Last Updated: 25 Jun 24 10 min read
Q. £325,000 was invested in a Prufund Investment Plan Mark 3 using a Gift Trust. If the PET fails how is any potential IHT paid and does the Gift Trust have to be collapsed?
A. The PET is relevant to the deceased settlor's IHT calculation. Whether or not IHT is payable will depend on the settlors history of gifts. For example, if they haven’t made any previous gifts and the PET fails it would simply use up their entire nil rate band and there would be no IHT payable on the failed PET. If they have made previous gifts, some or all of a failed PET will be liable to IHT with the beneficiaries of the trust being primarily liable for the tax on the failed PET. It would be up to the beneficiaries to decide how they pay the tax.
The PET has no relevance to the administration of the trust. Trustees of a bare trust manage the trust fund until the beneficiaries interest vests at age 18 (or 16 under Scots Law). The trustees need to tell the beneficiary when their interest vests and seek direction from the beneficiary what to do with their share of the trust fund as the trustees are at the order of the beneficiary at this point.
If all the beneficiaries for this trust are minors then the trustees will continue to manage the trust fund until their interest vests. If any beneficiaries have a vested interest then the trustees shouldn’t be making decision on how their share of the trust fund is invested unless the beneficiary has given them authority to do so. However, it would be a bit unusual for the trustees to manage on behalf of the beneficiary because it’s the beneficiary that will require financial advice (not the trustees) to ensure the money is invested in line with their own objectives, attitude to risk, capacity for loss and making use for tax favoured products where appropriate.
Q. Can each Trust discussed be used on existing Bonds already set up?
A. The Gift Trust can be used with an existing bond. It is possible to set up a DGT with an existing bond but ultimately it will depend on the options provided by the DGT scheme provider. It is more common for DGT scheme providers to require the trust to be established with cash.
A Loan Trust is set up by the settlor making an interest free “cash” loan. It’s not possible to establish the loan trust with an existing bond as you can’t lend a bond.
Q. There is an IHT benefit to a bare trust for settlor regarding getting your main residence nil rate band back
A. I think you are referring to putting a home into a bare gift trust where the settlor is not the bare beneficiary, rather than a “bare trust for settlor” which is when the settlor is the only beneficiary (a type of trust that might be used to allow trustees to manage an investment while the client is temporary unable to e.g. working overseas).
On the assumption you are referring to a client gifting their home into trust for others, we agree with you and we cover this in sections 5 and 12 our residence nil rate band article
Please note the comment during the session about bare gift trusts not being suitable for adult beneficiaries was not linked to IHT planning. It was linked to the objective of achieving control over the distribution of the trust property where the trust property is an investment, not a home.
Q. When the Settlor waives a part of the outstanding loan, making that part a PET/CLT, does the 7 year clock start ticking at the date of the waiver?
A. Correct.
Q. If a regular income is taken from the loan trust to cover expenditure is this deemed to be growth outside the estate on death in addition to any capital growth attained?
A. The outstanding loan value remains part of the settlors estate. If the settlor reduces the value of the loan by taking loan repayments which are subsequently used to pay for things that don’t increase their estate value (e.g. bills, food, holidays etc) then as a consequence the settlor is reducing the value of their estate.
Q. What happens where loan trust in place and settlor is taking from this on a regular monthly basis and then reaches the point where he has taken back his full loan. What happens if he does not turn off the regular payments and inadvertently takes back more than loan?
A. Clearly that would give rise to a breach of trust as the settlor is excluded from benefitting from the trust fund. The consequences would need to be considered on a case by case basis given the particular circumstances.
Q. An accountant has pushed back on a recommendation I have made to place a sum into 4 consecutive loan trusts, part through Rysaffe principle and part through providing flexibility in future for Deed of Waivers...saying that they will need to register this with DOTAS - I don’t believe they do?
A. We agree with you and not the accountant.
You should find Les’ November 2023 Professional Paraplanner article helpful.
Note, that waiving loans in the future will also need to be done on different days to avoid the same day addition rules applying. The same can be said by having an instruction for any outstanding loan to be waived on death. You should also find the following Loan Trust planning article from our Tech Matters site helpful
Q. Can you use a loan trust for a rental property owned unencumbered - i.e. without a mortgage on it? Will there be CGT payable or can holdover relief be claimed?
