Family wealth management - summer 2012 - Smith & Williamson

family wealth
management
Personal financial planning, tax and investment
Summer 2012
Finding the
perfect
balance
Budget 2012
Closing loopholes and stimulating growth
Liquidity in today’s markets
A balancing act
Relevant life plans
Tax relief on life insurance
Equity pays dividends
Building a UK equities portfolio
Philanthropy in the art market
Tax breaks for art donors
EIS and VCTs
A look at the proposed changes
Investment outlook
Eurozone worries continue
New incentives for
charitable giving
Changes to inheritance tax
Capital loss relief claims
Mansworth v Jelley saga revisited
International retirement
benefit schemes
Are Section 615 schemes the answer?
Holiday homes
Qualifying for business property relief
Where next for savers?
Offshore regular investment accounts
Smith & Williamson produces a range of
newsletters. For a full list, or to register, visit
www.smith.williamson.co.uk/
publications-registration

Foreword
Finding the
perfect balance
Globally, the economic picture is improving.
The US is making great strides towards
recovery, creating jobs and showing a
moderate and sustained gross domestic
product (GDP) growth trajectory.
Yet Europe continues to suffer amid growing
concerns that the respite from the eurozone
debt crisis is coming to an end. With poor
growth prospects, Spain is a particular
worry with fears that the country will need
bailing out. Let’s hope the US economy
continues its recovery and can provide
a guiding light for the rest of the world’s
struggling markets.
At home, many of the changes announced
in the Chancellor’s March Budget mean
the balance between spending and taxes
will stay the same. As the UK economy
continues to struggle, the focus was on
pushing for growth and clamping down on
tax avoidance. Mr Osborne made renewed
efforts to hang an ‘open for business’ sign
outside Britain’s shop door. By lowering
corporation tax to 24% from April, and to
22% by 2014, he aims to boost the UK’s
global competitiveness.
Balance is also key when looking at personal
finances. In this issue of Family wealth
management, we consider how the right
investment portfolio can deliver a good
inflation-beating income in the form of
dividends. We also look at the importance
of getting the right balance of liquidity in
your portfolio so that cash can be easily
raised when required.
We examine the new inheritance tax (IHT)
incentives for charitable giving in your will,
and the outcome of a recent tax case, which
could help secure valuable business property
relief for owners of holiday home businesses.
We look at ‘relevant life plans’ a little known
but tax-efficient staff benefit provided by
employers, which pay out a lump sum in
the event of death or diagnosis of terminal
illness during employment.
We also look at philanthropy in the art
market and how donors of pre-eminent works
of art are set to receive lifetime tax savings.
Disclaimer: This document contains information from sources believed to be reliable but
no guarantee, warranty or representation, express or implied, is given as to its accuracy or
completeness. This is neither an offer nor a solicitation to buy or sell any investment referred to
in this document. Articles in this publication may contain future statements which are based on
our current opinions, expectations and projections. Smith & Williamson does not undertake any
obligation to update or revise any future statements. Actual results could differ materially from
those anticipated. Appropriate advice should be taken before entering into any transactions. Some
of the investments mentioned in this publication are not suitable for all clients and they may
contain a risk that some or all of your capital could be lost.
The Chancellor’s
third Budget speech
emphasised the need
to raise revenue by
closing loopholes
and further cracking
down on tax
avoidance.
In the weeks leading up to the 2012
Budget the rumour mill was working
overtime. There was much speculation
about what would be announced,
particularly concerning the 50% higher
rate of income tax, further restrictions on
pensions tax relief, a rise in the personal
allowance and a new mansion tax. This
was no doubt in part a by-product of
having a Coalition Government in power,
with the two parties setting out their
aspirations in public.

