UK Financial Services, regulations and ethics

The simplest way to operate a business is as a sole trader. In the eyes of the law, there is no difference between the legal personality of a sole trader and their business.

Individuals have complete control over their business and, after tax, all profits  to them. However, this business structure – described as ‘unincorporated’ comes with the risk that the owner is personally accountable for any liabilities that their business incurs, i.e. any business debts are personal debts of the business owner. In effect, they could lose everything! In respect of tax, HMRC does not distinguish between the individual and the business. Self-employed/sole traders provide services for others under a ‘contract for services’.

Sole traders will be liable to income tax and Class 4 National Insurance contributions (NICs) on their net business profits. In broad terms, profits are the business’s turnover less allowable expenditure. Any capital gains made on the sale of business property, including assets like machinery, will be chargeable on the owner.

As far as administrative burdens go, sole traders simply have to file an annual self-assessment tax return and keep records of their business income and expenses.

There is nothing to stop a sole trader employing people. If this happens, the employees will be pa...

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Public limited companies

A public limited company (PLC) is a company that began life as a private limited company, but which is later ‘floated’ on a Stock Exchange, and its shares are then quoted on that Stock Exchange. It has share capital and its memorandum of association states it to be a public company. The shares of a PLC may be offered for sale to the general public. Hence, companies listed on a recognised stock exchange such as the London Stock Exchange must be PLCs. A PLC must comply with the following requirements:

The must be at least two directors and two shareholders

The company’s name must end with plc

The authorised share capital must be a minimum of £50,000 of which 25% is paid up (i.e. £12,500 must be placed in a bank account for the shares)

A PLC is not entitled to commence business or exercise any borrowing powers until the Registrar of Companies has issued a certificate of compliance with the capital requirements as set above

Accounts must be audited and filed each year within six months of the end of their accounting period

An annual general meeting (AGM) must be held each year

The company must have a qualified Company Secretary who must be a qualified person

The law of contract in relation to life assurance contracts

Starting with the basics – a life policy is a legal contract (between the persons buying and selling the life insurance policy) and to be a valid contract recognised in law, it must have:

An offer and acceptance

There must be “insurable interest”

There must be “consideration”

The parties to the contract must have the capacity to enter into the contract

Both parties must enter into the contract with utmost good faith and retail customers must take reasonable care not to make a misrepresentation

Offer and acceptance

When considered in the context of a life policy, what would be considered as an offer? Well, an applicant completes a proposal form and sends this to the insurer. This, in law, is considered an offer

If th...

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This approach was problematic as the onus was on the applicant to understand what information may or may not be relevant, should they, for example, disclose details of a minor medical condition that happened many years ago

Problems also arose as a number of policy claims were declined on the basis of non-disclosure (of relevant information), particularly in relation to critical illness cover

The duty to act in utmost good faith was replaced with a requirement for the applicant to take reasonable care not to make a misrepresentation

This change was implemented by the Consumer Insurance (Disclosure and Representations) Act 2012 which came into force in 2013

Therefore, it follows that if all material facts are not disclosed, then the

The duty of commercial customers is set out in the Insurance Act 2015, their obligation is to make a fair presentation of the risk in a way that is reasonably clear and accessible to a prudent insurer

Where two parties establish an...

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General – why making a will is important

Making a will allows a person to leave specific instructions as to how their estate should be distributed of and who should benefit following their death. A person’s estate is the value of their assets on death, less the value of their liabilities.  

No one likes to think about what will happen when they die but if they do not make a will they could leave their dependants with delays, financial hardship and worry while their estate is sorted out. There could also be significant legal costs if the estate and the range of beneficiaries are complex. In summary, if a person does not make a will, administration of their estate will be unnecessarily complex and their assets may not be distributed in the way they would like.  

Dying without leaving a valid will is referred to dying intestate and the person’s assets with distributed under the intestacy provisions, we will consider these later.

For a will to be valid there are three requirements:

It must be in writing

It must be signed by the person making it (the testator)

The testator’s signature must be witnessed by two or more people, present when it is signed

The advantages of writing a will

If the value of the deceased’s estate is more than the inheritance tax (IHT) nil rate band, there will be a liability to pay IHT of 40% on the excess

One way to avoid this is for a UK res...

Shortened demo course. See details at foot of page.

The duties of the personal representatives are to gather the assets of the estate together, pay any debts, pay any inheritance tax liability and distribute the remaining assets, in line with either the terms of the will or the intestacy provisions. For a fee, personal representatives can engage the assistance of a solicitor.

