the death of one partner are becoming more and more frequent. The sensible thing to do is to make a will. However, don’t forget that if a couple then decide to marry or enter into a civil partnership, previous wills become invalid and new ones should be written.”
Cohabitation and Estates
When one member of a cohabiting couple dies, it can come as an unpleasant surprise to the bereaved partner to discover that not all of their late partner’s estate will pass to them in the absence of a will. It is only when this happens that many people become aware that there is no such thing in law as a ‘common law’ spouse, so it is important that people living together give thought to protecting their position by the means currently available to them.
Where there are assets which are jointly held (as ‘joint tenants’ in legal terminology), these will pass by survivorship to the other partner. Property held jointly and joint bank accounts are normally held in this way. Also, if there is a life assurance policy or there are pension benefits payable to a nominated person, then the surviving partner will receive these if they are the named beneficiary.
Once such assets have been dealt with, however, the rules of intestacy apply if there is no will. An intestate estate passes (with a rather complex formula regarding its division depending on the size of the estate) to the relatives of the deceased. This will normally leave the deceased’s partner with nothing.
However, the law does allow a claim for provision to be made from the estate of the deceased by dependents if they are persons for whom the intestate person might reasonably have been expected to make provision.
A surviving cohabitee can make a claim if the deceased died intestate or failed to provide for them in the will if:
- they were maintained by the deceased in whole or in part immediately before the death of the deceased; or
- for two years prior to the death of the deceased they lived in the same household as the deceased as if they were the husband, wife or civil partner of the deceased.
In such cases the court may be requested to make ‘reasonable provision’ for the applicant. There are a series of guidelines which have been set to ensure that the provision made is fair bearing in mind the size of the estate and the circumstances of those with an interest in it.
The court’s powers to divide the estate are considerable and can include making orders for periodical payments or lump sums or the transfer of specific property to the claimant. However, it should be remembered that transfers on death to a cohabitee do not qualify for the ‘spouse’ exemption from Inheritance Tax which applies to transfers to a spouse or civil partner.
Says <<CONTACT DETAILS>>, “With nearly 2.5 million people cohabiting in the UK, issues arising following the death of one partner are becoming more and more frequent. The sensible thing to do is to make a will. However, don’t forget that if a couple then decide to marry or enter into a civil partnership, previous wills become invalid and new ones should be written.”
Contested Will – Who Pays?
A recent case, involving the family of a man who died and left his entire fortune to the Conservative Party, illustrates one of the main exceptions which can apply, in cases involving wills, to the normal rule that ‘the loser pays the costs’ of a legal action – both their own and those of the winner. This is called ‘costs following the event’ in legal terminology. It means that the party in whose favour the issue is decided normally has his or her costs met by the unsuccessful party. The principle behind this rule is that the winner in a contested claim should not be worse off because of having to use legal proceedings to demonstrate the rightness of their argument.
There are, however, exceptions to this principle. In the case of contested wills, there are two exceptions. The first is when the cause of the litigation was the behaviour of the person who drew up the will. An example of this might be where the will was inconsistent with itself or unclear as to its meaning. In this case, the costs of the legal proceedings will normally be borne out of the estate. The second exception is when the circumstances are such that it is reasonable for an investigation to be made of the circumstances surrounding the will. In this case, the costs of the proceedings will generally be shared between all the parties to the action.
In the case in point, the man left £8 million to the Conservative Party and the will was contested by his family on the basis that he was not ‘of sound mind’ when he made it – in legal parlance, he lacked ‘testamentary capacity’. Evidence was presented to the court that the man was delusional to the extent that a challenge to his last will was more or less inevitable in any circumstances. The court ruled the will invalid. The question of how the legal costs should be borne was then raised.
The court ruled that it was proper in the circumstances for the Conservative Party to investigate the issue of the man’s testamentary capacity once the will had been challenged. Their costs to that point should therefore be met out of the estate. In this case, both sides had appointed experts to examine the issue of testamentary capacity. Their reports were exchanged, as is normal practice. The court ruled that it was appropriate for the costs to be shared up to the point at which the reports of the experts were exchanged.