Tax rates and allowances
The Coalition Government has established
what it calls the ‘Tax Policy Framework’.
This includes a strict timetable following
the announcement of changes in a spring
Budget. Consultation should take place
in the summer, with draft legislation
published in the autumn and taking effect
the following 6 April.
This means that most changes to tax rates
and allowances will be fixed a year in
advance. So, we now know that the top
rate of tax will fall to 45% and the personal
allowance will rise from £8,105 to £9,205
from April 2013.
For 2013/14, taxpayers earning up to
about £41,400 will see their tax liability
fall by £220 because of the increase in
the personal allowance. Similarly, those
with income over £158,500 will see their
tax bills fall because of the cut in the top
rate of tax to 45%, such that an individual
with an income over £198,000 will suffer
£2,000 less income tax.
However, taxpayers with an income
between £118,410 and £150,000 will be
£425 worse off because of the adjustment
to the higher-rate tax threshold.
Closing loopholes
The theme of the Budget seemed to be to
help less well-off families by closing tax
loopholes. The Government introduced
disclosure of tax-avoidance schemes in
2004. It has been so successful in giving
Budget 2012
Getting the balance right
them a heads up on contrived tax-planning
schemes, enabling them to shut down
schemes where appropriate, that the
Government is now planning to consult on
how to beef up the system.
The Government also announced a
consultation on introducing a general
anti-abuse rule. The Chancellor set the
tone for this announcement in his Budget
speech when he said: “I regard tax evasion
and, indeed, aggressive tax avoidance as
morally repugnant.”
SDLT changes
Ahead of the Budget it was clear that steps
would be taken to tax expensive properties.
The only question was the precise form this
tax would take. In the end, the following
changes were announced.
The rate of stamp duty land tax (SDLT)
on residential properties bought for over
£2m will increase to 7%. (The highest rate
of SDLT for residential properties was
previously 5%.) A new 15% tax will be
charged where such properties are bought by
‘non-natural’ persons or through a company.
It would appear that any expensive
residential property bought by ‘nonnatural’
persons will be caught by the 15%
rate. Therefore, unless there is a carve out
introduced in amendments in the Finance
Bill, a UK property investment company
that invests in such property will have to
pay the higher rate of SDLT despite there
being no intention to avoid tax.
The 15% charge may be seen as akin to
an entry fee, since future sales can still
be achieved SDLT-free by selling the
company. However, the proposed changes
constitute a serious disincentive for
individuals to holding expensive residential
property through a company.
The Government has also announced
plans to consult on the introduction of an
annual SDLT charge from 2013, where
such properties are ‘enveloped’.
Furthermore, there will be consultation
on charging capital gains on the disposal
of such properties held by non-UK
residents. At present, non-UK residents
are only subject to UK capital gains tax
(CGT) where an asset is used in a trade
carried on in the UK or they operate from
a UK permanent establishment.
The Government has also said that it will
take action to close down future SDLT
avoidance schemes with effect from
21 March 2012. Retrospective legislation
will be considered, where appropriate.

Liquidity –
not a dry
subject
Investors need a
balance of liquid and
illiquid assets in their
portfolios if they are
to take advantage of
potential investment
opportunities.
In the context of portfolio management,
the term ‘liquidity’ describes how easy it is
to convert an asset into cash. An asset that
is difficult to convert quickly into cash and
without significant loss of market value is
known as ‘illiquid’.
Cash is usually the most liquid asset, with
real estate typically sitting at the opposite
end of the spectrum. Equities and bonds
lie somewhere in between, although there
can be significant variations within these
broader categories. Government bonds
and FTSE 100 stocks are generally highly
liquid, while smaller company stocks and
sub-investment grade bonds can be illiquid.
Cash itself can sometimes be illiquid if, for
instance, it is placed on term deposit.
Liquidity squeezed by the
credit crunch
Liquidity concerns have been at the fore
since the run on Northern Rock in 2007
and the collapse of Lehman Brothers in
2008. In the depths of the credit crisis, a
dramatic tightening in the funding market
for financial institutions resulted in it
becoming more difficult for investors to
sell a variety of different assets.
In extreme cases, liquidity in some of the
more esoteric areas dried up completely
and fund managers were forced to
suspend redemptions. Having invested in
funds that allowed quarterly or monthly
redemptions at the outset, investors often
found that they had to wait months or
even years to receive all their money back.
Moreover, the lack of buyers in the market
for these types of assets meant the price
at which they could be sold was often
markedly reduced.
Market dislocation has, however, produced
many opportunities for cash-rich
investors to buy decent assets at cheap
prices, a technique demonstrated to great
effect by Warren Buffett. For less liquid
investments, a commensurately higher rate
of return should be sought.
The key lesson learnt from the crisis was
that liquid markets can become illiquid
with surprising speed. Never was the
aphorism ‘cash is king’ more true. That
said, with interest rates at historic lows,
cash is unattractive in pure investment
terms and inflation has the effect of
reducing its value over time.
Get the right balance
Overall, investors should always try to
ensure that their portfolios have a balance
between liquid and illiquid assets that is
appropriate to their circumstances. In
most cases, this means a majority of liquid
assets. This ensures that cash can be raised
as and when it is needed and that holdings
in a portfolio can be bought and sold
quickly, so that opportunities can be taken
advantage of in these fast-changing times.
It’s not just the early bird that catches the
worm, but the one with ready cash to hand
as well!