A. This type of planning would be out of scope for an insurance company loan trust deed. Specialist advice would need to be sought.
Q. What happens to the outstanding loan on death?
A. We have a loan trusts on death article on our Tech Matters site that covers this specific question which you should find helpful
Q. If a loan is automatically waived on death, does it count as a lifetime transfer for tax purposes (as if it occurred just before death) or a transfer after/on death?
A. No it does not give rise to a lifetime transfer. Remember that there is no IHT advantage of waiving the loan on death. You should find our loan trusts on death article helpful
Q. When would you consider a joint life last survivor discretionary loan trust or would you always do two single bonds for husband and wife say?
A. There is no one size fits all answer.
Single vs joint Settlor – if the survivor on first death will need access to the full outstanding loan then a joint settlor loan trust would achieve this objective but a single settlor couldn’t. However, it should be noted that if two single settlor discretionary loan trusts were used then the surviving spouse on first death would be a potential beneficiary of their late spouses trust. If the first to die waives any outstanding loan to the trust fund then the survivor (at the discretion of the trustees) potentially has access to the entire trust fund (which includes the growth on the loan). Two single settlor discretionary trusts therefore provide greater flexibility than a joint settlor discretionary trust as both settlors are excluded from benefitting from the trust fund.
Single vs joint life assured bonds – this relates to chargeable event planning i.e. do you want the bond to come to an end on someone’s death and automatically trigger the chargeable event. It is a common strategy to have at least one younger life assured who is not the settlor to avoid the bond ending on the settlors death. If the bond doesn’t end on the settlors death it provides the trustees with the option of being able to assign segments of the bond to the trust beneficiaries so the trust beneficiaries can realise the gain on the segments assigned to them at their own marginal rate.
Providing the opportunity to assign segments can help with the income tax planning side of things, particularly if you had a joint settlor discretionary loan trust as quite often one settlor will have passed away in a previous tax year. In such a scenario, if the surviving settlor was the sole surviving life assured, their death would automatically trigger a chargeable event which would result in 50% of the gain being assessed at the trust rate (45%) and 50% against the settlor who’s death triggered the chargeable event.
In the case of single settlor discretionary loan trusts, there might be scenarios where having the settlor as the sole life assured is appropriate because they might be in a lower tax bracket than the intended beneficiaries, in which case having the gain assessed against the settlor in the tax year of their death might be the most tax efficient option.
Care is also required in respect of discretionary loan trusts if there is the potential for there to be an outstanding loan on death and the loan is not getting waived on death. Such a scenario can cause issues from a chargeable event perspective as it’s not possible to assign segments to repay the loan as that would be an assignment for monies worth and trigger a chargeable event.
In the case of absolute loan trusts, the gain will be assessed against the beneficiaries so it’s a case of considering whether it would be appropriate to have the settlors death trigger the ending of the bond. Generally speaking, avoid the automatic chargeable event by having a younger life assured is likely to be more appropriate as it will allow the trustees to assign to beneficiaries and let the beneficiaries decide when it’s best to trigger the chargeable event.
It should be noted that there is still a risk that a younger life assured will die before the settlor. The only way to ensure someone’s death doesn’t automatically trigger a chargeable event is using an offshore bond on a capital redemption basis. However, you then need to weigh up the pros and cons of onshore vs offshore bonds.
Q. When waiving part or all of a loan to a gift trust with an investment bond, please could you explain how the loan and gift are identified as separate? Are x number of segments attributed to the loan/trust for example?
A. This is a paper exercise by the trustees who manually keep a record of the loan position. If the settlor decides to waive part of the loan (which needs to be done by deed) then the trustees will adjust their records of the outstanding loan amount. They do the same for any loan repayments to the settlor.
There is no special structure to the bond because it’s held by the trustees of a Loan Trust. The bond is simply where the trustees have invested the loan from the settlor.
Example:
Original loan: £200,000
Settlor requests loan repayment of £20,000 - The trustees will need to take a withdrawal from the bond and consider the normal chargeable event implications i.e. partial withdrawal across segments utilising the 5% tax deferred allowance, surrender individual segments or consider a combinations of a partial and segment surrender. Once the withdrawal has been made and payment made to the settlor, the trustees need to adjust their record of the outstanding loan amount to £180,000.
Settlor wants to waive £50,000 to the trust fund – Settlor completes a deed to waive £50,000 and the trustees adjust their loan record to £130,000. No action required in relation to the bond.
