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 all profits after tax go to them. However, this business structure 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!

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 Class 2 and Class 4 National Insurance contributions. Any capital gains made on the sale of business property 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 1 NICs for the...

Shortened demo course. See details at foot of page.

Public limited companies

A public limited company (PLC) is a company which is quoted on a Stock Exchange, has share capital and whose 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

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 consider...

Shortened demo course. See details at foot of page.

An insurer cannot know all the facts about 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

Shortened demo course. See details at foot of page.

Wills

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.

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 “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

Bu...

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. 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.

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 benefit of the beneficiaries in accordance with the specific terms ...

Shortened demo course. See details at foot of page.

Accumulation & Maintenance (A&M) trusts – lifetime transfers into A&M trusts were regarded as PETs even though the trust itself was discretionary although there were no periodic and exit charges. Such trusts were typically used by grandparents for the benefit of their grandchildren

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.

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. Lease terms can be as much as 999 years. At the end of the lease term the property reverts back to the freeholder. However, with long leases, this is somewhat academic.

Commonhold

Commonhold was introduced in 2002 for property ownership in England and Wales. It is a...

Shortened demo course. See details at foot of page.

The borrower remains wholly responsible for the mortgage repayments

The property being purchased can be an existing or newly built property in the UK up to a value of £600,000 in England

The borrower must not own any other property anywhere worldwide

The mortgage must be a repayment arrangement

The property cannot be sublet

The scheme cannot be used in conjunction with any other Government scheme

The deposit for the property cannot come from a Government scheme

There is no fee payable to the Government

The size of the mortgage must be less than 4.5 times income

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...

Shortened demo course. See details at foot of page.

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

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 cou...

Shortened demo course. See details at foot of page.

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

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.