Relevant
life plans
Tax relief on life assurance
Individuals could
benefit from
employer-provided
life cover, which is
both tax efficient
and doesn’t affect
their pension
contributions.
Directors and employees may be eligible
for life cover in the form of a ‘relevant life
plan’, a little known but highly tax-efficient
staff benefit provided by employers. A
relevant life plan is an individual deathin-service
life policy. It is designed to pay
out a lump sum death benefit in the event
that the person covered should die or be
diagnosed with a terminal illness during
their employment.
Qualifying criteria
Any director or employee can be covered
under a relevant life plan. However,
because the benefits of relevant life plans
are written on the lives of individual
employees, it is not possible to offer joint
life policies on spouses or partners.
Insurers will usually cover a multiple of
between 10 and 25 times an individual’s
employment package including salary,
bonuses, benefits and dividends payable
from the employer. Because of the tax
relief available the cost of providing the
life cover is usually substantially cheaper
than conventional life policies. But as this
is a policy that is provided to employees,
the self-employed, partners or equity
members of limited liability partnerships
are not eligible for this type of plan.
Other conditions apply. The terms of the
policy cannot exceed the individual’s 75th
birthday; there must be no surrender value;
the employer must not be a beneficiary;
and it must not be set up for tax avoidance.
Tax reliefs available
Relevant life plans are similar to most
other types of life cover but attract various
tax reliefs, which significantly reduce the
cost of providing this cover.
• Employer premiums to a relevant
life plan are usually a corporation tax
deductible expense.
• The premiums paid by an employer
towards a relevant life plan are not a
benefit in kind for the employee. So the
employee does not suffer any income
tax liability on the premiums paid
and neither employer nor employee
are subject to any national insurance
contribution liability.
• Because a relevant life plan is not
a registered pension scheme, any
contributions towards the plan do not
count towards the employee’s annual
allowance for pension purposes. This
means that full pension contributions
can be made and the provision of
relevant life plans will not interfere
with pension protections, such as
primary, enhanced or fixed protection,
that an individual may have.
• Upon death, the benefits of a relevant
life plan are usually paid under a
discretionary trust to the dependants
of the individual covered.

An investment
portfolio of
dividend-paying UK
equities can provide
a steady income.
Many people think that you make money
from shares by selling them when the price
goes up. In fact, income from equities
in the form of dividends can provide
the lion’s share of total returns from an
investment portfolio over time. Since 1950,
UK equities have returned 6.1%
per annum, of which almost 4.5% has
come from dividends (Source: Barclays
2012 Equity Gilt Study).
The yield on the UK equity market, as
measured by the FTSE All-Share Index,
appears very attractive compared to almost
all other asset classes. The current yield
of 4% for the overall market compares
to UK 10-year bonds yielding just over
2% (Source: FT UK Benchmark 10-year
Government Bonds, April 2012), with
bank deposit rates equally low. Looking at
the largest ten stocks in the FTSE 100 –
Equity pays
dividends
often known as blue-chip companies – the
attractions of some equities from a yield
perspective seem even more compelling.
For example, the largest stock in the UK
equity market Royal Dutch Shell yields
5.2%, as does GlaxoSmithKline, while
HSBC yields 5% and BP just under 5%.
Beat inflation
An investor can build a portfolio – either
by buying individual shares or investing in
a unitised vehicle – and expect to achieve
a current running yield in excess of many
other asset classes, such as cash and bonds.
Equities also have an advantage over
conventional bonds in that they provide
a hedge against inflation. History shows
that over time, dividends more than match
inflation, with all of the above-named
stocks expected to grow their dividends by
over the forecast rate of inflation.
Of course, equities are high risk and
more volatile than cash or bonds, but a
diversified portfolio of the largest stocks
in the equity market reduces this risk.
Because of their yield and the type of
industries they tend to operate in, income
shares may be less volatile than the wider
equity market.
Spread the risk
The UK-listed companies that pay
respectable yields also tend to be
geographically well diversified. This
reduces the risk to the investor of a
recession in one particular market and
often gives exposure to fast-growing
emerging markets. Companies are reticent
to cut dividends because of the negative
signals it sends to investors about their
long-term prospects, and for the wider
overall equity market, there are few years
when dividends are cut in nominal terms
(Source: Barclays 2012 Equity Gilt Study).
In conclusion, a portfolio of high-yielding,
blue-chip, UK equities can offer investors
a current running yield higher than most
asset classes, a growing income stream
over time and one with a degree of
protection against inflation. Generally,
these companies should provide a lower
risk to capital than the overall equity
market, with some exposure to the fastestgrowing
regions and countries around
the world.
Risk warning: The value of investments
can go down as well as up and investors may
not receive back the original amount invested.

Philanthropy
in the
art market
Tax breaks for donors
Art donors are
set to receive
significant lifetime
tax savings as part of
a new Government
scheme.
A new scheme introduced in April 2012
will allow donors of pre-eminent works
of art to offer them to the nation at a
self-assessed value. In return the donor
will receive a tax reduction as a fixed
percentage (30%) of the object’s agreed
value, which can be offset against the
income tax and CGT payable under the
self-assessment tax rules. The gift will be
free from IHT.
Companies can also donate artwork,
although the fixed percentage corporation
tax reduction is slightly lower at 20%. The
scheme is not available to trustees.
Applying the tax benefit
Donors can apply the tax reduction against
their tax liability in the year the gift is
registered or any of the succeeding four tax
years. There is also the option to spread the
tax benefit across the five years in varying
amounts, should the donor wish.
Defining ‘pre-eminent’
Objects or collections may be defined as
pre-eminent if they have an especially close
association with our history and national
life; are of special artistic or art historical
interest; are of special importance for the
study of a particular form of art, learning
or history; or have an especially close
association with a particular historic setting.
The existing Acceptance in Lieu (AIL)
panel of experts will assess and value the
gifts in the first instance. Once values have
been agreed the panel will decide where
to locate the objects. They will be loaned
to an appropriate establishment in the
UK, which is open to the public. It will
be the responsibility of the establishment
to ensure that the object remains in good
condition and is fully protected.
Annual fund
The annual fund for both the AIL and
pre-eminent objects regimes is £30m
in total, an increase of £10m on last
year’s budget. Offers of donation will
be accepted on a first-come, first-served
basis from the start of the tax year. So,
interested taxpayers should plan to make
an application as soon as possible to
maximise their chances of acceptance.
“...the donor will receive a tax reduction as a fixed
percentage (30%) of the object’s agreed value,
which can be offset against the income tax and
CGT payable under the self-assessment tax rules.”