“This case is important because it shows that the courts will be sympathetic as regards costs when the circumstances meet the exceptions to the ‘loser pays costs’ rule,” says <<CONTACT DETAILS>>. “Many families are wary of challenging wills which have been created when the testator lacked mental capacity, because they fear the costs of losing. However, when the circumstances justify it, the costs of the challenge may be borne, in whole or in part, by the estate.”
It should be remembered, however, that eccentricity is not a sign of lack of testamentary capacity.
Partner Note
Kostic v Chaplin and Others, Chancery Division, reported in the Times, 11 January 2008.
Government Abandons Plans to Protect Cohabitees
The Government has announced that it does not, for the time being at any rate, intend to proceed with reforms to the law that would have given cohabiting partners similar rights to married couples or civil partners on the breakdown of their relationship.
This unexpected announcement was made by Justice Minister Bridget Prentice and is all the more surprising given the inconsistency of rulings made by the courts in this problematic area.
The Law Commission had spent two years working on proposals to give protection to couples who live together. If introduced, these would have set out the respective rights of cohabitees as regards the financial arrangements on the termination of a relationship.
The number of people who are living together in a relationship but who are neither married nor civil partners continues to rise. Many of these people are probably completely unaware that they have few rights in the event of a break-up of their relationship and that such rights as they do have centre around any children of the relationship.
“The problem stems from the fact that, contrary to popular belief, in law there is no such thing as a ‘common law spouse’,” says <<CONTACT DETAILS>>. “Couples who live together do not acquire legal rights and there are no set rules for how their assets should be divided if they split up. With over 2.5 million people currently living together informally, the courts are seeing a flood of disputes about who owns what when such relationships end.”
One common problem is where partners have lived together for a long time but the property they share continues to be held in the name of only one of the couple. If the couple then split up, this may give rise to a claim that the property should belong to both parties. The issues involved are often complex and such disputes can be very expensive to resolve in court. In some cases, people who have made a very substantial contribution to the financing and improvement of a shared home have been left with little or nothing for their efforts.
The review of the law in this area was intended to create more certainty in such cases, but the Government has chosen instead to wait to see what are the effects of planned reforms to the law in Scotland before any changes are made to the law in England and Wales.
“Meanwhile, the position of cohabitees is best protected by having a formal written agreement, which should be made with the benefit of independent legal advice on both sides,” says <<CONTACT DETAILS>>. “This is particularly important where the assets involved are substantial, so that in the event that the relationship founders, a drawn out and acrimonious dispute can be avoided.”
Partner Note
The Law Commission’s Consultation Paper can be found at
The Justice Minister’s announcement can be found at http://www.justice.gov.uk/news/announcement060308a.htm.
Government Ratifies Tax Snooping Agreement
With surprisingly little press comment, the Government has ratified a tax treaty which could have far-reaching effects for some taxpayers. The treaty provides for cross-border exchanges of information, cross-border service of documents in tax matters and obliges signatory countries to collect tax on behalf of each other.
In other words, it allows the Government to share tax information with the tax authorities of other countries, collect their taxes for them and have UK taxes collected by them on behalf of the UK Government.
The other signatories to the treaty are: Azerbaijan, Belgium, Canada, Denmark, Finland, France, Iceland, Italy, the Netherlands, Norway, Poland, Sweden, Ukraine and the United States.
There are various supposed ‘safeguards’ for taxpayers, including one that taxpayer information will only be supplied to another tax authority when HM Revenue and Customs (HMRC) are satisfied that it will be kept confidential to the same extent as it would be in the UK. Another safeguard is that the requesting authority must have gone through all necessary legal processes to prove that the tax debt exists before the UK will assist in recovery.
More recently still, it has been announced that the Government will make use of information provided to it by the German tax authorities regarding people who have bank accounts in the ultra-secretive tax haven of Lichtenstein.
HMRC are already issuing letters to taxpayers detailing the bank account information that has been acquired by this means.
Partner Note
Reported in the ICAEW Tax Faculty ‘Taxwire’ 390 on 6 January 2008. http://www.icaew.com/index.cfm?route=153519
The treaty was ratified on 29 January 2008.
HMRC in Buy to Let Probe
HM Revenue and Customs (HMRC) have launched hundreds of investigations into the tax affairs of taxpayers they believe have under-declared or failed to declare taxable income from their buy to let activities.
