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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).

Tax year end planning checklist for individuals – 2021/22 tax year

A handy checklist of suggested planning considerations for individuals for the end of the tax year.


As well as considering tax planning for the current tax year, it’s important to put in place strategies to minimise tax throughout the next tax year. The majority of planning strategies have greatest effect if implemented before a tax year begins.

This tax year end planning checklist covers the main planning opportunities available to UK resident individuals and will hopefully help to inspire action to reduce tax for the 2021/22 tax year and to plan ahead for 2022/23. 

However, while tax planning is an important part of financial planning, it is not the only part. It is essential that any tax planning strategy that is being considered also makes commercial sense.

Suggested planning points for consideration

Income tax 

  • Reduce taxable income below £150,000 to avoid 45% tax. Pension contributions are one of the few ways to reduce taxable income.
  • For married couples / civil partners, ensure each has sufficient income to use their personal allowance: £12,570 in 2021/22. This will remain at that level until 5 April 2026. 
  • The personal allowance is gradually withdrawn for individuals with adjusted net income above £100,000. If income is above £100,000, then individual pension contributions before 6 April 2022 can reduce income to £100,000 to restore all or part of a 2021/22 personal allowance which would otherwise be lost.
  • Reinvest in tax free investments, such as ISAs, to replace taxable income and gains with tax free income and gains, or investment bonds that can deliver valuable tax deferment.
  • Investments delivering tax free, or potentially tax free, and/or tax deferred, income, can be beneficial for an individual in contrast to an income producing investment which might otherwise result in an erosion of personal allowances. Note that once an investment bond gain is triggered, for example, by encashment, it is included in an individual’s income without top slicing when assessing entitlement to the personal allowance.
  • Redistribute investment capital between spouses / civil partners to potentially reduce the rate of tax suffered on income and gains. No capital gains tax or income tax liability will arise on transfers between married couples or civil partners living together or where the asset to be transferred is an investment bond.

    Any transfer must be done on a ‘no-strings-attached’ basis to ensure that the correct tax treatment applies. This means investments must be fully transferred with no entitlement retained by the transferor.

Capital gains tax

The term “capital gains tax planning”, in this context, means the taking of action ahead of, or at the time of, the disposal of an asset to eliminate or reduce a current or future liability to capital gains tax. This may involve one or more of the following:

  • timing of the transaction, e.g. bringing the transaction forward or delaying it;
  • ensuring that full advantage is taken of all available exemptions and reliefs;
  • depending on the personal objectives of the taxpayer, prior transactions such as a transfer to a spouse / civil partner or the use of a trust;
  • using the annual exempt amount; and
  • making full use of any available losses.

Capital gains tax planning:

  • Maximise use of this year’s annual exemption (currently £12,300). Any amount unused cannot be carried forward – “use it or lose it”.
  • To defer the payment of tax for a year, make a disposal after 5 April 2022.
  • To use two annual exemptions in quick succession, make one disposal before 6 April 2022, and another after 5 April 2022. 
  • Try to ensure each spouse / civil partner uses their annual exemption. Assets can be transferred tax efficiently between spouses / civil partners to facilitate this.

Any such transfer must be outright and unconditional. In transactions which involve the transfer of an asset showing a loss to a spouse / civil partner who owns other assets showing a gain, care should be taken not to fall foul of anti-avoidance rules that apply (money or assets must not return to the original owner of the asset showing the loss). 

It should also be borne in mind that a return in respect of the disposal of a residential property (e.g. a buy-to-let property) has to be delivered to HMRC within 30 days following the completion of the disposal, and a payment on account has to be made at the same time, if the completion date was between 6 April 2020 and 26 October 2021; 60 days for disposals completed on or after 27 October – please see HMRC’s guidance. 

In July 2020, the Chancellor asked the Office of Tax Simplification (OTS), to carry out a review of capital gains tax, to ‘identify opportunities relating to administrative and technical issues as well as areas where the present rules can distort behaviour or do not meet their policy intent’. Based on the first report published by the OTS on 11 November 2020, it was thought that the Government might look to introduce proposals, such as taxing capital gains at the same rates as income and reducing the annual exempt amount. However, no such announcements were made in the March 2021 Budget. Instead, the Government announced that the annual capital gains tax exemption would be frozen at £12,300 until 5 April 2026. And, on 30 November 2021, the Treasury issued the Government’s formal final response to the OTS reports, as part of the publication of its ‘Tax administration and maintenance’ package. It did not accept any of the tax changes suggested by the OTS in its first report, saying: “…these reforms would involve a number of wider policy trade-offs and so careful thought must be given to the impact that they would have on taxpayers, as well as any additional administrative burden on HMRC”. It added that “The Government will continue to keep the tax system under constant review to ensure it is simple and efficient”. The Treasury has, however, accepted five of the 14 OTS recommendations in the second OTS report, which deal with practical and administrative issues.