Q. If the original settlor of a loan trust dies 1 April. Is there any way that the taxation of encashment to repay any loans could *Not* be taxed at trust rates?
A. This scenario would only exist based on there being a surviving life assured or an offshore bond on a capital redemption basis (no life assured).
If it’s a bare trust any gains would be assessed against the beneficiaries. If it’s a discretionary trust and the outstanding loan must be paid back to the estate then the only way to avoid the trust rate applying to a surrender by the trustees would be to surrender before the 6th of April.
However, if the estate beneficiaries entitled to the outstanding loan are also the intended beneficiaries of the discretionary loan trust, then those beneficiaries could consider executing a deed of variation to waive the outstanding loan to the trust. The loan would then become comprised in the trust fund. The trustees could then consider assigning segments of the bond to the intended beneficiaries who can then realise the gains at their marginal rate.
Q. What constitutes an 'emergency' distribution within the DGT structure?
A. In our opinion, this would be a situation where a beneficiary is in urgent need of funds (perhaps following a business failure or on a divorce). You should find the following DGT: payments to beneficiaries article from our Tech Matters site helpful
Q. Should a DGT be on single life only?
A. There is no one size fits all answer. If there’s a sole life assured then the bond will end on their death and automatically trigger a chargeable event. Depending on the circumstances, that might be the desired outcome e.g. if the settlor of a discretionary DGT is in a lower income tax bracket than the intended beneficiaries then having the settlor as the sole life assured the gain would result in the chargeable event gain being assessed against the settlor on their death.
Q. Are the DGT regular payments paid out to the settlor index-linked?
A. It is possible for the settlors payments to be index-linked but ultimately it will depend on the payment options being made available by the DGT scheme provider. In the current market, its more common for the settlors payments to be a fixed amount.
Q. With discounted gift is the remainder of unpaid capital subject to IHT?
A No see our What is a Discounted Gift Trust article on our Tech Matters site for more information.
Q. Regarding DGTs and entry charges. Is it the discounted value that counts i.e. if you place £500k into a bond but the discount is £175k - leaving £325k - is that Ok and wouldn't trigger an entry charge?
A. Correct. The chargeable lifetime transfer (CLT) in your example would be £325k. On the assumption the settlor had no other CLTs in the previous 7 years there would be no entry charge.
Q. Husband & wife, joint DGT or single DGT?
A. There is no one size fits all answer but the key point with a joint settlor DGT is the level of payments carved out will continue until 2nd death. For example, if £1,500 a month is carved out on a joint settlor DGT, will the survivor on first death need £1,500 a month? If the survivor won’t need the full £1,500 there’s a risk the excess capital will build up in their which would be counterproductive to their IHT objectives. In such a scenario it would be appropriate to consider two single settlor DGTs so each settlor can carve out what they need and importantly, will spend.
In addition, if a discretionary basis is being used by each settlor, then on first death the survivor would be a potential beneficiary of their late spouses trust in their capacity as a widow/widower. This means the trustees could consider making regular payments to the surviving spouse if the survivor needs additional funds, but the amount required can be capped at what they will need and will spend, which will ensure their IHT strategy isn’t disturbed.
Q. just after some clarity on the discounted gift trust? The discount falls outside of estate immediately and the gift drops out of estate after the 7 years?
A. The value of the PET or CLT is reduced immediately by the discount which means if the settlor dies within seven years it only the value of the reduced PET or CLT that is included in their estate valuation. After seven years the PET or CLT is out of their estate calculation.
Keep in mind that the settlor will be receiving regular capital payments for life. If those payments are not spent they will build back up in their estate which would be counterproductive to their IHT mitigation objectives.
Q. Has there been any challenge to the legal basis for separating the classes of equity in the DGT bond, without a GROB being asserted?
A. In IHTM20424, HMRC state that provided that the rights retained by the donor/settlor are sufficiently clearly defined, the donor will not be benefiting from the property gifted and the gift with reservation provisions of FA86/S102 (IHTM14301) will not be in point.
Q. Can the income from the DGT be gifted as annual exemption of gift from regular income?
A. No. In IHTM14250 HMRC state:
It is usually clear whether payments received are income in nature. Common sources of income are employment and self-employment, rents from property, pensions, interest and dividends. But, it is possible that payments received on a regular basis may appear to be income but are in fact capital in nature. An example would be receipts from a discounted gift scheme.