If the total assets of the deceased’s estate exceed a small minimum figure, they must obtain a grant of representation which is issued by the Probate Registry. The grant of representation empowers the personal representative to act in dealing with the estate. There are two types of grant of representation.

Grant of probate

The executors must “prove” the will in the Probate Registry to obtain the grant. Once issued, the grant enables them to administer the estate. Before receiving the grant, executors of large estates must complete an account for HMRC showing all assets of the deceased plus any gifts made in the last seven years. If this amount exceeds the inheritance tax nil rate band, the tax due (or at least a proportion of it) must be paid before the grant is issued.

Letters of administration

Where no will exists, the Probate Registry will issue Letters of Administration, with the same provisions for calculating and paying tax as for Grants of Probate.

There are three parties required to create a valid trust:

The settlor

The trustee(s)

The beneficiary or beneficiaries

A trust is a legal arrangement where someone (the settlor) gives away an asset to benefit others (the beneficiaries) without passing over immediate full control to the beneficiaries. The asset instead is legally owned by another person (the trustees) who hold the asset for the benefit of ...

Shortened demo course. See details at foot of page.

Freehold

A freehold property is one where both the building and the land it stands on are wholly owned by a person until such time as that person decides to sell it or they die. If someone owns the freehold, it is their name in the Land Registry and they own 'title absolute'.

Leasehold

A leasehold property is one where the land on which the building stands is not owned outright by its buyer. Instead it will be leased from the freeholder to the buyer for a specific period. Leases often run for periods of 99 years or 125 years. Lease terms can be as much as 999 years. At...

Shortened demo course. See details at foot of page.

In Scotland,  common property ownership operates on a similar basis to tenancy in common and joint property operates like a joint tenancy.

Government schemes

Shared ownership schemes are operated by housing associations in their locality. Purchasers  buy a percentage share of the property, with the remainder owned by the housing association. A rental fee is paid to the housing association for the percentage not owned by the purchaser. It may be possible to increase the percentage owned (up to 100%) over a period of time. The owned share can be sold.

Ordinary powers of attorney

An ordinary power of attorney is a legal document executed by the donor, which gives the attorney authority to act on their behalf. The power of attorney may be restricted to a specific matter or could give the attorney the power to deal with all of the donor's affairs (general power). It can be useful in circumstances where, for example, an individual will be outside of the UK for an extended period and requires someone to look after the business interests or property in the UK.

An ordinary power of at...

Shortened demo course. See details at foot of page.

The Court of Protection

The Mental Capacity Act 2005 introduced powers under the Court of Protection to make decisions in relation to the property and circumstances of people who are unable to manage their own affairs.

The Court has the same powers, rights, privileges and authority in relation to mental capacity matters as the High Court. It has the powers to:

Decide whether a person has capacity to make a particular decision for themselves

Make declarations, decisions or orders on financial or welfare matters affecting people who lack capacity to make such decisions

Appoint a deputy to make decisions for people lacking capacity to make those decisions

Decide whether an LPA or EPA is valid

Remove deputies or attorneys who fail to carry out their duties, and hear cases concerning objections to register an LPA or EPA

Bankruptcy

Where an individual’s financial situation is such that they have an inability to repay their debts they may face the prospect of bankruptcy. This could either be undertaken voluntarily by the debtor (borrower), or procedures could be instigated against them by their creditors (lenders).

It is important to understand when bankruptcy could occur and the effects it could have on a person’s assets, as virtually all assets could be liquidated (including any financial products or investments that they own) to repay debts.

Bankruptcy applies to individuals, whereas the term insolvency applies to corporate bodies. We shall discuss insolvency more later.

Bankruptcy procedures

Bankruptcy procedures start where a creditor or creditors (or the debtor himself) petition the court for a bankruptcy...

Shortened demo course. See details at foot of page.

Corporate Insolvency

Insolvency applies to companies. Where a company is insolvent, it can be put into liquidation and its residual assets are then used to firstly repay creditors, with any balance left over going to shareholders. As a result of this process, the company is wound up by the liquidators and will no longer exist. This is known as compulsory liquidation or ‘winding up’.

These are alternatives to liquidation:

Administration – whereby administrators appointed as officers of the court (or by the company’s directors) run the company with the intention of retaining it as a going concern whilst realising sufficient assets to repay debts

Company Voluntary arrangement (CVA) – whereby insolvency is avoided by substituting it with an agreed settlement between the creditors and the company

These procedures can allow a company to survive insolvency.