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Wealth Management Planning: The UK Tax Principles

ISBN: 978-0-470-74231-0
588 pages
April 2010
Wealth Management Planning: The UK Tax Principles (0470742313) cover image
Wealth Management Planning addresses the major UK tax issues affecting wealth management planning for both the UK domiciled and non-UK domiciled individual. It explains, with numerous worked practical examples, the principles underpinning the three main taxes: income tax; capital gains tax; and inheritance tax. It is aimed at those involved in providing advice in the field of wealth management planning including solicitors, accountants, financial planners, private bankers, trustees, students of tax and law and the layman seeking in depth knowledge. 

The recent Finance Acts 2006 and 2008, in particular, have modified significantly the tax rules in key areas applicable to wealth management planning. These new tax rules are all addressed in detail in this book and include the pre and post Finance Act 2006 inheritance tax treatment of trusts; the new post Finance Act 2008 residence rules; and the new Finance Act 2008 rules applicable to non-domiciled individuals and the tax treatment of off shore trusts.

In view of the increasingly international nature of wealth management planning the book attempts to place the UK tax rules in an international context addressing such issues as: the role of wills in the international arena; the implications of the EU; the suitability of off shore financial centres; and the role and use of double taxation agreements.

Appendices bring together useful material produced by HMRC and a detailed bibliography for the interested reader is also included.

  “ This book gives comprehensive coverage to the complicated subject of taxation for Financial Planners. It will be very valuable to all those Financial Planners who wish to extend their learning and reference and desire to meet the needs of clients”.
NICK CANN, CHIEF EXECUTIVE OF THE INSTITUTE OF FINANCIAL PLANNING.

“ In this book, Malcolm Finney presents a comprehensive summary of the UK tax rules in straightforward language and with many practical examples. It is a notable achievement to put incomprehensible tax legislation into such readily understandable terms; anyone advising on wealth management will find this to be an invaluable guide to the subject”.
MALCOLM GUNN, CONSULTANT, SQUIRE, SANDERS & DEMPSEY

“ The author demonstrates considerable skill in explaining complicated tax rules in a manner that makes them easy to assimilate and understand. The book contains Chapter summaries, useful Appendices and numerous worked examples, which provide a very clear, helpful explanation of some difficult tax rules. The book’s contents cover wide areas of the tax system, and yet provide sufficient technical depth to be a valuable point of reference for those involved in wealth management and financial planning”.
MARK McLAUGHLIN, MARK McLAUGHLIN ASSOCIATES, MANAGING EDITOR OF TAXATIONWEB 

“ A valuable new text explaining the tax treatment applicable to financial planning products and strategies for UK domiciled persons (UK resident or expats) and non domiciled UK residents. This book will be of interest to a wide readership ranging from students of law and tax, the interested layman seeking in depth knowledge and professionals including solicitors, accountants, financial planners, private bankers and trustees. Malcolm is to be commended on distilling a vast amount of detailed material into a logical and well ordered framework”.
ANDREW PENNEY, MANAGING DIRECTOR, ROTHSCHILD TRUST CORPORATION LTD

“ Malcolm Finney’s book is stimulating, innovative and refreshingly practical. Anyone wanting either a high-level understanding of tax principles involved in wealth management or a deeper insight should read this book”.
JACOB RIGG, HEAD OF POLICY, SOCIETY OF TRUST AND ESTATE PRACTITIONERS, STEP WORLDWIDE

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About the Authors.

Preface.

Abbreviations.

PART ONE: THE BUILDING BLOCKS.

1. Tax Systems and Their Bases of Taxation.

Background.

Categories of Tax.

Capital v. Income Distinction.

Worldwide v. Territorial Tax Systems.

(a) Income and Capital Gains Taxes.

Worldwide Basis.

Territorial Basis.

Territorial Basis plus Remittances.

Residency.

Citizenship Test.

Source Basis.

(b) Inheritance Tax.

Trailing Tax Imposition.

Summary.

2. UK Taxation: An Overview.

Background.

Domicile, Residence and Ordinary Residence.

Domiciled Individual.

Non-domiciled Individual.

Persons Other Than Individuals.

UK Taxes and Law.

