UK Financial Services, regulations and ethics

Self employed/sole trader

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 all profits after tax go to them. However, this business structure – described as ‘unincorporated’ comes with a risk that the owner will be personally accountable for any liabilities that their business incurs, i.e. any business debts will be their personal debts. In effect, they could lose everything! 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 on their net business profits. In broad terms, profits are the business’s turnover less allowable expenditure. They will also be liable to National Insurance contributions. Any capital gains made on the sale of business property, including business 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 paid and pay income tax and Class 1 NICs via PAYE. The sole trader/employer will also be liable for secondary Class...

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... may draw income in the form of a dividend which holds the advantage of not being subject to National Insurance contributions.

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 minimum number of directors and shareholders must be two

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 Company Secretary who must be a qualified person, i.e. a Chartered Secretary, Chartered or Certified Accountant, Solicitor or other similarly qualified person

In this section we try to understand what the constituent parts of a valid contract are and consider additional elements that make up a contract for life assurance.

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 ...

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... a proposer’s state of health unless the proposer declares all the facts (in utmost good faith and with reasonable care not to make a misrepresentation) to the insurer’s underwriters as they need to know the proposer’s state of health or other details, not just of the proposer but also the life assured if different. The Consumer Insurance (Disclosure and Representations) Act 2012 which came into force in 2013, replaced the duty to disclose facts which an insurer would consider material with a duty to take reasonable care not to make a misrepresentation

Therefore, it follows that if all material facts are not disclosed, then the contract between the proposer and the insurer could become void. This would probably not come to light until the event of a subsequent claim

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

In this section we briefly describe the term “agency” and how this applies to the workings of the financial services industry.

Where two parties establish an...

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...valid – liability falls on the insurer. In other words, an insurer is responsible for the acts and omissions of its agents and ensure that they comply with FCA rules.

In this section we try to understand the laws of succession in the UK and also consider the main structure and uses of trusts.

General – why bother making a will?

Making a will allows a person to leave specific instructions on how their estate should be disposed 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, hardship and worry while their estate is sorted out. There could also be heavy legal costs if the estate and the range of beneficiaries are complex. In short – if you do not make a will, your estate could be passed on to beneficiaries that you did not intend to benefit!

Dying and not leaving a will is called intestacy and this will be covered in more detail 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 deceased’s estate is more than the inheritance tax nil rate band, there will be a liability to pay IHT of 40% on the balance over the nil rate band

One way to avoid this is for the estate to be left to the UK domiciled spouse/civil partner, as this is an exempt transfer

But what h...

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...d the administration of estates

Those persons named in a will as the “executors” are responsible for dealing with the deceased’s estate. Where no will is made, the estate is normally handled by the next of kin, who is known as the “administrator”. These two terms are known collectively as the “personal representatives”.

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. Assistance is available to personal representatives from solicitors.

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. 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.

Basic trust structure

There are three parties required to create a valid trust:

The settlor

The trustee(s)

The beneficiary or beneficiaries

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

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...versary (called the “periodic charge”) and also on payment of capital out of the trust at any other time (called the “exit charge”). These charges can be complex to calculate and beyond the scope of this course, but in general they will only apply if the trust assets are more than the nil rate band at the start of the trust or the last ten-year anniversary, otherwise the IHT tax charge will be zero

In this section we discuss the different forms of ownership and their effect on the way assets are held both singularly and jointly.

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 freeh...

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...ner.

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.

Under the Powers of Attorney Act 1971, a power of attorney enables an individual (known as the donor) to allow someone (the attorney) to make decisions on their behalf as regards matters such as their property and money. In this section we try to understand the different forms of attorney that are available and how they affect the decision-making process for a client.

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).

An ordinary power of attorney will come to an end if the donor becomes mentally incapable. Up until 1 October 20...

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...tion

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 deputies 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

In this section we describe when bankruptcy occurs, the effects of a bankruptcy order and possible alternatives to taking this course of action. We also consider the subject of corporate insolvency.

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 they could all be virtually 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 order. The court will not entertain a petition where...

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...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 liquidations:

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.

Since 1 December 2020 if a business becomes insolvent more of the taxes paid by employees and customers which are temporarily held by the business (VAT, PAYE income tax, employee NICs) go to fund public services rather than being distributed to creditors. Taxes owed by the business themselves (corporation tax and employer NICs) can still be used to pay the debts of the business.