IIPTrust Investment Options - Alternatives to Investment Management

Lumphammer2

I am trustee.  There is around £200k proceeds from a house sale which will need to be invested for life tenant.

It seems Investment Management (Stockbrokers) will charge 1% + VAT to ensure balance between capital and income and showing the investment is at arms length from me - the remainder man.

One firm I have spoken to say they might be able to make about 3.5% dividend income on £200k that is £7k.  Fee is £2400.  Leaving £4,800.  So the fee is one third of the income!  (I know they are managing the capital too!)

Should I consider taking a more active role in selecting multi asset/balanced funds e.g. Vanguard Lifestrategy - Income which is 0.22% ongoing charge.  But it says only 2.28% income....

I am guessing that the Vanguard product is more global whereas the broker is more UK centric where dividend yields are higher?

I have only just started looking into this so any advice or direction is welcome.

poseidon1

Evidently you appear to have not taken professional advice as to your duties as trustee to fairly balance the interest of income and capital beneficiaries - the following article from Farrer's ( King Charles' solicitors) would be worth while your reading.


https://www.farrer.co.uk/news-and-insights/trustees-duties-and-powers-when-making-investment-decisions/

As for the specifics of your post, trustee investment management fees are always chargeable to trust capital not against income, so the full income is payable to the income beneficiary not the reduced figure you quoted. The fee of 1% sounds reasonable especially from a stockbroker who presumeably are familiar with the strictures of investment management for trustees.

As the remainderman, it would be wise that you do not take the lead investment management role in this matter, to avoid any accusation of bias favouring your capital expectations at the expense of the income beneficiary. In any event you also appear to be  unaware of the investing protocols for life interest trusts.

In summary and as regard trustee investing, leave  it to the professionals but ensure you have a Trustee Act 2000 policy statement in place - see a template below from Standard Life - Option 1 at D1 ( page 3) would seem to be the appropriate instruction in your case

https://library.standardlife.co.uk/iht18.pdf

Lumphammer2

Thank you Poseidon for your reply.  I really appreciate your time.

It appears that I need to educate myself on trustee responsibilities and to understand the Trustee Act 2000.

Clearly I was wrong regarding where the investment fees should be paid from.  Is that in the Trustee Act also?

Lumphammer2

Thinking about it again, why I believed that fees would come from income was because, if it the property had been let out rather than sold, the rental income to the income beneficiary would have been after letting fees had been taken.  Would that be the case?

If it were true, there would seem to be an anomaly?

poseidon1

Lumphammer2 said:

Thank you Poseidon for your reply.  I really appreciate your time.

It appears that I need to educate myself on trustee responsibilities and to understand the Trustee Act 2000.

Clearly I was wrong regarding where the investment fees should be paid from.  Is that in the Trustee Act also?

The position with regard to the  general deductibility of professional investment management fees against trust capital, is  derived from a long line of trust law precedent and practice, culminating in the  House of Lords case of Carver v Duncan 1985 and further reinforced by HMRC rules disallowing such fees as a lawful deduction for income tax purposes - see below

https://assets.publishing.service.gov.uk/media/623c50c58fa8f540eea34c1c/HS392-table-2022.pdf

The only exception to this general rule is if the trust document specifically and unequivocally authorises such fees to be deducted from trust income. 

As regards tax, do you plan to take on the obligation of preparing and submitting the annual trust tax returns, if so have you acquainted yourself with the SA900 trust tax return?

You should note, if you arrange for the trust income to be automatically mandated direct to the income beneficiary ( rather than retained by you and distributed at your convenience) this would avoid your having to report the income at trustee level, and the income beneficiary would be required to report on their own personal tax return. If you don't choose that option you will need to account for the income tax on interest and dividends at trust level, and provide the income beneficiary with tax deduction certificate form R185 (trust income)  summarising the income  and tax deducted therefrom.

However, as trustee you will always be required to declare annual trust investment gains and losses and ensure trust  CGT is paid as necessary.  You therefore need to acquaint yourself with the necessary record keeping systems for this purpose, although the stockbroker will issue an annual CGT summary to assist you in this task. However if they invest in OEICS you will need to know the CGT treatment of equalisation payments, and of course there should be no purchase of accumulation units.

