Author Archives: Lucy McIntosh

HMRC consults on low income trusts and estates

HMRC is consulting on legislative proposals to remove trusts and death estates with small amounts of income from income tax

Back in 2016, following tax on bank and building society interest no longer being deducted at source, HMRC introduced an arrangement to ensure that new burdens did not arise on those managing trusts and estates whose only income consists of small amounts of savings interest. This reflected the fact that following the introduction of the Personal Savings Allowance from the same date, around 95% of savers were expected to be no longer liable for tax on this interest.

However, trustees of trusts and personal representatives (PRs) of death estates do not have tax allowances in the same way as individuals do. As a result, with the payment of interest gross, even the trustees and PRs of the smallest trusts and estates would have become liable to file a self-assessment return when they hadn’t previously had to do so. HMRC’s arrangement therefore removed trustees and PRs from income tax where the only source of income for the trust or estate is savings interest and the tax liability is below £100. This arrangement was intended to be a temporary arrangement pending a longer-term solution.

The new consultation, which runs until 18 July 2022, seeks views on proposals to formalise and extend that concession.

Under the latest proposals, low-income trusts and estates with income from any source up to a ‘de minimis’ amount (to be decided following this consultation) will not be subject to income tax on that income.

For trusts and estates with income more than the de minimis amount, income tax will be due on the full amount of income rather than only applying to the income above the de minimis amount. This is in the interests of simplification for both taxpayers and HMRC, as the rules required to take the alternative approach would be complicated and require additional administration for all involved.

Tax pools apply to discretionary trusts and keep track of income tax the trustees pay. When trustees make a discretionary payment of income it is treated by the beneficiary as if income tax has already been paid at the trust rate (currently 45%); and the trustees must have paid enough income tax (in the current or previous years) to cover this ‘tax credit’. Under these proposals, even where discretionary trusts would be covered by the de minimis rule, they will still have to pay tax when they pay income out to a beneficiary, to ensure that the tax credit remains funded.

HMRC’s impact assessment points out that this measure is expected to have an impact on an estimated 28,000 individuals overall. It is expected to simplify the administration of tax in the majority of cases by avoiding the need for people to claim refunds; but some people are expected to have to return and pay the tax due, where previously that would have been done by the trustees.

We will update you on any developments.


Note that non-taxable trusts are required to register on the TRS. All trusts which are not “excluded trusts” have to be registered by 1 September 2022 or within 90 days from the trust’s creation, whichever is later. Any new registrable trusts set up from 1 September 2022 will have to be registered within 90 days. So, even if a trust does not need to register as a taxable trust, it may still need to be registered as a non-taxable trust (unless it is an excluded trust).

Sarah Walker, Financial Planning Week Tip: Putting protection at the forefront of financial planning

The foundation of all financial advice is built on protection. There is little sense in building a great wealth portfolio on shaky ground. The fuel that powers our ability to build up our investments is often reliant on our ability to generate an income. If the fuel runs out, the vehicle stops moving. Therefore, it is logical to ensure (or should that be insure?) that our client’s income continues to flow, even in the event of them being unable to continue working due to ill health, or as the result of an accident.

How well we cement our client’s ‘foundations’ is dependent on what protection is available to them. Appropriate advice obviously relies upon needs and risks being identified and discussed. However, it is also vital that an in-depth conversation about a client’s health is conducted at an early stage. There is no point in discussing a solution with a client, if the product in question would ultimately be unavailable to them, due to their medical history, or even that of their family.

Conducting detailed research before making a recommendation to a client is extremely important. It ensures that expectations are managed, and this can come in many forms:

  • The premium – will a loading be applied, and, if so, what will the final premium look like?
  • Exclusions – will any be applied to the final underwritten offer issued by the insurer? If so, they need to be discussed with the client before an application is made, to avoid any unwelcome surprises once the underwriting has been completed.
  • Declined applications – can lead to awkward conversations with a client. Adverse and unwelcome decisions can often be avoided if the fact finding and research process is thorough at the outset. In other words, by not applying for cover that was always going to be declined.

Protection isn’t complicated, but sometimes it can be. There are a lot of moving parts to stay on top of. Insurance providers regularly update their policies, particularly critical illness and income protection cover.