Two thousand investors are expected to be targeted in a drive to identify taxpayers who have failed to declare investment income. It is thought that the first wave of enquiry letters includes many sent to taxpayers who have already sold their buy to let properties and therefore probably thought it unlikely that their under-declarations would be discovered.
Where the evasion of tax is wilful (i.e. fraudulent), HMRC can collect tax for up to 20 years after it is due, plus interest. They can also levy penalties of up to 100 per cent of the unpaid tax.
HMRC’s exercise is in addition to their usual enquiries in this area which focus on excessive expense claims and, in particular, on whether taxpayers have claimed their mortgage payments in full, as opposed to the interest on the mortgage, as a tax deduction. Only the interest element of a mortgage is allowable as a deduction for Income Tax purposes, not the capital element.
Says <<CONTACT DETAILS>>, “Tax law for owners of rental properties of different types is very complex and quite often poorly understood by taxpayers. We can advise you on all aspects of property ownership and letting and assist you in dealing with HMRC.”
Partner Note
Reported in the ICAEW Tax Faculty’s ‘Taxline’ 398, 4 March 2008.
If you would like to see a sample of the letter, please email joe@bestpracticeonline.com.
HMRC Pursue Foreign Connections
The Government’s watering down of its proposals for the taxation of non-UK domiciled people has been well documented. Even after being made less aggressive, the new proposals do pose significant tax planning considerations for those affected by them. One particular problem that affects UK residents of US domicile is whether the American Internal Revenue Service (IRS) will accept that the £30,000 levy, which ‘non-doms.’ can opt to pay in order to avoid being taxed in the UK on their unremitted world income, would qualify for double taxation relief under the UK/US double taxation treaty. Guidance on the Budget, prepared by HM Revenue and Customs (HMRC), contains a lengthy opinion by a US law firm that the levy will be accepted for this purpose, but the IRS has issued no such assurance.
However, all this publicity about the taxation of ‘non-doms.’ has left two other significant areas in which HMRC have ‘upped the ante’ being given scant publicity.
The first of these are the new rules over determination of whether a person is or is not UK resident. From 6 April 2008, any day in which a person has been physically present in the UK will count as a day in the UK. Previously, the days of entry to and exit from the UK were ignored. This is possibly less important for those who would be caught under the ‘183 days in a year’ rule, which makes any person spending more than half of the tax year in the UK resident for Income Tax and Capital Gains Tax purposes. However, the new rules also apply to the ‘91 day’ rule, which is much less well known. This rule makes any person who spends an average of 91 days or more per year in the UK, over a period of four tax years, resident in the UK for tax purposes from the beginning of the 5th year.
Secondly, HMRC now have an enhanced ability to swap information and enforcement powers with foreign tax authorities, which will allow them to collect taxes due here from residents of several foreign countries. This follows HMRC asking over 100 foreign banks with branches in the UK to provide information regarding foreign accounts held by UK citizens.
The message is that HMRC are pulling out all the stops to find people who have undeclared income hidden in foreign accounts.
Partner Note
There is a good summary of the current proposals in New Law Journal, 22 February 2008 at pages 290-291.
HMRC Reduce IHT Compliance Burden
HM Revenue and Customs (HMRC) have issued new draft regulations which are intended to reduce the number of reports which need to be made for Inheritance Tax (IHT) purposes. This move follows the passing of the Finance Act 2006, which restricted the extent to which lifetime transfers into trust qualify as Potentially Exempt Transfers (PETs) and extended the categories of settlement that are liable to charge as a Relevant Property Trust (RPT).
The problem arose because Schedule 20 of the Finance Act 2006 meant that more transactions involving trusts would have to be reported to HMRC. The Act required taxpayers to deliver an account to HMRC where an individual makes a transfer during their lifetime which does not qualify as a PET or where a chargeable event arises in connection with a RPT. In many of these cases, the reporting requirement is not accompanied by a requirement to pay IHT, so HMRC intend to extend the rules that excuse taxpayers from delivering returns for certain transfers where there is no IHT to pay.
The draft regulations apply to excepted transfers and excepted settlements and are intended to reduce greatly the number of occasions when a report has to be made to HMRC. The intention is that the new regulations will be effective for chargeable events that have arisen from 6 April 2007 onwards.
We can advise you on all matters relating to IHT and family wealth preservation.
