Ask the experts - your questions answered - October 2006

A&M trusts are somewhat inflexible, because at a pre-determined age, and certainly no later than when the beneficiary is aged 25, they have an absolute right to the fund.

Passing what may be a large amount of money to an eighteen year old, possibly with a drug or debt problem, or a 24 year old a few weeks before they get divorced, is hardly productive or what the Mother-in Law would intend, so we can look elsewhere.

You could use a 'bare trust', as being potentially more tax efficient as it is not treated as a chargeable lifetime transfer for Inheritance Tax purposes.

However, when all of the beneficiaries are 18 or older, and assuming that they (i) know about the Trust and (ii) act unanimously, they can demand immediate payment of the Trust assets, again, possibly not in their own best interests.

My preference would be a Discretionary Trust, with the grandchildren and great grandchildren named as 'default beneficiaries'.

The terms of the Trust could see the timing and nature of distributions left to the discretion of the Trustees, but could be event driven, such as the money being used as a deposit on a house, or age related, perhaps at age 25, 30 etc.

There would not be an initial charge because the funds would be paid from the Mother-in-Laws net Estate, but there may be a risk of a periodic charge every ten years, but the ten year periods would start on the commencement of the Trust, on the Mother-in-Law' death.

Paul White, Belgravia Insurance Consultants, London:

I would like to deal with the grand-children separately from the great grand-children, on the basis that the former are nearer adulthood and so have a shorter investment horizon.

For them, I recommend that you only consider Deposit Accounts, by setting up a 'Bare Trust', which can be done through a Savings Account in your mother-in-law's name, followed by the initials of the grand-children.

For the others, the longer timescale means that you can consider an Investment Bond in Trust, where the amount settled into it should be free of IHT after seven years and the growth in the fund free of that tax.

Q. I retired recently and took up a new job. Combined income and pension come to about £50,000 so I'm being hit for tax at 40%.

The company I'm with offers a pension scheme to which they contribute 16% against 4.5% employee contribution. My contract is only for 2 years. Is it worth my while joining the pension scheme for such a short time - if only for tax efficiency?

Daniel Clayden APFS, Clayden Associates:

I would definitely recommend that you join your new employer's scheme, if only to benefit from your employer's 16% contribution (even if it is for only 2 years).

It is worth pointing out that you will only get tax relief on your own (4.5%) contributions, with basic rate (currently 22%) tax relief at source and the additional relief (currently a further 18%) reclaimed through your tax return, as your employer will get the tax relief on their contributions.

However, bearing in mind the fact that you have recently started to receive a pension from previous employment you need to consider the implications of recent legislation introduced to prevent the recycling of tax-free cash (otherwise known as PCLS - Pension Commencement Lump Sum).

The most important factor is respect of these rules is whether an individual has taken their PCLS with the specific intention of recycling it in order to gain further tax relief, which I would imagine would almost certainly not be the case is your situation.

For further guidance I would recommend that you speak to a suitably qualified Independent Financial Adviser (www.unbiased.co.uk) who can offer unbiased advice specific to your individual circumstances.

David Brunning, Managing Director, Brunning Newman Houghton Limited:

Yes, you should join the pension scheme at your first opportunity.

There are four advantages; (i) you will benefit from a significant contribution from your employer of 16% of your salary, (ii) you would benefit from 40% income tax relief on any contributions you make and (iii) you can expect to be able to take up to 25% of the resulting pension fund as a tax-free lump sum when you take your pension benefits and finally (iv) if your income after you stop work, i.e. your pension income alone, is within the basic rate income tax threshold, then you will benefit from an 18%, and potentially 20%, income tax advantage between the 40% income tax relief you would receive on payments and the 20% / 22% you would pay on the pension income you receive.

Paul White, Belgravia Insurance Consultants, London:

You should definitely join that pension scheme, as the Company multiplies your net contribution by 356%! Not joining is effectively turning down a payrise. I cannot see any negatives in becoming a member.

Q. My daughter paid a lot of bank charges when a student and in the year after, eg if she went overdrawn even by a few pounds. Please could you tell me how does she claim this money back? I heard on the radio that others are doing this, as the banks were charging illegally

Daniel Clayden APFS, Clayden Associates:

In April 2006 the Office of Fair Trading (OFT) issued a statement indicating that it considered that the broad principles in relation to default charges on credit cards are likely to be relevant to other standard agreements with consumers such as those for bank current accounts.

This basically means that even though you may have agreed to and be aware of the terms & conditions of the account, they are not deemed fair if they are greater than the administrative costs that arise from the action concerned (ie. exceeding your overdraft limit).

If you have been charged unfairly then the main steps to follow are as follows:

Check how much they owe you, get together your last 6 years bank statements and add up all of the charges applied (and interest) every time you went over your overdraft limit.

Ask for your money back. Write to your bank asking for all of these charges to be refunded, plus interest. Always ensure that you state that a response is required within 14 days.

Don't Give Up! If the bank refuses to settle or ignores your request then write with the threat of pursuing court action. If the bank only offers a partial refund you need to decide whether to accept or take proceedings further.

There are consumer groups such as the consumer action group (www.consumeractiongroup.co.uk) that can offer further guidance on how to claim back excessive bank charges.