The time for
enterprise?
Proposed changes
to VCT and EIS
schemes could
see them
becoming more
widely available.
As a brief recap, both venture capital trusts
(VCTs) and enterprise investment schemes
(EISs) seek to provide capital to small
and expanding companies with the aim
of growing the business and generating a
profit. The main difference between the
two schemes is that while a VCT invests in
a series of companies, the EIS only invests
in a single company, which increases the
element of risk to the investor.
The Treasury has proposed a relaxation
of the legislation governing both VCTs
and EISs, which could shift a previously
esoteric area of investment into the
mainstream for many individuals.
VCTs
Individuals can invest up to £200,000 per
tax year and benefit from 30% income
tax relief, which is claimed via their selfassessment
tax return. Dividends are taxfree
and there is no CGT should the VCT
be sold. There is, however, a minimum
holding period of five years to continue to
benefit from the 30% tax relief.
EISs
Following a change in legislation in April
2011, the EIS now provides the same
level of income tax relief upon investment
as a VCT at 30% (increased from the
previous level of 20%) for investments up
to £500,000. There is a minimum holding
period of three years and the EIS also
provides CGT deferral.
Any capital gain realised on sale is not
taxable, provided income tax relief
has been received and not withdrawn.
Losses may also be allowable for income
tax purposes. After two years the EIS
investment is exempt from IHT.
It is now possible to carry back all of the
income tax relief to the previous tax year.
For example, relief for investments made
in 2012/13 can be set back to 2011/12.
Proposed changes
While the changes noted in the table below
came into force for EIS on 6 April 2012
the Treasury recently announced that
the proposed new rule for VCTs which
disqualifies their VCT status if they invest
in companies breaching the investment
limit (the maximum funds raised from
EIS, VCT and SEIS sources, which is £2m
prior to EU state aid approval and £5m if
the new proposals are approved), will take
effect on or after the Finance Bill 2012
receives Royal Assent. This means that
before that date, provided VCTs meet the
test of at least 70% of their investments
meeting the current £2m funding limit,
they can invest in companies raising
more than that without disqualification in
the event the higher £5m limit does not
receive EU state aid approval.
The proposed changes will provide
VCT and EIS managers with much
greater flexibility to invest in larger and,
ultimately, more established companies,
which should reduce the level of risk to
which the investor is exposed.
As these VCT and EIS tax reliefs
constitute EU State Aid, any rule changes
require EU approval, and this has still to
be secured.
With many small businesses continuing to
have difficulty in raising finance through
the traditional bank route, VCTs and EISs
are ideally placed to strike attractive deals
Fig.1 Proposed changes to EIS and VCT rules
Current position Proposal
Size of company £7m of gross assets £15m of gross assets
Number of employees 50 250
Annual amount a company can raise £2m £5m
Maximum subscription amount (EIS) £500,000 £1m

with these businesses. In many cases, the
manager will take a seat on the board
to provide expertise in decision-making
and help guide the business forward and
represent investors’ interests.
Previous opportunities
There are a variety of offers in the VCT
and EIS markets each year and Smith &
Williamson meets with each manager to
assess their investment strategy and the
track record of previous offerings.
VCTs
Dealing first with VCTs, our buy list for
the last tax year included those providers
who were offering ‘limited life’ VCTs.
This means they aim to maintain capital
and intend to return around 110p against
an initial cost of 70p after the minimum
holding period of five years. Typically
this will occur around year six. Generally
speaking, these are normally lower risk
VCTs as the investments they make may
include a minimum return to the VCT of
70p, i.e. the net subscription of investors.
The more traditional VCTs are those in
the ‘generalist’ sector, which should be
seen as a longer-term private equity play
with investor return coming by way of
tax-free dividends as the VCT makes
profitable realisations. One of the offerings
for the last tax year was effectively a fund
of VCTs, which divides the investment
between seven existing VCTs, all with
differing investment strategies. The
advantage of such a structure is that
investors are immediately accessing mature
VCTs and will receive tax-free dividends
from day one, and on a monthly basis
going forward.
EISs
With EISs it is much more difficult to
track performance, so we concentrated
on two very different structures – both of
which have demonstrated their ability to
produce investor returns.
The first offer was centred on mitigating
risk as much as possible and invested in
various television productions with the
aim of producing a return of 105p after
the minimum holding period of three
years. The other EIS was a very exciting
opportunity involving principals with an
enviable track record in the pub freehold
sector who were also committing personal
funds. This opportunity benefited from
the backing of pub freeholds, but EIS
investment is not without risk so would
not suit the low or lower-risk investor.
VCTs tend to be more tax year-end driven
while EISs will continue to be available
throughout the year. We anticipate the
launch of a number of offerings once the
Finance Bill receives Royal Assent.
Seek advice
These types of investments are not suitable
or appropriate for everyone. Investments
of this nature, while aiming to mitigate
tax, can carry a significant risk to capital.
Specialist advice is therefore essential.