Q. Can the payments from the DGT be inflation adjusted?
A. It is possible but ultimately it will depend on the payment options being made available by the DGT scheme provider. In the current market, its more common for the settlors payments to be a fixed amount.
Q. Any issues with setting up an absolute trust DGT with minimum "income" (as some "income" must be paid) to stop beneficiaries gaining access at 18?
A. Although the trustees could refuse to pay out the entire trust fund, the issue would be that the beneficiaries could argue that the trustees don’t need to retain a significant amount of capital to be able to maintain the settlors rights for the duration of the settlors lifetime.
If the beneficiaries took the trustees to Court, the trustees might be forced to release a significant proportion to the beneficiaries.
Q. Don't you have to be careful converting to DGT with existing life assurance bonds where the settlor or their spouse are lives assured? Doesn't it create a GWR?
A. This relates to the special GWR rules within para.7 Schedule 20 Finance Act 1986 and is covered in section 14452of HMRCs Inheritance Tax Manual.
In simple terms a life policy on the life of donor/spouse is only an issue if para 7 applies and that only applies if benefits accruing to the donee vary by reference to benefits accruing to donor or spouse. Using us as an example our DGT doesn’t work like that so para 7 doesn’t apply to us and we obtained Counsel Opinion on this matter in relation to our DGT schemes. Although our DGT schemes have to be set up with a new investment bond anyway.
If you do find a DGT scheme provider that would allow an existing bond to be used with their DGT offering and you are concerned about para.7 Sch.20 FA86 being an issue, we would suggest you ask them if they have obtained Counsel Opinion on the matter as ultimately whether it’s an issue will depend on the terms of the DGT scheme.
Q. Can you set up a DGT without an income instruction, say a client wants to start the 7-year clock now and perhaps draw down on the plan later in retirement?
A. The settlors retained rights (capital, not income) need to be defined at outset in order to calculate whether a discount is applicable. Therefore a payment instruction for the settlors rights will always be required. It is possible for the settlors payments to start at a later date but the frequency must be set at outset. Generally speaking this means annual in arrears is the longest period you can delay the settlors first payment but ultimately it will depend on the system functionality of the underlying investment bond.
Q. With Flexible Reversionary Trusts, like a DGT, there are carve outs so the full capital does remain available to the settlor in tranches each year, but you stated no access to settlors on gift trusts?
A. The presentation did not cover Flexible Reversionary Trusts (FRT). A FRT is entirely different to a Gift Trust which has no carve out for the settlor. However, while there is the potential for the settlor of a DGT to receive more back than the original capital amount gifted (e.g. 5% of the premium for more than 20 years) and for the settlor of a FRT to have a return of the original capital, the settlor is excluded cannot access the “trust fund” on a Gift Trust, Loan Trust, DGT or FRT as they are explicitly excluded.
Q. What would happen if the beneficiary did give the money from a trust back to a settlor?
A. The beneficiary would be deemed to be making a Potentially Exempt Transfer (PET) for IHT purposes. The settlors estate would increase by the value of the PET.
Q. What do we know so far about Labour's view on IHT? Is there any detail from their statements or manifesto on what is likely to happen to allowances and business relief on asset backed and AIM as well last trust planning?
A. To the best of our knowledge there is, as yet, no such detail on IHT.
Q. Do you see any situation in practice where there is rationale for the CLT getting triggered, i.e. the gift value is going to be exceeding the NRB?
A. If you knew when someone was going to die you could calculate whether an entry charge would be worthwhile paying or not. If an individual had £100k which was going to have 40% IHT paid on it on death, then paying an entry charge might be preferable if death were to occur within 7 years. If the money was in trust at least the growth on the money would be outside the estate and taper relief may apply of the settlor survived more than 3 years leading to less than 40% tax on the money.
Q. To get around the parental settlement rule, can the parent gift the money to the grandparent to settle the money into a gift trust?
A. No.
Q. Can the same person set up 2 trusts on different days to escape CLT if the settlement (or value thereof) they are making is over £325,000?