So, after nearly four years of uncertainty, the work of the OTS on capital gains tax can now mostly be forgotten, at least until after the next election.

Inheritance tax

  • Everybody has an annual exemption of £3,000 to use each tax year. Any unused annual exemption can be carried forward for one year only. So, use any available annual exemption carried forward from last year before 6 April 2022.
  • The annual £250 per donee exemption cannot be carried forward. A person can make as many outright gifts of up to £250 per individual per tax year as they wish free of inheritance tax, provided that the recipient does not also receive any part of the donor’s £3,000 annual exemption.
  • For those who have income that is surplus to their needs, it may also be appropriate to establish arrangements whereby regular gifts can be made out of income in order to utilise the normal expenditure out of income exemption. An ideal way of achieving this is to pay premiums into a whole of life policy in trust to provide for any inheritance tax liability.

The OTS recently produced two reports on the simplification of inheritance tax. While the first OTS report looked at administration, the OTS’s second report was focused on the structure of inheritance tax, including suggestions to revamp annual exemptions and review the interaction of the capital gains tax uplift and inheritance tax business relief on death.

No such changes were announced in the March 2021 Budget. Instead, the Treasury accepted the OTS proposal to relax reporting regulations for non-taxpaying estates. And the Government issued a further response as part of the ‘Tax administration and maintenance’ package published on 30 November, in which it said: “…the  Government has  decided not  to  proceed  with  any  changes  at the  moment,  but  will bear  your very valuable  work  in mind  if  the  Government  considers  reform of  IHT  in the  future”. So, the work of the OTS on inheritance tax can now also mostly be forgotten.

However, the Government did announce that the inheritance tax nil rate band and residence nil rate band would be frozen at £325,000 and £175,000 until 5 April 2026, and the residence nil rate band taper will continue to start at £2 million. Therefore, as wealth continues to rise, planning to mitigate inheritance tax should be started as early as possible.

And clients that can afford to make substantial gifts out of income may like to get that planning up and running sooner rather than later in case any rule change occurs in future – in the hope that if a rule change does occur, existing arrangements will be protected.

Savings and investments 

Savings income and dividends 

  • For married couples / civil partners ensure each has sufficient savings income to use their £500 or £1,000 personal savings allowances, and sufficient dividends to use their £2,000 dividend allowances.
  • Those able to control the amount of dividend income they receive, such as shareholding directors of private companies, could consider paying themselves up to £2,000 in dividends in tax year 2021/22.
  • The 0% starting rate band for savings income of £5,000 is available on top of the dividend allowance and personal savings allowance. It reduces £1 for £1 by all non-savings income over the personal allowance, so in 2021/22 people are not able to take advantage of this starting rate band where earnings and/or pension income exceeds £17,570. However, if a person does qualify, ensure they have the right type of investment income (e.g. interest) to pay 0% tax.
  • Where interest is due just after 5 April 2022, closing an account just before the tax year end can bring that interest forward to the 2021/22 tax year, which, for example, may help in making better use of any surplus personal savings allowance or nil rate starting (savings) band for the current tax year.

ISAs and JISAs 

  • Annual subscriptions (£20,000 and £9,000 respectively) should be maximised before 6 April 2022 as any unused subscription amount cannot be carried forward. The annual ISA and JISA subscription limits remain at £20,000 and £9,000 for 2022/23.


  • For subscriptions to be relieved in tax year 2021/22 they must be made before 6 April 2022:
    • EISs – Up to £1 million can be invested; £2 million where any amount above £1 million is invested in knowledge-intensive companies. Maximum income tax relief is 30%. Unlimited capital gains tax deferral relief – provided some of the EIS investment potentially qualifies for income tax relief. To carry back an EIS subscription for tax relief in 2020/21 it must be paid before 6 April 2022.
    • VCTs – Up to £200,000 can be invested. Maximum income tax relief is 30%. No ability to defer capital gains tax, but dividends and capital gains generated on amounts invested within the annual subscription limit are tax free.

It is essential that would-be investors are aware of the likely greater investment risk and lower liquidity that will have to be accepted in return for the attractive tax reliefs offered by EISs and VCTs.