Capital v. Income Distinction.

Rates of Tax (2008/09).

Income Tax.

Capital Gains Tax.

Inheritance Tax.

Allowances.

Tax Returns.

Income and Capital Gains Tax.

Inheritance Tax.

Timing of Tax Payments.

Income and Capital Gains Tax.

Inheritance Tax.

Summary.

3. Domicile.

Background.

Concept of Private International Law Not Taxation.

English/Welsh, Scottish or Northern Irish.

Importance of Domicile for UK Tax Purposes.

Categories of Domicile.

Domicile of Origin.

(i) Legitimate v. Illegitimate Child.

(ii) Father Dead at Date of Birth.

(iii) Parents Married but Separated.

(iv) Legitimation.

(v) Loss of Domicile of Origin.

(vi) Resurrection of the Domicile of Origin.

(vii) Adoption.

Domicile of Dependence.

(i) Children and Domicile of Dependence.

(ii) Married Women and Domicile of Dependence.

Domicile of Choice.

(i) Misleading Nature of the Word "Choice".

(ii) Age Requirement.

(iii) Two Basic Requirements.

Non-UK Domiciled Individuals Spending Significant Time in the UK.

UK Domiciled Individuals Failing to Acquire non-UK Domiciles of Choice.

UK Domiciled Individuals Successfully Acquiring non-UK Domiciles of Choice.

Abandonment of a Domicile of Choice.

Special Categories of Individual and Domicile of Choice.

(i)   Individuals of Ill Health.

(ii)  Employees.

(iii) Member of the Armed Forces.

(iv) Diplomats.

Deemed UK Domicile.

(i) Three-year Rule.

(ii) 17 Out of 20 Tax Year Rule.

(iii) 15 Tax Years plus Two-day Trap.

(iv) Dealing with Deemed UK Domicile Status.

(A) Avoidance.

(B) Plan Accordingly.

(C) "Split" Domicile.

(D) International Dimension.

Summary.

4. Residence and Ordinary Residence.

Background.

Lack of Definitions and IR20.

Dual Residence.

Split Tax Years.

Income Tax.

Capital Gains Tax.

Temporary non-UK Residence.

Capital Gains Tax.

Income Tax.

Residence Rules and IR20.

Short Absences.

The 183-day Rule.

Arriving and Departing the UK.

Arriving in the UK.

Departing from the UK.

Summary.

5. Residence, Ordinary Residence and Domicile: Some Practical Points.

Background.

The Tax Return.

Domicile.

Claim for the Remittance Basis to Apply.

IHT Return.

Domicile and Residence Rulings.

Domicile Ruling.

Residence Ruling.

Summary.

6. Income Source and Asset Situs.

Background.

Income Source.

Rental Income.

Dividends.

Authorised and Unauthorised Unit Trusts.

Authorised.

Unauthorised.

Interest.

Mutual (Offshore) Funds.

Asset Situs.

Inheritance Tax.

Tangible Property.

Registered Shares.

Bearer Shares.

Intangible Property.

Ordinary Debts.

Speciality Debt.

Bank Accounts.

Unit Trusts.

Nominees.

Life Policies.

Capital Gains Tax.

Tangible Property.

Registered Shares.

Bearer Shares.

Ordinary Debts.

Units of Unit Trusts.

Life Policies.

Summary.

7. The Principles and Implications of Joint Tenancy and Tenancy in Common Ownership for Spouses and Non-Spouses.

Background.

Legal Title.

Beneficial Ownership.

Land.

Legal Title.

Equitable Interests.

Tax Issues.

Inheritance Tax.

Income Tax.

Spouse Joint Ownership.

Non-spouse Joint Ownership.

Capital Gains Tax.

Spouse Joint Ownership.

Non-spouse Joint Ownership.

Non-UK Domiciled Individual.

Spouses.

Summary.

PART TWO: THE MAJOR TAXES.

8. Capital Gains Tax.

Background.

Basics.

Inter-spouse Transfers.

Calculating the Tax.

Annual Exemption.

Payment of the Tax.

Year of Death.

Pre FA 2008 Reliefs.

Indexation Allowance.

Taper Relief.