They also regularly update their underwriting policies – just because a particular insurer previously accepted someone with an above average BMI on standard terms, it doesn’t mean they are going to offer the same terms again.

Unless you advise and arrange protection on a very regular basis, it is easy for knowledge to slip. In our experience, many clients in the ‘wealth management space’ tend to be in their 50’s and 60’s where it’s unusual to find a client with a clean bill of health. We also find that due to their age and the sum assured required, medicals and GP reports are frequently requested. Helping a client navigate safely and efficiently through this process can also take a considerable amount of time and effort.

Broadly, we find that clients are all too ready to insure their lives and maybe even protect themselves against critical illness, but income protection often lags behind as it isn’t deemed to be a priority.

In a year when Swiss Re reported a 10% reduction in income protection policies sold, we all know that the risk of becoming too ill to work is greater than the risk of suffering a critical illness or even dying.

Yet so much is reliant upon income, such as our:

  • Lifestyle
  • Mortgage
  • Bills
  • Mental wellbeing.
  • Pension contributions.
  • Education
  • Bank of Mum and Dad.
  • Payment for health/household insurances.

Often the person who stays at home to raise the family can be completely overlooked. If that person had an accident or was too ill to be able to run the house, raise the children, cook the meals, taxi drive the children, then who would do it? And how would that be financed?

Why liquidate hard-earned savings and assets, or be forced to downsize, when they can all be protected by arranging a suitable policy whilst paying an affordable monthly premium?

What matters is your duty of care to your client and that protection is considered at the forefront of financial planning.  

Marcia Banner, Financial Planning Week tip: IHT planning ahead of the Budget

The latest inheritance tax (IHT) Statistics, published by HMRC in July, show that despite the relatively recent introduction of the residence nil rate band, IHT receipts received by HMRC during the tax year 2020/21 were £5.4 billion – an increase of 4% (£190 million) on the tax year 2019/20. With the nil rate band and residence nil rate band frozen at current levels until at least 5 April 2026, and house prices and asset values continuing to rise, it is likely that this represents the beginning of an upward trend in the annual IHT take.

While no significant IHT reforms are expected in the impending Budget, it is always worth making use of currently available IHT strategies prior to Budget Day where possible, so as to pre-empt any measures that are introduced unexpectedly and with immediate effect. With this in mind, in this article we will consider a simple six-step strategy that clients with estates in excess of the nil rate band should follow in order to mitigate the effects of IHT on their estates and maximise the amount that passes to their heirs upon their death:

  1. Tax-efficient Wills – The first step in any estate planning strategy should be to ensure that clients have tax-efficient Wills in place and that these are reviewed regularly to take account of legislative as well as circumstantial changes. For example, a Will drafted prior to 2016 is unlikely to include provisions that take account of the effect on the residence nil rate band of leaving the home otherwise than to children or grandchildren outright. Recommending that clients review and update their Wills not only helps you develop relationships with fellow professionals; it also can save the clients significant amounts of IHT thereby enhancing your own professional credibility. Many clients with joint estates that are above or approaching £2m do not, for example, recognise the potential benefit of leaving an amount up to the nil rate band to a trust on first death – yet this will reduce the amount passing to the surviving spouse or civil partner and help to keep the joint estate on second death down to below the £2m figure above which valuable residence nil rate band starts to be lost. Married clients and clients in a civil partnership with business assets that are likely to be sold after death, as well as those who have previously been widowed, can also make significant IHT-savings by leaving business assets and/or nil rate sums to a trust on first death – and, of course, Will trusts present opportunities for trustee investment business and further IHT planning following the client’s death.
  2. Deeds of variation – where a client receives an inheritance that creates or aggravates an existing IHT problem, deeds of variation offer a solution that is superior to any other form of planning. Usually where a substantial gift is made, the gift will constitute a potentially exempt transfer (PET), if made outright, or a chargeable lifetime transfer, if made to a trust, that must be survived by seven years for an IHT benefit to be obtained. In addition, it is not possible (unless a sophisticated packaged scheme is used – please see 5. below) for the donor or settlor to retain any benefit in the gifted sum or asset without this being a ‘gift with reservation’. If, however, property or funds that derive from an inheritance are gifted within two years of the death, the gift is treated for IHT purposes as if it had been made by the deceased. This means that not only is the donor’s estate reduced immediately by the full amount of the gift (i.e. no requirement for the donor to survive seven years); if the gift is made to a trust, the donor/settlor can be included as a possible beneficiary – and so retain full access to the inheritance – without any gift with reservation issues. The planning opportunity will be lost once the two-year period has expired though – so it is vital to act quickly to identify appropriate clients and implement the planning without delay. This will be especially important with Budget Day looming given the ever-present speculation that deeds of variation may be ‘abolished’ at some point.
  3. Maximise use of IHT exemptions – there are a number of exemptions from IHT that enable gifts, that leave the estate immediately, to be made without them impacting on other planning. The most well-known of these are the annual exemption of £3,000; and the normal expenditure out of income exemption which allows an individual to regularly give away surplus earned or investment income without restriction provided that certain conditions are satisfied. This second exemption is particularly valuable as there is no cap on how much can be given and the amounts gifted can vary from year to year as long as some sort of pattern can be demonstrated. This could, for example, be something as simple as the client resolving to give away “a third of my rental income each year” or “the annual dividend income paid on my shares in XYZCo Ltd”. Alternatively, the pattern could be linked to regularly occurring events such as grandchildren’s birthdays or payment of school fees or life insurance premiums. It is, however, important that the donor does not have to resort to capital (such as withdrawals from an investment bond) to maintain their standard of living having given away income, otherwise the exemption will be denied and the gifts will be treated as PETs or chargeable transfers as appropriate. An impending Budget is an ideal time to review clients’ financial affairs to ensure that all available exemptions have been used to avoid losing out if modifications to exemptions are made from Budget Day.
  4. Make outright gifts or gifts to trusts – gifts that do not fall within one of the exemptions from IHT will be either potentially exempt or chargeable depending on whether they are made directly to another individual or via a trust. Either way, for a gift to be treated as made ‘outright’ it will be necessary for the client to be able to comfortably afford to make the gift in the knowledge that he or she will not be able to access the gifted funds if circumstances change. Where a gift is made directly to another individual (or via an absolute trust) it will be a PET. PETs leave the estate after seven years and will never give rise to an immediate liability to IHT when made, whatever the value. They can, however, impact on the nil rate band available to the estate as well as the nil rate band available to any later created trust if not survived by seven years.

Clients who are happy to give up access to some of their wealth but are not comfortable about giving their intended beneficiaries unfettered access to large funds, may prefer to make gifts via a discretionary trust. Again, the gifted amount will be fully outside the estate after seven years. However, unlike with a PET, there could be an immediate liability to IHT at the lifetime (20%) rate if the amount gifted exceeds the settlor’s available nil rate band. In addition, discretionary trusts will be subject to the ‘relevant property regime’ of IHT ten-yearly (periodic) and exit charges. Although such charges are unlikely to apply to smaller trust funds, it is vital to seek tax guidance before setting up discretionary trusts to ensure that full account is taken of other planning (such as earlier chargeable transfers or even PETs) that could impact on the likelihood and size of charges going forward. With proper advice, measures can be taken that will help to mitigate or even avoid these charges while ensuring that the client’s overriding objectives for control are met. Of course, mitigation techniques (such as multiple trust planning) are always at risk of HMRC attack and this is therefore another area where it may be prudent to try to establish arrangements prior to Budget Day.

  1. Consider packaged schemes for IHT and income tax-efficient access – where clients are unable or reluctant to make outright gifts to trust or otherwise due to a (potential) need for access to their investments, there are a number of life-insurance based schemes that are based on established IHT principles which are acceptable to HMRC . The most popular examples of these are the Loan Trust and the Discounted Gift Trust.

Generally speaking, the Loan Trust is most suitable for clients who are looking for flexible ad-hoc access to their original capital in return for moderate IHT rewards: the investment amount will initially be frozen at its original value for IHT purposes but will reduce to the extent that loan repayments are taken and spent during lifetime; while the Discounted Gift Trust provides the settlor with regular cash payments at a fixed, pre-determined level with no ad-hoc access to the rest of the investment in return for an immediate reduction in the estate for IHT, with the entire investment IHT-free after seven years.