Partner Note
ICAEW Tax Faculty – Newswire 394, 5 February 2008.
In Brief
Bereavement Damages Increase
The level of damages for bereavement in England and Wales has been increased from £10,000 to £11,800 and the new level applies for causes of action which commenced after 31 December 2007.
It is intended that in future, adjustments will be made at three-yearly intervals.
Partner Note
The Damages for Bereavement (Variation of Sum) (England and Wales) Order 2007 (SI 2007/3489).
In Brief
Inheritance Tax Threshold
As announced in the 2007 Budget, the threshold above which Inheritance Tax is payable on a deceased person’s estate rises to £312,000 for the tax year 2008/2009. The threshold for 2009/2010 will be £325,000, followed by a further rise bringing the level to £350,000 for the tax year 2010/2011.
Intention Not Enough Rules Court
When promises are made but not kept, the law often provides no redress for the disappointed person, as a recent case involving a couple who looked after a friend demonstrates.
The couple looked after their friend when he became unable to care for himself, and they helped him deal with his affairs. He offered them the use of two properties he owned, which they accepted. Over the ensuing years, they decorated and maintained the properties and even carried out improvements to one of them. The man told the couple that he intended to leave the properties to them when he died and also made other people aware that this was his intention. He signed a document to that effect, but it was not a valid will and he died legally intestate. At the point at which the man died, the properties were worth £280,000.
The couple applied for the title to the properties to be transferred to them. When their request was refused, they went to court claiming that the man’s promise had created a ‘constructive trust’ for them and that they were entitled to the properties because they had acted to their own detriment on account of the man’s promise. Where a person acts to their own detriment on the basis of a promise made by another person, it may be possible to mount a successful claim.
However, the court rejected the couple’s claim. There was, in the mind of the judge, an insufficient link between the promise and the couple’s detriment to mean they should benefit, except by way of compensation for their expenditure and a small amount for their disappointment. Accordingly, an award of £20,000 was made. The couple appealed, claiming that there was in effect a bargain between them and the man which the court should uphold.
The Court of Appeal concluded that the man’s offer of property for use was not accompanied by a requirement that the couple carry out the acts for which they claimed compensation, so there was no ‘bargain’. Nor was there any ground for the assumption that receipt of properties worth £280,000 was in proportion to the detriment that the couple had suffered. The claim was therefore rejected.
Says <<CONTACT DETAILS>>, “The couple were no doubt disappointed, but relying on stated intention in such cases is a very risky strategy. The sensible thing to do is to make sure that the correct paperwork is put in place to give effect to the owner’s intention. Creating the documentation needed to transfer property or writing a will is both quick and inexpensive.”
Partner Note
Powell and Powell v Benney [2007] EWCA Civ 1283.
Mental Illness and Wills
A will is only valid if the person making it has ‘testamentary capacity’, which is the basis of the phrase ‘being of sound mind’. In simple terms, having testamentary capacity means that a person:
- can understand the meaning of the will;
- has some sort of understanding of what assets the will deals with;
- is aware of their moral obligations and who will benefit from the will; and
- can understand in broad terms the effect of the will.
Recently, a woman died several years after writing a will which, on the face of it, seemed rational. It was, however, disputed after the grant of probate on the ground that the woman had lacked testamentary capacity when the will was made.
The court heard that the woman had a long history of mental illness and was likely to have been mentally disturbed when the will was drawn up. As the mental condition from which she suffered was severe to the point of being disabling, the court revoked the grant of probate.
Partner Note
Ledger v Wootton [2007] All ER (D) 99 (Oct).
Should I Have a SIPP?
A SIPP (Self Invested Personal Pension) is one of several types of pension provision in which a person can invest – but it is crucially different from most other forms of pension in that it is the purchaser of the pension who controls the investments held by the pension fund.
SIPPs have all the normal tax benefits attaching to pension investments generally and are governed by the same rules relating to contributions. It is in the choice of investments that the SIPP differs from a conventional pension.
A personal pension or stakeholder pension will invest in a fund managed by, or on behalf of, the insurer. These funds may hold a variety of investments, including cash, but the actual investments held will be decided upon by the fund managers.
In a SIPP, the policyholder can decide to invest in specific shares, unit trusts or even less mainstream investments such as traded endowment plans, commercial properties and so on.