Business Asset.

Taper Relief and Share Sales.

Gifts of Assets (not Inter-spouse).

Non-resident Recipient.

Precipitation of an Immediate Inheritance Tax Charge.

Business Assets.

Effect of Gift Relief.

Non-UK Situs Assets.

Impact of FA 2008.

Introduction of the New 18% Rate; Abolition of Indexation Allowance and Taper Relief.

Higher Rate Taxpayer.

Employees Owning Shares in the Employer Company.

Sole Trader.

Buy to Let.

"Banking" the Indexation Allowance/Taper Relief.

Capital Losses.

UK Domiciled and UK Resident Individual Capital Loss Utilisation.

1. Connected Person Capital Losses.

Non-UK Domiciled and UK Resident Individual Capital Loss Utilisation.

(1) Overseas Capital Loss Utilisation for the Non-UK Domiciled but UK Resident Individual pre FA 2008.

(2) Overseas Capital Loss Utilisation for the Non-UK Domiciled but UK Resident Individual post FA 2008.

Entrepreneur Relief.

Disposal of the Whole or Part of a Business.

Disposal of One or More Assets in Use for the Purposes of the Business at the Time at which the Business Ceases to be Carried on.

Disposal of One or More Assets Consisting of Shares or Securities of a Company.

Disposal Qualifying as an "Associated" Disposal.

Relevant Business Assets.

Claim for, and Amount of, Relief.

Offshore Companies.

Leaving/Arriving in the UK.

Summary.

9. Inheritance Tax: The Basics.

Background.

Territorial.

Domicile.

Deemed UK Domicile.

Rates of Inheritance Tax.

Lifetime Gifts.

Chargeable Lifetime Transfer (CLT).

Potentially Exempt Transfer (PET).

Quantum of a Transfer of Value.

Taper Relief.

PET.

CLT.

Seven-year Cumulation Period.

Lifetime.

CLTs Only.

CLTs and PETs.

Persons Responsible for Payment of Inheritance Tax and "Grossing up" on Lifetime Transfers.

CLTs.

Additional Inheritance Tax Liability.

Grossing up.

PETs.

Death Estate.

Assets.

Assets Beneficially Owned.

Gifts with Reservation.

Qualifying Interests in Possession.

Assets not Forming Part of the Death Estate.

Liabilities.

Reliefs.

Rate on Death and the NRB.

Death Estate.

Payment and the Bearing of Inheritance Tax on Death.

Payment of Inheritance Tax on Death.

Bearing of the Inheritance Tax Charge on Death.

Gifts with Reservation.

Qualifying Interests in Possession.

Beneficial Asset Entitlement.

Specific Gifts Bear Their Own Inheritance Tax on Death.

Inheritance Tax Liabilities on the Lifetime Transfers.

Inheritance Tax Liabilities on the Lifetime Transfers Due to Death.

Death Estate.

Planning Considerations: Initial Thoughts.

Summary.

10. Inheritance Tax: Exemptions and Reliefs.

Background.

Exempt Transfers.

Lifetime only Exempt Transfers.

Annual Exemption.

Normal Expenditure out of Income Exemption.

Gifts in Contemplation of Marriage Exemption.

Gifts for Family Maintenance Exemption.

Death only Exempt Transfers.

Transfers in Lifetime or on Death Exemptions.

Inter-spouse Transfers.

Inter-spouse Transferable NRB.

Miscellaneous Exemptions.

Ordering of Exemptions.

Reliefs.

BPR.

Relevant Business Property.

Businesses not Qualifying.

Pro-rata BPR.

Ownership Requirements.

Inter-spouse Transfers.

BPR and Death within Seven Years of a Transfer.

Order of Transfers.

Settled Business Property.

Pre 22 March 2006 Created Interest in Possession Trust.

Post 22 March 2006 Created Interest in Possession Trust.

Discretionary Trusts.

Agricultural Property Relief.

Ownership Requirements.

APR And Death within Seven Years of a Transfer.

Quick Succession Relief.

Summary.

11. Inheritance Tax: Gifts with Reservation.

Background.

Exemptions.

Exemptions.

Inter-spouse Gifts.

Full Consideration.

