Chapter 6 - Legal concepts relevant to financial advice

1. Individuals who solely controls their own business.
2. They are self-employed, personally liable for the debts and liabilities of their business. Self-employed pay income tax twice yearly directly to HMRC and NI is paid under class 2 & 4.
3. Law doesn't distinguish between the person who owns or runs the business and the business itself. Neither does HMRC. No tax on an unincorporated business which makes profits, instead the tax is levied on the individual owner(s) . (They are one and the same).
4. Profits in normal trade is liable to income tax, payable by owner. Capital gains made by the business, treated as gains made by individual = liable to CGT.
5. The taxation of employees is separate from the business. Employees pay income tax under PAYE & class 1 NI. The employer is liable to pay secondary Class 1 NI for the employee.

1. Each partner has unlimited liability for the trade of debts & pays income tax and NICs on their share of the partnership profits. Each partner is liable for their own tax not any other partner. (Employees the same as sole trader)
2. Limited Liability Partnerships (LLP) are separate legal persons, they have limited liability and the partners are not individually liable for the LLP's debts.
   1. However the parnters are still self-employed and pay their own tax & NIC. But no corporation tax.

1. HMRC look at the company for tax not the partners. These have limited liability, the company is responsible for debts to the limit of its own assets. NO member of the company is responsible for debt or it will be unlawfully trading.
2. Ltd's must be registered under Registrar of Companies, they have to supply specified info, and yearly accounts which is avaliable to the public
3. Moving from a partnership to a Ltd is called incorporation.
4. Ltd's & plc's are the same except Ltd's are unable to advertise its shares for sale, only changes hands by private agreement.
5. Tax difference between Ltds & unincorporated firms: Ltds don't pay income tax nor CGT, but they pay corporation tax on all forms of profits. Also the owners become employees and are liable for PAYE income tax & Class 1 NI.

1. When a company becomes quoted on the Stock Exchange!!!!
2. Following rules apply:
   1. 1. Have at least 2 directors and 2 shareholders. 2. must state they are a plc and have plc at the end of there name. 3. An extra certificate from the Registrar of Companies, by having an allotted shares witha a nominal value of £50,000, the company must have recieved at least 1/4of the nominal value.
   2. 4. The company secretary must be part of a professional body/ directors to recognise as qualified. 5. Must lay their accounts & reports before a shareholder/ annual meetings. Accounts must be filed within 7 months before end of accounting period. No waivering/ abbreviating of accounts.
   3. 6. Disclosure of shareholdings & info that might affect share price. 7. Takeovers & mergers of listed companies are controlled by the Takeover Panel.

1. For a binding contract to exist the following has to happen: 1. There must be an OFFER and an ACCEPTANCE, both parties must understand the terms. 2. An INTENTION must be created & both parties must have the POWER TO CONTRACT. 3. Must be CONSIDERATION. Both parties must pay or stand to pay something to the other.

   Annotations:

   • 3.e.g. - Policyholder pays the premium, and the life office guarantees to pay the sum assured.
   1. However, in the case of Life Assurance contracts: UTMOST FAITH applies to both proposer and insurer. INSURABLE INTEREST applies as it requires the proposer of a life contract.

      Annotations:

      • Utmost faith - defined as a positive duty voluntarily to disclose, accurately and fully, all facts material to the risk being proposed, whether requested or not
      • Insurable Interest - the party to whom the benefits will be payable, to have some financial interest in the life assured. Interest must arise through a legal or equitable obligation.
      1. CONSUMER INSURANCE ACT 2012 - in force from 6 APRIL 2013 - the duty to take reasonable care not to make a misrepresentation.

1. Some people are subject to special rules which restrict their capacity to contract
   1. MINORS: to protect them from their own inexperience which may lead them into agreements which are disadvantageous to them.

      Annotations:

      • Three contract: Contract which are binding - employment. Contract which are binding unless repudiated - lease or partnership and holding of shares. Contract which ar not binding - most contracts. mainly contracts to borrow money.
   2. Mentally Disordered Persons: Generally valid, except avoided when they are unable to understand the nature of agreement & other party was aware of this inability.
   3. Drunken persons: similar to mental disordered. Only avoided if the drunk person was so confused at the time & didn't understand what they were doing.

1. The proposal form is completed by the proposer is by law the offer - then considered by insurer, who make& if prepared to accept the risk, will issue a letter of acceptance stating it will issue the policy, once the 1st premium is take in time and medical health is unchanged.
2. The letter of acceptance is, at law, a counter offer - proposer can accept by paying the 1st premium. A receipt of signed DDM or standing order = receipt of cheque - is acceptance - binding contract
3. 30 day cooling-off period in which to change their mind under cancellation notice period

1. If client discloses info to IFA but IFA doesn't disclose it to insurer = NO non disclosure = contract valid.

1. FREEHOLD - both building & land it stands on is owed until such as the owner decides to sell it or dies. LEASEHOLD - land on which a building stands is not owned outright by the buyer. Instead, it is leased from the person who owns the freehold rights at a 'rent'. COMMONHOLD - new form of ownership for flats and was introduced by the COMMONHOLD & LEASEHOLD REFORM ACT 2002.

   Annotations:

   • Commonhold - it aims to provide an alternative to leasehold & eventually replace it. Flat owners under this are called UNIT-OWNERS. they own the flat & are members of commonhold association. also commonhold association own the land, building & common parts.