Investment outlook
Eurozone worries continue
Political uncertainty
and increasing
resentment towards
austerity policies
across Europe
further risks
financial stability.
After an impressive five-month rally
fuelled by signs of improving economic
data in the US and hopes a new eurozone
crisis might have passed, financial
markets have stalled in recent weeks with
worries about the eurozone returning to
the forefront of investor concerns. The
release of several key first quarter GDP
figures in April seemed to confirm what
markets were beginning to fear: that any
rebound in global economic growth will
be more anaemic than many had begun
to hope. Growing resentment towards
‘austerity’ policies is meanwhile leading
to heightened political uncertainty across
Europe and creating new risks to financial
stability. With the effects of the European
Central Bank’s (ECB) liquidity tap now
beginning to run dry, equity markets
have lost momentum over the past month
while volatility has increased somewhat,
although it remains well below crisis levels.
UK’s poor performance continues
The official first quarter GDP figures
issued by the Office of National Statistics
showed the UK economy slumping to its
first double dip recession since the 1970s,
with GDP contracting by 0.2%, following
the 0.3% decline in the fourth quarter of
2011. GDP figures are notoriously prone
to later upward revision and as the data
is revised, it may turn out that fears of
a new recession prove to be premature.
Nothing can disguise the fact, however,
that the UK economy is performing
poorly, in both absolute and relative
terms. Unlike the US and Germany, which
have recovered all the output lost in the
aftermath of the global financial crisis, UK
output is still 4.3% below its pre-recession
peak. The main driver behind the first
quarter decline in growth was a 3% fall
in construction output, which failed to be
offset by any significant gains in services.
More concerning was the overall decline
in financial services output during the
quarter. The one-time engine of the UK
economy appears to be running out of
steam. The UK’s exposure to Europe, its
biggest trading partner, remains a drag
on potential growth and the economy is
unlikely to export its way out of trouble if
the current climate remains uncertain.
On a more positive note, April’s CBI
Industrial Trends Survey (a more forward
looking indicator) suggested the UK
manufacturing sector remains on the road
to recovery. The CBI figure is consistent
with growth in the sector of 2% over the
quarter. With the Government’s opinion
poll ratings falling, more questions are
likely to be asked over the Chancellor’s
austerity drive if the public sector net
borrowing position deteriorates further
and growth continues to contract. We
continue to believe that the Coalition must
pursue more active growth policies if the
economy is to join the road to recovery.
With inflation still well above the 2%
target, the Bank of England’s Monetary
Policy Committee says it has little room
to loosen monetary policy any further. It
is unlikely, therefore, to introduce further
quantitative easing (QE) when the current
programme ends in June. Our view is
that a further £25bn of easing in the
autumn remains a real possibility, given
the continued poor outlook for growth.
Although equity markets have reacted
calmly to the latest data, bond yields have
declined (to 2.1%) and the UK equity
market has started to underperform the
world index. Somewhat surprisingly,
perhaps, sterling has strengthened slightly.
US election hindering
policymakers
There were mixed messages to take from
the somewhat disappointing first quarter
GDP figures which came in at a less than
expected 2.2% annualised. US consumers
appear to be doing their part with a 2.9%
increase in personal expenditure, a strong
figure considering the impact of rising
gasoline prices on disposable income over
the quarter. Clearly the continued recovery
in labour market conditions is helping to
boost consumer confidence, despite real