Co-ownership.

Trusts.

Pre-owned Assets.

Summary.

12. Inheritance Tax: Excluded Property.

Background.

Non-settled Property.

Settled Property.

Excluded Property and the Non-UK Domiciled.

Non-UK Situs Property.

Minimum Length of Time to Hold Assets.

UK Situs Assets.

Authorised Unit Trusts (AUT) and Open Ended Investment Companies (OEIC).

UK Government Securities or Gilts.

Foreign Currency UK Bank Accounts.

Channel Islands and the Isle of Man.

Settled Property.

UK Situs Trust Assets.

AUTs and OEICs.

UK Government Securities and Gilts.

Foreign Currency UK Bank Accounts.

Mixing UK Situs and Non-UK Situs Property in a Trust.

Excluded Property and Gifts with Reservation.

"Excluded Property Trusts" and FA 2006.

Summary.

13. Inheritance Tax: Administration.

Background.

Lifetime Transfers.

CLT.

PET.

Excepted Transfers.

Excepted Settlements.

Death Estate.

Excepted Estates.

Low Value Estates.

Exempt Estates.

Foreign Domiciliaries.

Transferable NRB.

"D" Forms.

Clearance Certificate.

Penalties.

Non-UK Resident Trusts.

Obtaining Information.

Summary.

PART THREE: TRUSTS.

14. Trusts: An Overview.

Background.

The Trust.

Equity.

Trusts Today.

Protection of Minors.

Bankruptcy Protection.

Will Substitute.

Tax Aspects.

Discretionary Trust.

Interest in Possession Trust.

Lifetime and Will Trusts.

Summary.

15. Inheritance Tax: Trusts.

Background.

Discretionary Trusts.

Exit Charge before the First 10-year Charge.

Ten-year Charge.

Interest in Possession Trusts.

Immediate post Death Interest (IPDI).

Transitional Serial Interest (TSI).

Accumulation and Maintenance Trusts (A & M).

Discretionary v. Interest in Possession Trust.

Pre FA 2006.

Post FA 2006.

"Excluded Property" Trusts and Domicile.

Summary.

16. UK Resident Trusts: Income and Capital Gains Taxation.

Background.

UK Resident v. Non-UK Resident Trusts.

Pre 6 April 2007.

Capital Gains Tax.

Income Tax.

Post 5 April 2007.

FA 2008 Impact.

Income Tax.

Capital Gains Tax.

Income Tax.

Discretionary (and Accumulation and Maintenance) Trusts.

Interest in Possession Trusts.

Beneficiaries.

Discretionary Beneficiaries.

UK Resident Beneficiary.

Non-UK Resident Beneficiary.

Interest In Possession Beneficiaries.

UK Resident Beneficiary.

Non-UK Resident Beneficiary.

Capital v. Income.

Capital Gains Tax.

Pre FA 2008.

Post FA 2008.

Anti-avoidance Provisions.

Income Tax.

Settlor Interested Trusts.

Discretionary Trust.

Interest in Possession Trust.

Income of Trust Paid to or for Benefit of Unmarried Minor.

Bare Trusts for Unmarried Minors.

Capital Payments to the Settlor.

Capital Gains Tax.

Settlor Interested Trusts post FA 2008.

Settlor Interested Trusts pre FA 2008.

UK Resident Trust for non-UK Domiciled but UK Resident Individuals.

Income Tax.

Capital Gains Tax.

Inheritance Tax.

UK Resident Trust for UK Domiciled and UK Resident Individuals.

Capital Gains Tax.

Inheritance Tax.

Summary.

17. Non-UK Resident Trusts: Income and Capital Gains Taxation.

Background.

FA 2008 Impact.

Income Tax.

Capital Gains Tax.

Income Tax.

Discretionary Trusts.

Interest in Possession Trusts.

Beneficiaries of the non-UK Resident Discretionary Trust.

Anti-avoidance Provisions.

Settlor Interested Rules: Income Tax.

Sections 720 and 731 ITA 2007.

Settlor Interested Rules: Capital Gains Tax.

Section 87 TCGA 1992 (Charge on Beneficiaries).

Transitional Provisions.

"Washing out".