Accordingly, the SIPP gives much greater investment freedom. For the experienced investor wishing to control their pension investments, or for someone with a particular investment in mind which they want to be held in a pension fund, a SIPP may well be worth consideration.
Any pension or investment planning should only be undertaken with the benefit of professional advice. If you require advice on securing your family’s financial future, contact <<CONTACT DETAILS>>.
Tax Consequences of Keeping Your Home When You Move
Tax law in the UK permits a person (or a couple who are married or civil partners) to have only one home designated as their ‘Principal Private Residence’ (PPR). The importance of this is that any gain on a PPR is exempt from Capital Gains Tax (CGT), except in very limited circumstances. The gain on a second home, a property which is owned for letting purposes or one bought with a view to being sold at a profit is subject to tax.
Because of the way the law works, many people think that if they need to move away from their home – say because they are temporarily transferred to another area or country – they will pay tax on the profit on the sale of their home if they retain it for a period and later sell it. This is not necessarily true as there are various exemptions which may apply.
Firstly, where a second residential property is bought, the purchaser may elect, within two years of the purchase of the second property, which property is to be treated as the PPR.
Secondly, CGT law exempts from tax any gain made on a property which has been a PPR in the last three years of ownership. Other absences also do not disturb a property being treated as a PPR. These are:
- periods of absence not exceeding three years in total;
- periods of absence when the owner is employed abroad; and
- periods of absence not exceeding four years in total when the owner is obliged to live elsewhere by virtue of their employment.
Lastly, when a property is let for residential purposes, the first £40,000 of the gain relating to the period of letting is exempt and this exemption applies to each owner of the property (i.e. a husband and wife who jointly owned a propertywould qualify for an exemption of £80,000).
“In many cases the exemptions will be sufficient to eliminate any CGT liability,” says <<CONTACT DETAILS>>. “The tax law does allow a property owner the time to seek advice and think through the implications of multiple home ownership before the tax consequences bite, so there is no need to do things in a rush.”
For advice on taxes or wealth preservation, contact us.
Tax Man Taking Tougher Line
A few years ago, enquiries and arguments over technical tax points raised by HM Revenue and Customs (HMRC) tended to be fairly relaxed affairs, with goodwill and a spirit of compromise being not uncommon.
Regrettably, those days are little more than a fond memory. Tax Inspectors now take a much more uncompromising attitude to such matters, which may well be due to the influence of the ‘Customs’ side of HMRC, following the merger of the Customs and Excise and the Inland Revenue. Customs Officers have traditionally dealt with people whose activities are criminal and their Inspectors have as a matter of course adopted a very robust attitude to dealing with taxpayers since they were given the job of supervising the collection of VAT. That attitude appears to have rubbed off on the ‘Inland Revenue’ side of HMRC.
Proof of the increasing difficulty in negotiating with HMRC can be seen in the rapidly increasing number of taxpayers who appeal against the decisions of HMRC Officers to the VAT and Duties Tribunal and the Special Commissioners of Tax. The number of such appeals has risen from 2,014 in 2002 to 3,146 in 2006.
The 2008 Budget contains provisions which give HMRC Officers significant new powers to obtain information concerning the financial affairs of taxpayers, including the right to require third parties to provide information and making the failure to provide information in certain circumstances a criminal offence.
If you are engaged in a dispute with HMRC, you should ensure that you have the benefit of professional advice and do not compromise your position if you have to go to a tribunal.
Undue Influence Claim Fails if Evidence Insufficient
A claim that a will is invalid because of ‘undue influence’ having been brought to bear on the testator demands a high standard of proof in order to succeed.
A recent case concerned a man who in 2001 had set up two settlements and made his son and daughter trustees of them. They were also beneficiaries under the settlements. The man had set up an earlier settlement benefiting only his daughter and a second daughter.
The man lived with his daughter, who cared for him. In the fullness of time, he executed a deed by which his son was removed as a trustee of the two settlements and was also removed as a beneficiary under them.
The son sought to have this set aside on the ground that his sister had exercised undue influence over their father.