personal disposable income only rising by
0.4%. Signs that the US housing market
is finally bottoming out in some parts of
the US have also contributed. The rise
in consumption was offset by declines in
government spending, mainly defence, and
a 2.1% fall in business investment.
The Federal Reserve has painted a
brighter picture for growth in 2012,
upgrading their forecasts and predicting
unemployment will fall to a range of
between 7.8% and 8% this year. The public
stance of the Federal Reserve’s rate-setting
open market committee remains that it
will hold interest rates at their current low
levels until at least 2014. The committee
has acknowledged the recent pick up
in inflation and a more hawkish stance
among committee members suggests
another round of QE is off the table for
now. In an election year, the prospects
of policymakers in Washington making
a decisive start on reducing the budget
deficit are low to non-existent. Given the
‘fiscal cliff ’ that is approaching at the
end of 2012, when expiring tax cuts and
planned new reductions in public spending
kick in, potentially reducing GDP by 4%
(or US$1trn) in 2013/14, the deficit is set to
become an important battleground once
the new president and Congress have been
elected in November.
Anti-austerity pressure in Europe
With much of Europe now technically in
recession, the ‘liquidity boost’ provided
by the ECB’s second round of three-year
cheap financing for European banks in
February appears to be fading. While the
ECB’s liquidity measures have stemmed
the immediate threat of a Lehman-style
credit crunch, the deep-rooted challenges
facing most of the region’s peripheral
countries have started to rise to the surface
once more, with increasing signs of
popular resistance to government austerity
measures in several countries. The ECB
president, Mario Draghi, emphasised in
a recent speech the need for new progrowth
policy measures to supplement the
austerity measures being implemented in
the weaker southern European states.
His call for a ‘growth compact’ to
supplement the earlier ‘fiscal compact’
agreed by eurozone leaders (and now
awaiting ratification) appears to have
won the backing of the German leader
Angela Merkel.
With the most recent surveys pointing to
a further contraction in manufacturing
and services output, and other forwardlooking
economic sentiment indicators all
pointing down, political tensions across
the eurozone are rising; all eyes are now
on the outcome of elections in France and
Greece. As expected, Francois Hollande
defeated Nicolas Sarkozy in the French
presidential election and has pledged to
renegotiate the fiscal treaty, something
Merkel has refused to countenance.
With economies in some of the peripheral
countries heading backwards, fears
about the solvency of banks in Spain
and Italy have also intensified in recent
weeks. Bond yields in both countries
remain close to unsustainable levels. The
German economy meanwhile continues
to strengthen. Retail sales rose by 2.3%
year-on-year in March, and unemployment
is still at a two-decade low, underlining the
increasing divergence in the fortunes of
the north and south of the eurozone.
Risk warning: The value of
investments can go down as well as up
and investors may not receive back the
original amount invested.
Investments in emerging markets may
involve a higher element of risk due to
political and economic instability and
underdeveloped markets and systems.
When investments are made in overseas
securities, movements in exchange
rates may have an effect on the value
of that investment. The effect may be
favourable or unfavourable.

New incentive to
be more charitable
in your will
Estates leaving
10% or more to
charity are set to
benefit from a new
reduced rate of IHT.
The 2012 Finance Bill includes legislation
which will reduce the rate of IHT to 36%
in cases where 10% or more of an estate is
left to charity. The new rules will apply to
cases where the person’s death occurred on
6 April 2012 or after this date.
An estate will be divided into three
components:
1. the free estate
2. jointly owned assets passing on
survivorship
3. settled property (certain life interests
in trust).
Calculating whether more than 10% of
the net estate has been left to charity
will be applied to each section in turn,
although there will be the option to
combine and consider component elements
together. For this purpose, net estate is
defined as the value of the estate after
deducting the nil-rate band and all reliefs
and exemptions, except for charitable gifts.
It may be that increasing a charitable
legacy will produce a tax saving and
increase the amount left to beneficiaries.
Beneficiaries can backdate any charitable
gifts using a deed of variation.
Based on the figures in the example
below, the non-charitable beneficiaries
would be better off by £5,400 as a result
of the charities receiving an additional
£22,500. The tipping point for this ‘winwin’
position is where the current level of
proposed charitable legacies exceeds 4% of
the value of the net estate.
There will therefore be an incentive for
those who already have a reasonable level
of provision in their wills for gifts to
charity to increase the amounts or for their
families to do so after death. On the other
hand, a married couple might decide to
defer such legacies so that they are only
Example
made out of the estate of the surviving
spouse so as not to ‘waste’ the value for
IHT-rate purposes.
IHT is a particularly emotive tax, although
government statistics indicate that only 3%
of estates were liable to pay tax in 2010/11.
Nevertheless, it may be that some people
would prefer to increase legacies to charity
if it means reducing the size of their tax bill.
How increasing a legacy of less than 10% may increase the distributable estate
An estate is valued at £850,000 and the available nil-rate band is £325,000. This table
shows how a charitable bequest of £30,000 is increased to pass the 10% test.
Below 10% Increased sum
Estate value £850,000 £850,000
Less charitable legacy -£30,000
Less available nil-rate band -£325,000 -£325,000
Net estate for 10% test purposes £525,000
Less minimum charitable legacy to pass 10% test -£52,500
Taxable estate £495,000 £472,500
IHT due
Amount left for distribution to non-charitable
beneficiaries, i.e. the estate value less any charitable
£198,000 (@40%) £170,100 (@36%)
legacy and IHT due, would be: £622,000 £627,400
Increase in the charitable legacy £22,500
Increase in distributable estate £ 5,400