Again, while there is no suggestion that either of these schemes will be targeted by Budget Day measures, it won’t hurt clients who are considering implementing packaged IHT-schemes to do so before Budget Day as a precautionary measure.

  1. Consider whole of life insurance to fund any residual liability – once you have worked your way through the above five steps in the strategy and either implemented or discounted taking action at each stage, clients facing an IHT liability upon their death may wish to consider funding for any residual liability with life insurance. Depending on the client’s age and state of health, a life insurance plan written in trust can provide a cost-effective solution to an IHT-problem where there is no opportunity to reduce the estate – perhaps because it is largely tied up in property or other assets standing at a significant capital gain. Premium payments will be treated as gifts to the trust but if these can be funded out of surplus income, these will usually fall within the normal expenditure out of income exemption for IHT meaning that they will leave the estate immediately and not impact on any other planning.


In summary, this simple six-step strategy will serve as a useful IHT mitigation tool regardless of whether or not a Budget is impending. However, like all forms of tax planning, IHT mitigation techniques that work in the present are vulnerable to legislative change and a looming Budget is therefore a good opportunity to spur clients into action and implement any planning that is being considered before it’s too late.

Chris Jones, Financial Planning Week tip: Making the most of pensions tax relief ahead of another Budget

As we approach another Budget there will no doubt be the usual speculation that pensions tax relief may come under attack. And with the latest HMRC statistics showing the estimated gross tax cost of pensions tax relief at £41.3bn in 2019/20, this may be too tempting for the Treasury to ignore.

Whilst wholesale changes to pension tax relief are unlikely in the short term, there may be some tinkering with allowances and reliefs. Any further changes are unlikely to make to make pension contributions more favourable. Therefore, where clients have the available funds and allowances, it may be better to make contributions sooner rather than later.

It’s worth a reminder of the limits and mechanics of the tax relief available on pension contributions to ensure clients can maximise the benefits of making any contributions.

Annual allowance

The annual allowance limits the tax benefits on the total contributions paid in a tax year. This will include contributions made by the individual, their employer, or a third party on behalf of the individual. The standard annual allowance is £40,000. High earners may have a lower tapered annual allowance, which can be as low as £4,000 and will depend on their level of earnings. Those who have accessed their pension benefits flexibly may be subject to the £4,000 money purchase annual allowance.

Where an individual exceeds their annual allowance in any tax year they are be able to carry forward any unused allowances from any of the three previous tax years.  

If, after allowing for any carry forward, the contributions exceed the individual’s annual allowance in any tax year, the individual will be subject to an annual allowance charge. The annual allowance charge aims to reclaim the tax relief received on the contribution. The excess over the annual allowance is added to the individual’s other taxable income and charged at their marginal rates of income tax. 

For example, if a higher rate taxpayer exceeds the annual allowance by £10,000 the annual allowance charge would be £4,000 assuming they remained within the higher rate band after adding the £10,000 to their other income.

Tax relief on personal contributions

Tax relievable personal contributions are limited to 100% of the individual’s relevant earnings in the tax year they are paid, which is broadly earnings from their employment or self-employment. Other types of income such as dividends or buy-to-let rental income do not count as relevant earnings. 

It is not possible to carry forward unused earnings from a previous year. If, for example, an individual has unused allowances of £90,000 and earnings of £30,000 the maximum tax relievable personal contribution is limited to £30,000.

Where an individual’s earnings are less than £3,600 they can pay and receive tax relief on contributions of up to £3,600 in any tax year. It is not possible to carry forward this allowance.

Tax relief is available on personal contributions at the individual’s highest marginal rates of tax. How the relief is applied depends on what type of scheme the contributions are paid into, either a “relief at source” scheme or “net pay scheme”. Aside from non-taxpayers (please see below), the tax relief available is the same whichever method is used.