As you say, there is a considerable amount of 'self education' for you to undertake not only with regard to general trust administration but also annual tax compliance. It will likely prove rather a steep learning curve, since the truth is you don't know what you don't know in this area especially with regard to trust law and practice. As such you might want to consider delegating the annual tax compliance function to a STEP qualified accountant.

Lumphammer2

Again, many thanks.  To click on the 'Thanks' thumbs up doesn't show my gratitude sufficiently.

I have had some advice, mainly regarding the tax treatment of the sale of the property and some indication of the way forward, but I definitely do not know what I do not know.  Please bear in mind that a few weeks ago, I just thought this was just a clause in the will.

It was suggested that even if the income was mandated, that, should the beneficiary not declare or pay the income tax themselves, there may be comeback on the trust.  This encouraged me to have a more active involvement (without understanding the level of admin).

I have understood there needed to be a balance between capital and income, but it seems that essentially all the costs will come from the capital.  Trust advice, legal advice, taxation advice, investment management, bank charges and (letting fees?)
 
It appears HMRC are also very strict on what is allowable for the income beneficiary's income tax purposes - hardly anything!

Whereas I thought that selling the house would crystallise the situation and simplify things, and would have avoided the effort involved in managing a property investment, it now appears that the investment alternative is more complicated.

As there is no money in the trust at the moment, I may have to make a loan to the trust to cover some of the immediate expenses, some of which have already been incurred.

poseidon1

Not clear why you would need to borrow for advice fees, you indicated £200k is or will be available from house sale.

In passing if you had retained the property and let it, estate agents fees for collecting and remitting rents to you as trustee would be tax deductible at trust level in calculating income tax payable - see below supporting  notes  for completing trust  return SA 903 page TLN7

https://assets.publishing.service.gov.uk/media/67dbf30adb5bf0deba4b4f7a/sa903_notes_2025.pdf

However, probably wise to have sold it, since where would you have got the capital cash for future capital repairs to the property? You would not be permitted to hold back any of the net rents for that purpose.


As regards mandating portfolio investment income direct to the beneficiary, there is no recourse to the trustees if the beneficary fails to declare to HMRC - see below a specific technical article addressing this circumstance 

https://www.taxadvisermagazine.com/article/mandated-trust-income

You have my commiserations with regard to the complexities that have been thrust upon you by the deceased's will, as a result of the life interest beneficary not going on to occupy the trust property as their home and you now having to address investment income matters on their behalf.

This outcome is all well and good where the property is expensive ( say £500k plus),  but is a bit of pain for much lower valued properties as in your case.

However, you can streamline your tax compliance by mandating the income as suggested ( so no annual income tax to pay). You might not need a separate bank account if the stockbroker pays the investment income direct to the beneficiary and of course deduct their own management fees at source. They might even agree to pay third party costs ( on your instructions).

Certainly if ( as suggested in the tax adviser article) you get HMRC to agree for you to only submit tax returns for occasional realised investment portfoilio gains or losses, this could  help cut down on annual trust admin.

All in all undoubtedly a bit of a steep learning curve. However if you have the time or inclination you might find it helpful to skim through the following guide produced for professional trust practitioners, if nothing else you would gain further insight into this complex area, which can be quite onerous even for trained professionals.

https://www.worldofbooks.com/en-gb/products/trust-practitioner-s-handbook-book-gill-steel-9781853289453?gad_campaignid=17415896148&gad_source=1&gbraid=0AAAAADZzAIC3a67-OiHAmoTJnpqg6J7ae&gclid=Cj0KCQjwjJrCBhCXARIsAI5x66UNkvQLvS8OXkobvPTf2-9VN5oI_aMfwqhwiRrN6CESnfCfsxXArLcaAr1lEALw_wcB&sku=GOR005654790

Lumphammer2

Congratulations on 1200 posts!

The property sale has not completed yet -  I am trying to get ahead of the game - haha.

I had no idea of the property maintenance situation.  Also, I had not considered CGT implications within the trust on investment gains - any investments I have personally are within ISAs.

Again, I appreciate your comments regarding streamlining the admin and will look into these.  I had wondered about whether the broker would make third party payments....

I do like the idea of a trust account, which would certainly serve a purpose in the short term, but presumably could be closed when everything was up and running smoothly via the broker. 

I think I will buy the book!

Thanks!!!