Capital loss relief claims
Mansworth v Jelley
saga revisited
Taxpayers with
cases under enquiry,
where capital losses
have been claimed
on the disposal of
shares acquired on
the exercise of an
employee share
option, may soon be
hearing from HMRC.
In January 2003, HM Revenue & Customs
(HMRC) published guidance that said
the gain or loss on the disposal of shares
acquired by such options should be
calculated by deducting from the disposal
proceeds the market value of the shares at
the time the option was exercised and any
amount chargeable to income tax on the
exercise of that option. This followed the
decision in the Mansworth v Jelley case.
The issue of this guidance led to a flurry
of claims being lodged with HMRC for
capital losses on unapproved share option
schemes, resulting in large amounts of
losses being carried forward and/or claims
for repayment of CGT previously paid to
HMRC for an earlier year.
However, HMRC subsequently announced
it had received legal advice that the
guidance was incorrect and changed its
mind with retroactive effect. This means
that taxpayers who have claimed to carry
forward capital losses calculated under
HMRC’s original guidance are now
meeting resistance from HMRC.
HMRC is writing to taxpayers who have
claimed Mansworth v Jelley losses inviting
them to withdraw their claim and asking
for a response within 40 days. Those who
are not prepared to withdraw their claim
are asked to explain why they believe their
claim remains valid. HMRC will review
cases on an individual basis and decide
how best to take them forward.
HMRC’s letter says: “Where the shares are
treated as having been acquired at market
value, that value is the full measure of their
deemed cost of acquisition. The cost is not
augmented by any amount chargeable to
income tax on the exercise of the option.
Thus in computing any capital gain or
loss accruing on a disposal of the shares,
no deduction falls to be made of, or in
respect of, any amount that is chargeable
to income tax on exercising the option.”
What to do now
HMRC intends to finalise the enquiries
in cases where Mansworth v Jelley losses
have been claimed. It is inviting affected
taxpayers to withdraw their claim to
losses in the period covered by the
enquiry into their tax return or claim
to losses. Enquiries will then be closed
with an adjustment to the return, where
appropriate, to remove the losses and make
any other adjustments agreed.
Clients and their advisers will need to
consider whether the capital loss relief
claim made still stands, bearing in mind
that more recent case law has indicated
that a taxpayer should be able to rely on
clear guidance published by HMRC.

International retirement
benefit schemes
A look at Section
615 schemes,
which provide
retirement benefits
for employees of
UK companies
working abroad.
Section 615(6) Trust schemes are UKbased
retirement benefits schemes
established under trust law for the
purpose of providing bona fide retirement
benefits for employees of UK companies
working overseas. They are not approved
pension schemes, so they do not attract
exactly the same tax status as approved
schemes – but this does not make them
any less attractive. They do however have
to be established for the sole purpose of
providing superannuation benefits.
Section 615 schemes can be set up easily
and both the employer and employee can
contribute. The level of contributions is
not capped and it is possible for employees
to contribute through salary sacrifice
which may mitigate tax and social security
in the country they are working in. Money
invested grows tax free, is outside the
employee’s estate for IHT and beneficiaries
can be nominated. The sponsoring
employer should obtain a corporation
tax deduction.
Who is eligible?
The scheme is for individuals of any
nationality who are carrying out duties
outside the UK for a UK company
or associated company elsewhere in
the world, irrespective of domicile or
residency. They are not only for expatriates
but also for individuals resident in their
own country – with the exception of UK
and US residents. However, UK residents
with a separate and distinct contract for
overseas duties can be included.
How does it work?
A Section 615(6) Trust will generally be
established in the name of the employing
company, similar to an individual pension
arrangement in the UK for UK-resident
employees.
Employer contributions
Provided certain conditions are met, the
UK employer will obtain a corporation
tax deduction for contributions made to
the trust.
Qualifying companies
A non-UK company may make
contributions into a scheme, but only if
the company is associated with the UK
employer (essentially common ownership
between companies or a holding company
or subsidiary relationship).
Investment strategy
Rather like a self-invested personal
pension, individuals can choose their own
investment strategy and there is a wide
range of opportunities such as insurance
policies, direct equity holdings, fixed interest
securities, collective investment schemes,
money funds, property and cash deposits.
Drawdown
The biggest attraction to a Section 615
scheme comes on drawdown of the
pension. Benefits can be taken as one taxfree
lump sum by UK residents from the
age 55, or earlier if the employee leaves
the company, but must be taken by the
age of 75.

Claiming business property relief
Holiday homes
A recent tax case
could help owners
of holiday home
businesses secure
valuable business
property relief.
Owners of holiday lettings businesses
could save their loved ones 40% IHT due
on the business if they qualify for business
property relief (BPR). For example,
someone with business assets worth £1m
could potentially avoid a £400,000 tax bill
if they are eligible for BPR.
Who qualifies?
To qualify for this valuable tax break,
owners must be conducting a business
that is not primarily an investment
business. They need to provide ancillary
services to holiday guests rather than just
accommodation.
A recent court case considered the
distinction between a property used for a
qualifying business and a property held as
an investment. In Nicollette Pawson (deceased)
v HMRC, the taxpayer successfully argued
that the holiday accommodation in
question did qualify for BPR. The tribunal
was convinced that the constant need to
find new occupants, and that additional
services were provided, over and above the
bare upkeep of the property, meant that
the property was a business asset and not
just an investment. To date, HMRC has
not appealed the decision.
This is a very useful ruling for owners
of furnished holiday accommodation.
The key point is to ensure that additional
services are being provided and that it’s
not an ordinary property letting – but
these additional services need not be
onerous. For example, the additional
services in the Pawson case included heating
the accommodation and turning on the
hot water before guests arrived, as well as
cleaning the property between lettings.
In addition, it was fully furnished and
the kitchen was fully equipped. All these
services were provided for each letting.
Thankfully, these services are fairly typical
of holiday home businesses – and far less
onerous than HMRC’s view, which would
require owners to be more hands-on with
their guests.
There are a number of other requirements
to ensure BPR is available.
• The property must have been owned
for two years before the IHT event.
• At the time of the IHT event there
must be no contract in place to sell the
property.
Professional advice should be sought to
ensure all the necessary conditions are
in place to protect potentially substantial
IHT savings.