Relief at source

Personal pensions and group personal pensions will operate as relief at source schemes. With these, the contributions are paid net of basic rate tax and the provider adds the tax relief. The provider then reclaims this directly from HMRC. Basic rate relief is added regardless of the tax rate the individual pays, even if they are non-taxpayer. Any higher rate or additional rate tax is reclaimed direct from HMRC by the individual. The relief is claimed by increasing the individual’s basic rate tax band by the gross value of the individual’s contribution.


Paul earns £70,000 a year and wants to make a gross contribution of £10,000 to a relief at source scheme. He pays a contribution of £8,000 to the pension provider who add the 20% tax relief.

Paul’s basic rate tax band is then extended by £10,000. This means that £10,000 more of his income is taxable at 20% rather than 40% and so he benefits from a further £2,000 of tax relief.

Net pay schemes

Most occupational schemes operate on a “net pay” basis. With this type of scheme, the individual’s pension contributions are deducted from their pay before it is subject to tax. This means the full amount of tax relief is applied immediately by reducing the taxable pay. Note though that National Insurance contributions are still applied to the full pay before the deduction of the pension contribution.


Fiona earns £80,000 a year. She pays personal contributions of £5,000 to her occupational pension scheme. The £5,000 is paid gross to the pension provider and her taxable income reduces to £75,000. The net cost to her of the £5,000 pension contribution is £3,000 so she has received 40% tax relief.

Note that because contributions simply reduce the level of taxable earnings, any non-taxpayer in a net pay scheme will not receive tax relief. This is an anomaly in the tax system and one the Government has been consulting on to resolve.

Salary sacrifice

With salary sacrifice, the employee reduces their salary in exchange for a pension contribution. Therefore, technically, the pension contribution is an employer contribution. For tax purposes it works in a similar way to a net pay scheme. However, the advantage of salary sacrifice is that it reduces the salary for all purposes, meaning that both the employer and employee also save the National Insurance on the amount sacrificed.

Tax relief on employer contributions

Employer contributions are always paid gross. As long as they are within the individual’s annual allowance there is no tax consequences on the employee. The employer can claim relief against corporation tax on the contributions as long as they meet what are known as the “wholly and exclusively” rules. Essentially this means that in order to benefit from tax relief, any contributions must be a genuine expense in the running of the business. In a normal employer/employee relationship this is unlikely to be an issue as there would usually be a genuine commercial reason for paying employer pension contributions as part of the employee’s reward structure.  

For small owner managed limited companies it can also be an extremely tax efficient way of extracting funds from the company. Again, meeting the “wholly and exclusively” condition in this type of situation is rarely a problem where the owner/director is taking on the business risks (e.g. as a shareholding director) of the company. However, issues can arise where contributions do not represent the fair market reward for a role – if, for example, a large contribution is made for the spouse of a director who has minimal duties (and that spouse is not is taking on the business risks of the company) and a pension contribution of that size would not normally be made for other employees who have similarly minimal duties.

Unlike personal contributions, employer contributions are not limited to the level of the individual’s earnings. So, for example, a director earning £10,000 could also receive an employer pension contribution of £40,000. The company will receive corporation tax relief on the contribution as long as it meets the “wholly and exclusively” rules.

Lifetime allowance

In addition to the limits on pension contributions, the lifetime allowance (LTA) sets a limit on the overall benefits that an individual can receive from all of their pension plans without suffering an additional tax charge. The LTA is currently £1,073,100 and is frozen at this level until 2025/26. Where an individual takes benefits in excess of this, or dies or reaches age 75 without taking their benefits, an LTA charge applies on the excess. The LTA charge is 55% if benefits are taken as a lump sum or 25% if the funds are used to provide an income. Any income is also subject to income tax at the point it is taken.

Where uncrystallised funds or funds in drawdown are subject to an LTA test at age 75 the tax charge on any excess is always at 25%.

With the LTA currently frozen, more and more clients are likely to be impacted by the limit and charges. This limit also needs to be considered for clients considering making further contributions.

Earlier in the year there were rumours that this limit may be reduced further, and this is one to watch out for in the Budget. The only positive news is that whenever the LTA has been reduced in the past, protection has been available to allow clients to protect the LTA at the current levels.