 Investment bonds 

  • Investment bonds can deliver valuable tax deferment. To minimise taxation on encashment, consider deferring the encashment until later tax years, if other taxable income is likely to be lower, or nil, or the investor is a basic rate taxpayer. In the meantime, if cash is required, the investor can use the 5% tax-deferred annual withdrawal facility.

    (Alternatively consider assigning, transferring, the bond, outright, to an adult basic rate or non-taxpaying relative before encashment.)
  • Or, it may be worth triggering a chargeable event gain before the end of this tax year, by full encashment/surrender, so that the liability to tax falls in 2021/22, if the taxpayer anticipates that their top tax rate in 2022/23 will be greater than this year’s.

    (Note that the timing of the chargeable event depends on the way in which the chargeable event gain is triggered. Chargeable event gains in respect of partial withdrawals are triggered at the end of the policy year, whereas chargeable event gains on full policy encashments/surrenders are triggered on the actual date of the event.)


  • The carry forward rules allow unused annual allowances to be carried forward for a maximum of three tax years. This means that 5 April 2022 is the last opportunity to use any unused allowance of up to £40,000 from 2018/19.
  • In 2020/21, the Chancellor added £90,000 to the two income thresholds that govern the tapering of the annual allowance. So, in 2021/22, the threshold income level and the adjusted income level for the tapered annual allowance are £200,000 and £240,000 respectively. These levels should mean that fewer pension members will be impacted by the tapered annual allowance from 2020/21 onwards, than in earlier years. This means more pension savings and the possibility of avoiding a tax charge.

    For high earners, however, it’s still important to check if they are likely to be subject to the tapered annual allowance and whether there is anything, they can do about it. If the client has sufficient carry forward and their threshold income is only just above £200,000 for 2021/22, making additional individual pension contributions could reinstate their whole 2021/22 annual allowance.

    Note that the minimum the taper can take the annual allowance down to is £4,000 from 2020/21 onwards, a reduction from the previous £10,000. This will not have an impact on earlier tax years, and it will not affect the amounts of unused annual allowance available for carry forward from tax years prior to 2020/21.

  • The personal allowance reduces by £1 for every £2 for those with adjusted net income in excess of £100,000. This means that, for 2021/22, there will be no personal allowance available once adjusted net income exceeds £125,140. Making extra pension contributions not only increases pension provision, but for those who may be subject to a reduced personal allowance a personal pension contribution could claw back some of this allowance giving an effective tax saving of around 60%, more with salary sacrifice.
  • In addition to helping high earners gain back their personal allowance, pension contributions can also help families get back their child benefit, which is progressively cut back if one parent or partner in the household has income of more than £50,000. Benefit is totally lost when income reaches £60,000.
  • The changes to the death benefit rules on pensions from 6 April 2015 should have prompted a review of the pension scheme and/or the expressions of wish regarding the recipients of pension death benefits. If this has not been done, now is the time. In theory a person’s pension plan could provide income for future generations, as beneficiaries will be able to pass the remaining fund to their children and so on down the line.
  • Individuals should consider making a net pension contribution of up to £2,880 (£3,600 gross) each year for members of their family, including children and grandchildren, who do not have relevant UK earnings. The £720 basic rate tax relief added by the Government each year is a significant benefit and the earlier that pension contributions are started the more they benefit from compounded tax-free returns.
  • In the March 2021 Budget, the Government announced that the lifetime allowance will be frozen at £1,073,100 until 5 April 2026. Individuals who have funds close to or exceeding the lifetime allowance may need to review any previous decisions in respect of continuing to fund their pensions and or deferring crystallising their benefits based on the expectation of inflationary increases.

Hannah Coffey, Financial Planning Week tip: Vulnerability considerations

As Financial Planning Week is once again upon us and we are reminded of the importance of the financial sector to help clients clarify their goals and to create a plan to achieve these goals, we should also, this year, be considering the vulnerabilities of clients – not only as a result of the Financial Conduct Authority (FCA) guidance produced earlier this year, but also, of course, as a result of the pandemic and this ‘New Normal’ we find ourselves in.

It has always been important to ensure that we understand clients as part of a holistic approach. But what they want, what’s important to them, their goals and their aspirations, may well now be quite different to how they were 12-24 months ago. In addition to this, we are made increasingly aware of the vulnerabilities, or potential vulnerabilities, clients may be facing – and how these vulnerabilities, if not identified and responded to appropriately, could lead to detrimental consequences for clients.

The statistics from the FCA’s Financial Lives survey show that more adults in the UK display at least one characteristic of vulnerability than those who don’t – at 53%. With many of these adults having multiple characteristics of vulnerability, it’s unsurprising that protecting the vulnerable is a key focus for the regulator and the industry.

