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Tax advice on life insurance.
My client set up a whole of life insurance policy on his own life in 1992 with the policy proceeds in trust for the benefit of his then business partner.
The business partner died in 1999 and the insurance company has held the policy proceeds for my client absolutely since then. The current life cover is £450,000 and the annual premiums are about £3,600. The current cash in value of the policy is £30,000.
My client is now 70 and is in good health. He is planning to retire soon.
He’s asked me for advice on what best to do in respect of the policy. I’ve told him that I cannot give investment advice. I have said that I am will give him some limited taxation advice and I would welcome a steer from Taxation readers on the key points.
His main options appear to be:
- set up a trust of some type and place in it the life insurance proceeds for the benefit of his two adult children; or
- assign the benefit of the policy to his children.
What are the key pros and cons of each of these two routes from a tax perspective? Do they both have the same inheritance tax outcome or does one give a more favourable result?
The insurance company does provide standard template documents for the creation of a trust. Would readers recommend that the client use these or is it best that a solicitor is appointed to prepared a bespoke trust deed?
Query 20,191 – Confused.
Are companies owned by a mum and daughter associated?
I act on behalf of a mother (A) and daughter (B) who each carry out work through their own personal service companies, X Ltd and Y Ltd respectively. B carries out work for various clients through Y Ltd which is managed by A who is paid for this through X Ltd. The net taxable profits of both companies have been about £20,000 a year.
B owns all of the shares in her company Y Ltd, while A owns 50% of the shares in X Ltd with the other 50% being owned by her boyfriend (C). Other than possible IR35 implications – on which I would appreciate comments – this seemed, historically, a straightforward situation. My main concern now is the twin rates of 19% and 25%.
The cause of worry is that C also carries on business through X Ltd and has recently secured a contract that is likely to yield substantial profits. I have it in mind that the rules for associated companies have recently changed. I don’t think this would have been important in the past, but if the companies are associated and the profits of X Ltd increase, will more of this be taxed at 25% because the small profits limit has to be split between the two companies?
I suppose I could suggest that C forms a new company (let’s call it Z Ltd), in which he owns all of the shares, to carry on the work of the new contract. However, I then wondered whether Z Ltd would be associated with X Ltd and possibly Y Ltd, which would make the situation even worse. I also wondered whether the situation would change if A and C got married.
Is there a problem and how would Taxation readers resolve matters?
Query 20,192 – Sociable.
Tax-free travel and subsistence for director
My clients are a utility maintenance company and its two directors. The company’s offices are in Kent, but the directors are working on a project in Wales and so far this has lasted for more than 24 months. They took on a new employee to help with this work and he lives near the company’s main office, as do the directors. Each week, the directors and the employee travel by van to Wales and return to Kent on Friday evening. While in Wales during the week they live in a caravan. What, if anything, can the company pay them as a tax-free subsistence and/or travel allowance.
My clients have met some other workers who travel to Wales each week to work on a similar project – they also stay in a caravan – and they are being paid £300 a week tax-free for travel expenses.
Is there any difference in what could or should be treated as tax-free travel and subsistence between the directors and the employee, given that the latter was employed specifically to work on the Wales project? Would travel expenses he incurs not be home-to-office commuting? And would that mean that he could not be paid a subsistence allowance?
Query 20,193 – Traveller.
Sales of whisky: are they eligible for margin scheme?
I have a client who owns a cash rich limited company and he intends to purchase investment bottles of whisky, on the basis that they will increase in value with the passing of time and produce a better return when sold than interest earned on a deposit account with a bank.
The client’s company is VAT registered and fully taxable and my question is whether his new activity will be eligible for the VAT margin scheme? If so, are there any special rules that he must follow? I understand that the global accounting scheme might also be relevant but am not sure if this is correct?
As a separate suggestion, would it make more sense for the company to lend his wife money to invest in the whisky; she pays the company a commercial rate of interest; her turnover will be less than £85,000 so the VAT problem goes away?
Query 20,194 – John Daniels.
Queries and replies
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