Offshore Income Gains.

Interaction of the Various Apportionment Rules with Respect to "Capital Payments".

Non-UK Resident Trusts for Non-UK Domiciled but UK Resident Individuals.

Income Tax.

Capital Gains Tax.

Inheritance Tax.

Non-UK Resident Trusts for UK Domiciled and UK Resident Individuals.

Income Tax.

Capital Gains Tax.

Inheritance Tax.

Summary.

PART FOUR: INVESTMENTS AND PROPERTY.

18. Investments.

Background.

Deposit-based Investments.

Money Market Accounts.

Fixed Interest Securities.

Shares (including AIM Shares)/Options.

Ordinary Shares.

Zero Coupon Preference Shares.

Alternative Investment Market (AIM) Shares.

Individual Savings Accounts (ISAs).

Post FA 2008.

Self-select ISAs.

Pre April 2008.

Maxi ISA.

Mini ISA.

Packaged/Insurance Investments.

Term and Whole of Life Assurance Policies.

Term Assurance.

Whole of Life Assurance.

Husband and Wife.

Single Premium Bonds.

Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs).

Enterprise Investment Scheme.

Income Tax Relief.

Capital Gains Tax Relief.

Venture Capital Trust.

Income Tax Relief.

Capital Gains Tax Relief.

Chargeable Gains Deferment Possibilities (EIS only).

Collective Investments.

Offshore Funds.

Tax Treatment.

Distributor/Reporting Status Offshore Fund.

Non-distributor Status Offshore Fund.

Irish Offshore Funds.

Structured Products.

Limited Partnerships.

Private Equity Funds.

Property Funds.

Limited Liability Partnerships (LLPs).

Real Estate Investment Trusts (REITs).

Self-invested Personal Pensions (SIPPs).

Summary.

19. Main Residence or Home.

Background.

Capital Gains Tax.

Overview.

Two or More Residences of the Individual.

Non-UK Property.

Married Couple and Cohabitees.

Total v. Partial Capital Gains Tax Exemption.

Profit Motive.

Residence.

Deemed Periods of Residence.

More Than One Residence.

Electing Main Residence.

Planning and the Election.

Married Couples.

Inter-spouse Transfers.

Lettings Relief.

Trusts and Sole or Main Residence.

Death and Sole or Main Residence.

Inheritance Tax.

Lifetime Planning.

Joint Ownership Arrangements.

Cash Gift.

Sale.

Gift plus Rent Payable.

General Comments.

Death Planning.

Summary.

20. Non-UK Domiciliaries and UK Homes.

Background.

Ownership.

Individual.

Non-UK Resident Trust.

Non-UK Registered Company.

Financing the Acquisition.

Preliminary Conclusions.

Summary.

21. Stamp Duty and Stamp Duty Land Tax.

Background.

Stamp Duty/Stamp Duty Reserve Tax.

Stamp Duty Land Tax.

Matrimonial Home.

Purchase of House plus Chattels.

No Consideration.

Linked Transactions.

Matrimonial Breakdown.

Trusts.

Interest of Beneficiaries.

Appointments.

Non-UK Resident Trusts.

Bare Trusts.

Death.

Instruments of Variation.

Life Policies.

Summary.

PART FIVE: THE INTERNATIONAL DIMENSION.

22. Non-UK Resident Taxation.

Background.

General Rules.

Income Tax.

Capital Gains Tax.

Inheritance Tax.

Types of UK Source Income.

Trading Income.

Property Income.

Employment Income.

Savings Income: Interest and Dividends.

Interest.

Dividends.

Some Points to Note.

Summary.

23. Accessing Offshore Monies: The non-UK Domiciled Perspective.

Background.

Categories of non-UK Domiciled Individual.

Consequences of a Claim.

£30 000 Charge.

Nomination.

Where no Claim is Necessary.

Remittances to the UK.

Alienation of Income and Gains and Asset Purchase.

Conditions A/B.

Condition C.

Condition D.

Extensions of the Definition of "Remittance to the UK" for Each of Conditions A/B, C and D.

Conditions A/B.

Condition C.

Condition D.

Transitional Provisions (pre 6 April 2008 Income/Gains).