In court, evidence was given that the father was not the sort of man whose mind could easily be swayed. Furthermore, the father had reason to believe that his son was under the influence of someone he neither liked nor trusted. He also wished to ensure that his daughter’s financial position was secure. Also very important in helping the judge reach his decision was the fact that the family solicitor, who had a history of involvement with the family, had been present at two meetings with the man, at which the changes to the settlements were discussed, and had drawn up the deeds.
In the court’s view, all this added up to a man who had made up his own mind without undue influence being exercised.
“What is rather surprising about this case is that it was brought to court at all,” says <<CONTACT DETAILS>>. “It illustrates the fact that if arrangements are made in the correct manner, with evident thought and appropriate professional advice, the chances that they will be successfully challenged in court are small.”
Partner Note
Hogg v Hogg; Hogg v Otford Tool and Gauge Co Ltd. [2007] EWHC 2240.
Unlocking Your Equity – the Choices
There is a bewildering variety of equity release schemes on the market and, judging by the letters pages of the financial press, they are not well understood. Releasing equity in a house can be an effective way of supplementing your income or releasing spare capital that will not be needed for your children. Each type of scheme has its advantages and disadvantages and choosing the most appropriate one (or indeed, deciding whether to set up such an arrangement in the first place) should only be done after considering the options carefully and taking professional advice.
Here is a brief summary of the main types of scheme being offered:
Home Income Plans
This is really a fancy title for a mortgage-based annuity. The principle is that a mortgage is taken on the property and the lump sum is used to buy an annuity or invested to provide an income which is used in part to pay the interest on the mortgage. The mortgage reduces the value of your estate for Inheritance Tax purposes. However, for most purchasers of these schemes the net increase in income is rather low, as most of the income generated goes to paying the additional mortgage interest. These are most suitable for quite elderly people with a reasonable amount of free equity in their properties.
Roll-up Plans
With these plans, a lump sum is withdrawn and the interest payable on it 'rolls up' during the rest of your lifetime. The amount to be repaid will be an unpredictable proportion of the total value of the house and will depend on both the future movement in house prices and the prevailing interest rates (unless fixed at the outset). Because of the risk involved, Roll-up Plans are seldom used to advance more than half of the equity value in a house. Some schemes permit the maximum liability under the roll-up to be limited by reference to a percentage of the ultimate value of the house. The big plus point is that there are no repayments during your lifetime.
Home Reversion Plans
Under these schemes, your house is sold to the lender at a discount to current market value and you are then given the right to remain in the house for life. These schemes can be set up so that a fixed proportion of the value of the house is sold, not 100 per cent. There are no capital or interest payments.
“These schemes operate in quite different ways and have quite different financial and tax implications,” says <<CONTACT DETAILS>>. “In the present economic climate, finding a suitable scheme can be difficult and in many cases a family arrangement can achieve the same effect with less anxiety and at a lower or comparable cost. In addition, the termination clauses need to be carefully considered, as in some cases a change of circumstances – such as needing to sell the house in order to move into a care home – can lead to significant financial penalties. If you are considering such a strategy, we can help you make sure you make the right decision.”
What is Phased Retirement?
Phased retirement is the term given to the process by which retirement pensions are split into segments, which are then treated separately. It makes use of the rule in the UK that allows a retirement policyholder to take each pension policy at a time of their own choosing, rather than requiring that they are all taken at a set age or at one time.
In the UK, the only limitations on the use of such policies is that they normally cannot be taken before the age of 50 (55 from 2010) and must be taken by the age of 75.
Each pension policy can be taken separately and phasing the benefits can be particularly advantageous if you are likely to want to increase your income from your pension over time – for example, where you wish to continue working part-time after retirement age and defer taking your full pension until you cease working altogether.
The initial lump sum available from each policy will be tax-free as normal – it is only the taxable proportion of the subsequent annuity that constitutes taxable income. Any sums left untaken continue to remain in the pension fund, the income on which is itself tax free. Also, if you die before the funds have all been taken, the sums remaining in the pension fund will normally be available for your next of kin. Policies can usually be written to allow any such transfers to be free of Inheritance Tax.
The main advantage of phased retirement is that it lets you control when you receive your income and can be used to supplement other income.
Says <<CONTACT DETAILS>>, “Pension planning is an area in which good advice is a must. It interacts with Inheritance Tax and Income Tax planning and with family financial planning generally. We can help you plan ahead to achieve the best results for you and your family.”