Where next for
regular savers?
With pensions
capped, offshore
regular investment
accounts offer a taxefficient
alternative
for savers.
Many investors are facing the prospect of
not being able to make further pension
contributions or accrue additional pension
rights without breaching the new lifetime
allowance of £1.5m. Added to this is the
Chancellor’s decision to effectively stop
investment in UK-qualifying savings
plans. So, what are the regular savings
options now available to those affected?
Personal financial planning team
Office Contact Direct line
London Mike Fosberry 020 7131 4250
Paul Garwood 020 7131 4196
Daniela Glover 020 7131 4440
Birmingham Richard Wyatt 0121 710 5233
Bristol Martyn Cross 0117 376 2139
Sue Faiers 0117 376 2016
Nick James 0117 376 2101
Guildford Maggie Lowe 01483 407 143
Mark Garnett 01483 407 163
Andrew Yonge 01483 407 162
Planning for the future
Individual savings accounts (ISAs) should
be viewed as the optimum savings vehicle
after pensions, but another option that may
appeal to longer-term savers wishing to
save more than the annual ISA allowance
is an offshore regular investment account.
An offshore regular investment account
can form part of a long-term financial plan
and cater for a variety of scenarios such as
expatriate life, career breaks and school/
university fees, as well as help with early
retirement. Savings can be linked to a
range of investment funds run by leading
fund management groups and can be
stopped at any time.
Tax advantages
The principal advantage of an offshore
regular investment account is that savings
accrue in a virtually tax-free environment.
Principal tax contacts
Office Contact Direct line
London Joss Dalrymple 020 7131 4297
Nick Osler 020 7131 4257
Richard Mannion 020 7131 4252
Birmingham John Hodgson 0121 710 7837
Bristol Jerry Barnes 0117 376 2043
Dublin* Gordon Hayden +353 1 614 2500
Dungannon Enda McLernon 0161 837 1870
Guildford Graham Healy 01483 407 136
Manchester Leo Coyle 0161 837 1879
Salisbury Susan Shaw 01722 434 831
Tax is deferred until withdrawals are made,
but can be managed in such a way as to
mitigate the ultimate tax liability. So, as the
old accountancy maxim goes, tax deferred
is tax saved!
A safe haven
With the ability to save tax efficiently being
attacked in the pursuit of increased tax
revenues, these non-controversial regular
savings arrangements should be considered
as part of an overall financial plan for those
wishing to save for the future.
Follow us on Twitter @SmithWilliamson
Smith & Williamson is now on Twitter. Follow
us for comment and links to current tax and
accountancy news.
Principal investment contacts
Office Contact Direct line
London David Cobb 020 7131 4681
Peter Fernandes 020 7131 4695
Birmingham Mark Willis 0121 710 5212
Belfast Jonathan Cunningham 028 9072 3000
Bristol John Erskine 0117 376 2189
Dublin* Frank Brennan +353 1 614 2500
Glasgow Stephen Quaile 0141 222 1133
Salisbury/Southampton Sharon Grubb 01722 434 887 Southampton Trevor Hayman 023 8082 7672
Whether you are interested in accountancy, tax or
Email: firstname.surname@smith.williamson.co.uk *firstname.surname@swf.ie
investment management issues, you can register to
receive our newsletters by completing the online
Please visit our website for further information: www.smith.williamson.co.uk
newsletter registration form:
Principal offices: London, Belfast, Birmingham, Bristol, Dublin, Glasgow,
Guildford, Manchester, Salisbury, Southampton and Worcester.
www.smith.williamson.co.uk/publications-registration
Smith & Williamson Financial Services Limited Authorised and regulated by the Financial Services Authority.
Smith & Williamson LLP Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of
Nexia International.
Smith & Williamson Investment Management, a trading name of NCL Investments Limited (Member of the London Stock Exchange) and Smith & Williamson Investment
Management Limited. Both companies are authorised and regulated by the Financial Services Authority.
The Financial Services Authority does not regulate all of the products and services discussed in this newsletter.
The value of investments can go down as well as up and investors may not receive back the original amount invested. Past performance is not a guide to future performance.
We have taken great care to ensure the accuracy of this newsletter. However, the newsletter is written in general terms and you are strongly recommended to seek specific advice before taking any action based on the information it
contains. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. © Smith & Williamson LLP 2012.
12/334 exp 31/10/12