Income or Gains (Other than RFI) Arising pre 6 April 2008.

RFI Arising pre 6 April 2008.

Pre 12 March 2008 Condition.

Pre 6 April 2008 Condition.

General Traditional Rule.

"Relevant Debt" and "UK Services".

Exempt Property.

Clothing, etc. and the "Personal Use Rule".

Property below £1000.

Temporary Importation Rule.

Repair Rule.

Property and Public Access.

Meeting Exemptions.

Exempt to non-Exempt Property.

Offshore Income Gains.

Mixed Funds.

(i) Arising Basis and Remittance Basis Mixed Income.

(ii) Income and Capital Gains Taxable on Remittance.

(iii) Tax-free Capital and Remittance of Taxable Income.

(iv) Tax-free Capital and Taxable Chargeable Gains.

Segregation of Income and Capital Gains.

Gifts of Assets Precipitating Foreign Chargeable Gains.

Cessation of Source.

Offshore Mortgages.

Grandfathering Provisions.

Loans Secured on Property: IHT Impact.

Loans Secured on Property: Capital Gains Tax Impact.

Temporary non-UK Residents.

Income Tax.

Capital Gains Tax.

Summary.

24. The Offshore Dimension.

Background.

The Offshore Financial Centre.

Offshore Financial Centre Vehicles.

Companies.

Trusts.

Offshore Financial Centre Uses.

Tax Planning.

Probate Mitigation/Will Substitute.

Asset Protection.

Choosing an Offshore Financial Centre.

UK Tax and Information Disclosure Requirements.

Tax Exposure of Trust Settlor.

Relocation to an OFC.

Summary.

25. International Taxation.

Background.

Double Taxation.

Double Tax Agreements.

Income and Capital Gains Tax Agreements.

Inheritance Tax Agreements.

Pre 1975 Agreements.

Post 1975 Agreements.

European Union/Community.

EU Savings Directive.

Background.

Savings Income.

"Interest" only.

Information Exchange.

Withholding Tax.

Withholding Tax v. Information Supply.

Non-member States and TIEAs.

Switzerland and the USA.

Savings Directive and Directive 77/799/EEC.

Implications of the Savings Directive.

Human Rights.

Summary.

PART SIX: WILLS, PROBATE AND TAX ISSUES.

26. Wills.

Background.

Requirements for Valid Will.

Types of Will.

Marriage.

Separation/Divorce.

Revocation.

Intestacy.

Types of Gift.

Failure of Gift.

Survivorship Clause.

Witnessing the Will.

Capacity to Inherit.

UK "Forced Heirship".

Foreign Aspects.

Succession.

Capacity.

Formal Validity.

Material Validity.

Construction.

Revocation.

Miscellaneous Matters.

"Forced Heirship".

Probate.

Inheritance Tax.

Excepted Estates.

Assets not Requiring Probate.

Jointly Held Assets.

Life Policies.

Pension Death Benefits.

Chattels.

Bare Trusts.

Small Payments.

General Tax Issues.

Inheritance Tax.

Capital Gains Tax.

Income Tax.

Inheritance Tax Planning: Some Thoughts.

Married Couples.

Cohabitees.

Single Persons.

Charitable Giving.

Foreign Aspects.

Post Death Issues.

Deeds of Variation and Discretionary Will Trusts.

Deeds of Variation.

Capital Gains Tax.

Discretionary Will Trusts.

Capital Gains Tax.

Intestacy.

Some Points to Note.

Summary.

Appendices.

Bibliography.

Index.

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Malcolm Finney, B.Sc. M.Sc. (Bus Admin) M.Sc. (Org Psy) MCMI C Maths MIMA, runs his own tax consultancy and training firm, Pythagoras Training. Malcolm’s previous experience has included working for the international finance and international tax consultancy J.F. Chown & Company Ltd (now Chown Dewhurst LLP); as partner and head of international tax at the international accountancy firm Grant Thornton LLP; and as head of tax at the London-based law firm Nabarro Nathanson. Malcolm has written extensively on tax matters, has spoken at tax seminars both in the UK and abroad and has been a visiting lecturer at the University of Greenwich Business School.
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