Managing Your Investments

The Investment Policy Statement  – Have you got one in place?

The Investment Policy Statement (IPS) is a document highlighting how the Trusts assets should be managed to assist in future decision-making by the trustees.

The presence of an IPS helps to clearly communicate to all relevant parties the procedures, investment philosophy, guidelines and constraints to be adhered to by the parties.

It can be seen as a directive from the Trustees to their investment manager about how the money is to be managed, but at the same time the IPS should provide the guidelines for all investment decisions and responsibilities of each party.

When carrying out these powers, the trustees have a duty to act with due care and in a professional manner at all times. They must ensure that any investment is suitable for the trust and consider investment diversification. Otherwise the trustees may be in breach of trust and may be jointly and severally liable.

Trusts can be arranged during an individual's lifetime or under the terms of a Will.

The number of different types of trusts give rise to different taxation consequences that can be complex.

Packaged products or stockbroker services?

In the past, many trustees have delegated responsibility for the investment of trust portfolios to stockbrokers. However, this practice will now need to be reviewed in the light of the changes to the system of dividend tax credits, which affect Discretionary and Accumulation & Maintenance Trusts and result in a serious reduction in net income for beneficiaries who are reliant on dividend income.

Using tax effective products or ‘wrappers’ can enable more favourable tax treatment of assets held within a Trust.  The Monahans Wealth Management Service (MWMS) is an example of the most modern electronic investment service offering traditional investment services as well as new features designed to ensure regular review and rebalancing of portfilios:

• It reduces risk by permitting Trustees to achieve wider diversification than could be achieved through a portfolio of individual securities, combined with top professional management at a cost which reflects the benefits of the pooling of investments.
• It offers tax advantages over direct investment in securities hence the name "tax-wrappers".
• The tax advantages can greatly simplify the administration of investment portfolios and thereby create significant cost savings for the Trust.
• It can be packaged to achieve special investment objectives, such as a consistent high monthly income.
• It can incorporate facilities such as capital drawdown, which may be valuable to boost income when yields are low.
• It can incorporate guarantees to protect the interests of beneficiaries and thereby also protect the trustees.
• Unlike stockbroker services, they are mainly exempt from VAT. 

The two principle types of packaged product which might be considered by trustees in addressing various tax issues are:

• Collective investments (Unit and Investment Trusts and OEICs)
• Investment Bonds. 
   

Investment Bonds for Discretionary and Accumulation & Maintenance Trusts

The main problem arising from the abolition of Advanced Corporation Tax (ACT) and the changes in the tax credit system which affects trustees of non-Interest-in-Possession Trusts is the reduction in the value of dividend income which is distributed to beneficiaries. This problem can be resolved by investing through Investment Bonds. However, in order to be able to use Investment Bonds, trustees need to have been granted the power to advance capital.

Investment Bonds also provide a means of avoiding the administrative burden of Capital Gains Tax (CGT). However, the simplification of CGT, whereby a basic rate of only 18% applies, places Investment Bonds at a slight disadvantage to direct investment, because Bonds remain subject to Corporation Tax on gains at the rate of 22% (although in reality the payment rate is often considerably less). As regards the taxation of investment income, Investment Bonds still retain a distinct advantage over directly-held investments helped in part by their ability to produce a ‘5% income withdrawal’ which is not liable to any immediate tax charge.

Investment bonds, being technically life insurance policies, are non-income producing assets. Once a dividend payment has been received by a UK life fund, there is no tax liability at that time. The tax credit is deemed to satisfy the Corporation Tax liability of the life assurance company.

Trustees and other investors in Investment Bonds are, as indicated above entitled to withdraw up to 5% of the original investment value each year for 20 years without any immediate further liability to tax, because the withdrawal would not constitute a chargeable event. The 5% facility could be extended by, for example, withdrawing 2½% per annum for 40 years. The capital sums withdrawn can then be advanced by the trustees to the relevant beneficiaries with no personal tax charge, provided that the withdrawals do not exceed 5% per annum.

Investment bonds also provide a major advantage in their ability to be ‘assigned’ to a beneficiary from the Trust without creating a ‘Chargeable event’ thus avoiding an immediate tax charge on the asset transferred.  

This unique ability to assign allows a successful investment to be continued in the hands of the beneficiary and subsequently further assigned by them to another, for eventual encashment. The taxation position of the owner upon encashment is considered for the taxation liability to be calculated and thus assignment to a non or lower rate tax payer could eliminate any further tax charge upon the former Trust asset.

For more advice and assistance on this topic please call us on (01225) 785520 or send us an email.

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