1. Freehold property - not difficult to get a mortgage. Leasehold property - most mainstream lenders will only consider lending if the lease has at least 25 years to run after completion of the mortgage term.

   Annotations:

   • This 'safety margin' is required so that if the borrower defaults and the property has to be sold to repay debt, it can still be sold at reasonable value in the market.
2. Lender needs to see a clear & legally binding agreement concerning financial responsibility for the repair & maintenance of the building. However, lenders will lend on leasehold flats only - terms of lease will set out responsibility for common repairs & flat-owners within a block under the same terms can share part of the costs.
3. To overcome the difficulties of leases running out, a leaseholder has the right to do one of 2 things: 1. Buy the freehold. 2. Extend the lease. These conditions are only if the lease has been held for 2 years or more. The C&L reform act 2002 introduced changes to freehold purchase & lease extension.

   Annotations:

   • Changes such as: Reduction of the number of leaseholders within a block flats whose agreement is required in order to enforce the sale of the freehold from 2/3s of all leaseholders to 1/2.
4. Joint Ownership - 2 or more people buy a house together.
   1. Joint Tenancy - neither individual can sell without the other's agreement. Each has equal share of property, once one dies the other inherits the share without probate & regardless of the provisions of any will.
   2. Tenancy in Common - Each owner holds their share separately. The share can be disposed by wish, once holder dies the share goes to the estate or whoever in the will/ law of intestacy. Shares might not be equal.
   3. In Scotland, joint tenancy & tenancy in common do not apply. Common Property is used ( two people can own property with their own proportions) shares left for wills.

      Annotations:

      • Common property - equates to tenancy in common and joint property to joint tenancy.

1. Shared Ownership - Purchasers buy a share of the property, usually 25%, 50%, 75%, with the remaining share being owned by the housing association. Purchaser pays rent to house association on their share.
   1. Purchaser is able to increase share in the property - Staircasing - issued by house association. ShOw can be sold. And new purchaser takes property at existing owned/ renting split.
2. HomeBuy - Administered & funded by Housing Corporation. - This is a Gov backed initiative and provides grants via the Housing Corp to housing associations, which they can offer as equity loans.
   1. Purchasers must contribute 75% of the purchase price with the housing association providing the balance 25% as an equity loan.

      Annotations:

      • This loan is interest-free and there are no monthly payments or repayments. The loan is repaid when the property is sold, sharing in any rise in the value.

Annotations:

• e.g. in operating bank accounts etc. So someone leaving the country or an elderly person might want to give others power of attorney. 
• A power of attorney is automatically revoked on death, bankruptcy or expiry of a specified time and the donor may at any time revoke the attorney.

1. Enduring power of attorney Act does not apply in Scotland. Scotland uses the Law of Reform Act 1990/ Adults with incapacity Act 2000. A POA established before 1 January 1991 will become invalid on mental incapacity although the attorney may continue to act under MEGOTIORUM GESTIO

1. This was introduced to enable an attorney to continue to act in the event of mental incapacity of the donor of the power. An individual lacks capacity if they are unable to make a decision for themselves due to an impairment/ disturbance in the functioning of the mind/ brain.
   1. Individual is unable to make a decision when: 1. Understand the relevant info. 2. Retain that info. 3. Evaluate that info in making a decision. 4. Communicate that info.
   2. Requirements for enduring power of attorney: 1. It had to be established while the individual had full mental capacity. 2. The individual was aged 18 or over and was not bankrupt. 3. It satisfied the conditions of the EPOAA 1985. 4. The attorney registers the EPOA with the Court of Protection when they believe the individual is incapable. 5. It had to be established before 1 October 2007.
2. Its possible for individuals to restrict the EPOA so that power doesn't come into effect until registered. Powers can be general/ registered and attorneys can be individual or joint attorneys. EPOA do not cover cover the individuals attitude to health care provision. Once appointed, the attorney is expected to manage the individual's affairs in accordance with the principles of the Act.

1. This is a power of attorney where the donor may give the attorney power to make decisions about their personal welfare. To cover financial & Welfare, 2 docs are required - 1. the donor must be over 18with capacity. 2. The attorney must be 18 & not bankrupt.
2. LPA must be under Act regulations and registered with the Public Guardian at Outset. Donor & attorney must read prescribed info, and Attorney must understand their duties. A Certificate must be done from a prescribed person showing that the donor understands the LPA and that there is no fraud.
3. Under sec 12 the LPA cannot be used to make gifts except on customary occasions to persons related/ connected with the donor and gifts to charity which the donor might reasonably be expected to make, and only then if the value is reasonable. However, the Court of Protection can authorise gifts not allowed under LPAs.
4. The donor can revoke a LPA if they have capacity. A LPA is also revoked on the: 1. donor's bankruptcy ( but not as regards welfare). 2. death or bankruptcy of the attorney. 3. dissolution of marriage/ civil partnership between donor & attorney. 4. attorney's incapacity.
5. The Court of Protection can appoint a deputy to take care of a person who lacks capacity. The deputy cannot make settlements of the person's property/ exercise their powers as a trustee. Advanced medical decisions made when the person had capacity and was over 18 are valid after loss of capacity.
6. Receivers using existing Court of Protection orders can continue with all their original powers.