If a client, new or old, appears anxious or stressed – why might this be? Have they no confidence or previous experience with financial services? Has their circumstance changed to substantially impact financial security? Are they perhaps facing something entirely different – a health concern, or deterioration in themselves or a loved one?

Familiarising ourselves with the four key drivers as identified by the FCA:

  1. Health,
  2. Life events,
  3. Resilience,
  4. Capability,

is the first step to ensuring we treat clients fairly and that we arm ourselves with the correct alternative solutions for each individual client.

Tax Year Start Planning

The opportunities for tax year start planning.

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The Non- Financial Benefits of Advice

A summary of some of the key findings from the ILC research on the value of advice

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Tax planning for business owners under a Labour government

Potential tax planning implications of the Labour manifesto proposals on, corporation tax income tax and capital gains tax.

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Tax planning for investors under a Labour government

Potential tax planning implications for investors of the Labour manifesto proposals on income tax and capital gains tax.

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Family Investment Companies

FICOs as a possible trust alternative in estate planning with larger estates.

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One of the most important jobs of a financial adviser is to help their clients appreciate the existence of and then put in place reasonable measures to deal with risk. Financial risk.

An essential part of that process in relation to making investments is, no surprises here, the risk assessment, to clarify the investors “attitude to risk”.

It is generally accepted that investors should be encouraged to consider risk in two ways.

  • Your ability or capacity to take risk. This is all about your financial circumstances and goals. If you have more wealth and can invest over longer periods, you may be more able to accept a higher degree of risk.
  • Your attitude or willingness to take risk. This is more of a mental approach. Some people may not be able to sleep at night at the thought that their investment can fall in value rather than rise.

Both of these aspects ought to be discussed through the risk assessment .

Almost inevitably, many of these risk assessments result in the investor being categorised as being a  “medium risk” investor .

A typical description of this type of investor might be as follows:

  • “The opportunity to achieve attractive returns (for growth or income needs) is very important to you but you also want to invest in a way that does not expose all of your capital to more riskier investments. You have some experience in taking investment risks and accept this is necessary to achieve potential returns much higher than those available from cash deposits. You understand that this could involve your capital being invested for five years or more with medium to medium high exposure to stocks and shares and other more riskier investments.
  • You understand that the value of any investments you make will fluctuate and you might get back less (or more) than you invested (at maturity or earlier).”

Typically, investors would be regularly re-assessed to determine if their attitude to risk had changed.

It occurs to me  that this process of risk assessment should be more frequently extended to the owners of SMEs who (implicitly or explicitly are relying on their business as their pension) and potential “Nevertirees” (those who are , through choice, likely to continue working in whatever capacity) to encourage them assess or  re-assess the risk that might be inherent in their plans.

The underlying assumption for these people (that they, through continued working or their business will continue to supply sufficient income to deliver an acceptable/desirable lifestyle) must be accepted as carrying some level of risk. But first they need to appreciate that through their actions they are , in effect, making important investment decisions . It’s just that they won’t feel like they are.

In many cases , such individuals  through a traditional risk assessment in connection with say an investment of available money, may be categorised as  “medium risk”. However, in relation to what they are doing through reliance on their business (in effect a single unquoted, illiquid private equity) or reliance on themselves being able to continue to deliver a required level of income, they would be more appropriately categorised as “High Risk” .

If the adviser, in a non confrontational and professional way can get the client to appreciate this then the anxiety necessary for action to result may be generated.

It is likely though, that the client who is relying on their business doesn’t feel like they are taking a high risk by doing so. That’s probably because when they go into work it doesn’t feel like they are making an investment – they are just doing what they do. Making them appreciate the risk and then re-appraising and if necessary adjusting their financial plans in the light of this will be a fundamentally important achievement for the adviser.

While getting risk onto the agenda for many would be “nevertirees” will be essential, it will in many cases be entirely reasonable to assume that some continued income flow will result from their endeavours. And this can be factored into planning to determine what the likely gap will be between what they want to achieve as a future income and what they will based on their current planning – taking account of the risk that the “best case” (eg the continuation of current income at it’s current level will continue forever) may not be what happens in reality. By embracing, with appropriate caution built in, the likelihood that some income from endeavour or business will continue, the future income goal will appear more reasonable. And planning can proceed from this base. In effect  the individual and their adviser will have realised and accepted they they and/or their business is an asset class and through application of their “true” assessed attitude to risk, it will make some sense to add some diversification to the financial plan. This should also include appropriate life and income protection insurance. After all is not reasonable to include the impact of death or serious illness in our risk assessment?

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  • reduce risk
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