David S Brunning APFS: Managing Director, Brunning Newman Houghton Limited:

The Students Union has an excellent website addressing just this issue, including the process necessary and even includes draft letters to send. Their address is www.thesu.com/files, then look for the relevant fact sheet "Reclaiming illegal bank / credit card charges".

Q. I have a house worth £150000 with no mortgage. I would like to give my sons £15000 each to put down as a deposit on small houses for them. What is the best way to raise the money please?
Daniel Clayden APFS, Clayden Associates: There are 5 main ways of releasing equity from your property that you could consider.

These are: a. Sell your property and live in rented accommodation. There would be no tax implications, however you would incur various costs such as estate agency fees and solicitors fees.

You also need to consider the potential upheaval of leaving the family home, as well as the ongoing cost of rent and the potential loss of future property value increases - ask anyone who sold their home 10 years ago!

b. Downsizing to a smaller property - similar considerations as above, but no rent to pay and you still retain a foot on the property ladder. But there could be a potential stamp duty liability on the purchase of any new property (1% of total value if over £125,000).

c. Interest Only Mortgage - you could release equity from property by borrowing against the value of your home but paying only interest to the lender. The outstanding balance would be repaid at either the end of the term or on death from either the sale of the property or some other repayment vehicle (if present).

Again the option leaves the borrower with an open-ended ongoing commitment of the monthly mortgage payment which may fluctuate if rates are not fixed.

There may also be issues around affordability and suitability if the loan extends past retirement. Penalties incurred for early redemption of the loan can be massive.

d. Lifetime (roll-up scheme) mortgage - similar to the interest only mortgage, but instead of interest being paid by the borrower on a monthly basis it is rolled-up and added to the loan.

The compounding effect can be quite drastic over longer timescales and can therefore make a big difference to the value of an estate on death.

However due to the normally low limits on loan levels in relation to the property values, the chances of accumulating a debt larger than the property value are relatively remote.

Also SHIP (Safe Home Income Plan) providers all offer a no negative equity guarantee, which means the outstanding loan can never exceed the value of the property.

e. Home Reversion schemes - with this type of scheme the individual actually exchanges a share of the property for a cash lump sum (normally below market value, that how the providers makes their money!), while retaining the right to live in the property until they die or go into care.

You should note that any release of capital could potentially effect any entitlement to means tested benefits or tax credits. For specific recommendations I would suggest that you seek impartial advice from an Independent Financial Adviser (www.unbiased.co.uk).

David S Brunning APFS: Managing Director, Brunning Newman Houghton Limited:

Sorry, we don't advise on mortgages or other secured loans

Paul White, Belgravia Insurance Consultants, London:

Rather than lumbering yourself with a mortgage on your own property, in order to fund the deposit on your children's homes, why not consider acting as a Guarantor for them instead? Cheltenham & Gloucester's Guarantor mortgage allows your children to obtain 100% mortgages and as you have no mortgage yourself, you can use your income to boost their buying power.

Changing the Deeds over to the sons at a later stage is easy, with no deadline and no Solicitors involved. However, you must be no older than 75 at the end of the mortgage.

Q. I owe my brother the sum of £36,000 and I would like to find out ways that I can get this money to him without being stung by tax. He has recently had a son so could I transfer the money to my nephew? He also needs some work doing on his house so could I get around the tax by paying for that work directly?

Daniel Clayden APFS, Clayden Associates:
There would be absolutely no tax implications for your brother if you were to repay the £36,000, as it is merely the repayment of a loan, so the simplest way would be to give him the cash.

Your only real worry should be how to finance the repayment of your borrowings, once you have repaid the loan, your brother can then decide what he wants to do with the proceeds himself.

The only potential tax issues would depend on where he decided to put the money after he has received it. For example if he put the money in a building society account only the interest would be liable to income tax, not the capital itself, but if he were to invest in shares any profit made on disposal (over and above allowances) could potentially be liable to capital gains tax with any income from dividends liable to income tax, but it's the gain or interest that is taxed, not the original capital itself.

Probably a potentially more relevant issue to consider would be the fact that the capital could effect any entitlement (if applicable) to means tested benefits or tax credits.

David S Brunning APFS: Managing Director, Brunning Newman Houghton Limited:

The question is a little sketchy. If the money was simply borrowed from the brother, then as long as there has not been any interest charged he can simply repay the loan capital with no liability to income tax at all.

If the brother has charged interest, then tax would ordinarily be payable by the brother on the interest. If the debt is as the result of some other arrangement, for instance the brother has provided goods or services and now wants payment, then the whole issue of invoices etc. comes up and there is no legitimate way of avoiding tax

Paul White, Belgravia Insurance Consultants, London:
If your brother lent you £36,000 in the first place and you are repaying him, there would not be any tax.

Just make sure that that you have written him a note, stating that you have now repaid him in full and final settlement. That way, if you die in the next seven years and the Inland Revenue query this large transaction, they will have proof that it was a simple repayment of a loan.

This month's Independent Financial Advisors were:

Daniel Clayden APFS, Clayden Associates - www.claydenassociates.co.uk Tel: 020 7965 4700

Paul White, Belgravia Insurance Consultants, London - Tel: 020 83491003