A. I’m afraid not. The multiple trust strategy relates to periodic charge planning, not entry charge planning. If they haven’t used their annual exemption in the year or previous year then they could get a further £6k in without incurring an entry charge. Otherwise, anything above would incur an entry charge. If they want to avoid the entry charge, they could consider a loan trust for the amount above the nil rate band. At least that way the growth on that capital will be outside their estate. They can look at a further CLT once the rolling seven year period elapses. In between, if they are not using their annual exemption elsewhere, they could waive £3k of the loan each year which would be immediately exempt and save them £1,200 in IHT each time (a good way to demonstrate value each year for ongoing adviser charges).
With regards to multiple trust planning you should find Les’ November 2023 Professional Paraplanner article helpful.
Q. If you gave it back to the settlor it is fraud on a power?
A. The trustees can only act within the terms of the trust deed. If they act outside those powers they are said to be in breach of trust. A breach of trust will cause some detriment to the beneficiaries. As trustees can only act in the interests of their beneficiaries a newly appointed trustee is obliged to check that there have been no previous breaches of trust. If there have been such breaches the situation must be remedied. The beneficiaries may absolve the trustees from responsibility for the consequences of the breach. Otherwise the trustees have to make good any loss to the trust fund from their own resources.
Q. 2 x single settlor trusts - don't you need to remove one of them as a beneficiary on the other trust to avoid a reciprocal arrangement? Therefore remove John from her trust on the basis he dies first?
A. In our view no. Beware however if Jack and Jill each set up a discretionary gift trust (for example) and while both are alive Jack’s trustees distributed funds to Jill then it would be difficult for them to argue that no gift with reservation has occurred as Jack has probably (indirectly) benefitted. Different story though if Jack was deceased as there can be no GWR if the settlor is deceased.
Q. If an onshore bond in discretionary trust has a single life (the settlor) and they died so the bond paid the death benefit into the trust, is it right that the chargeable gain on the bond would be taxed on the settlor in the tax year they died in and not the trust rates?
A. Correct. Section 4 of the our Important Information about Trusts guide has useful flow charts to help you assess who is liable for bond gains for bonds held in trust.
Q. With a Discretionary Trust once the 7 years are up, does the Nil Rate Band reset?
A. Assume a client has carried out no IHT planning. Ignoring the annual exemption he/she could place £325,000 into a discretionary gift trust for example – no entry charge. Assuming no subsequent trust planning, then after seven years have elapsed, the client could later place a further £325,000 (assuming no change to the NRB) into the trust – again no entry charge.
Q. Where a CLT applies, what is the most practical method of funding periodic charges?
A. The trustees are liable for any periodic charge that arises and will need to pay it used trust funds. In the case of the trust property being an investment bond, the trustees will need to take a withdrawal from the investment. The trustees will obviously need to be mindful of the chargeable event implications of taking a withdrawal from the investment.
Q. Where there is an existing Will NRB, can the surviving spouse take a loan from the WNRB and then gift it to discretionary trust therefore creating a debt to her estate to mitigate IHT on her estate?
A. If the trust provisions allow the trustees to lend trust funds to trust beneficiaries and the spouse is a beneficiary then this would be possible. The trustees should get a formal loan agreement drafted by a solicitor.
Q. Hi, appreciate this is not a trust covered today, but I have a client with Prudence Savings Account with MWPA trust - would this be IHT-free on death?
A. Suggest you pass it onto your account manager and he/she can forward onto us (i.e. the technical team) for review. You can redact names if you so wish.
Q. Every life company appears to have interpreted the TRS requirements differently. What are Pru / M&G's views on this?
A. Life companies create their own procedures for fulfilling their obligations from interpreting the legislation and HMRC’s guidance in the Trust Registration Manual. Different life companies have different procedures although many are broadly aligned in what they ask for.
Q. If Labour gets in, will there be any ramifications on any of the IHT arrangements in the next parliament?
A. See earlier query, we have no knowledge of Labour’s IHT plans.
Q. Bust a Trust: why don't trusts routinely include a provision to allow it to be revoked? I assume HMRC reasons.
A. A revocable trust is not suitable for trusts designed to mitigate inheritance tax.
Q. At what point do these trusts to be registered with the TRS and who is responsible for doing it?
A. Trust registration deadlines for trustees can be found at the link below. It’s worth remembering however that “relevant persons” e.g. providers, financial advisers, have a responsibility to carry out discrepancy checks prior to entering into a new business relationship with trustees so the trust would need registered by that point.
Please see section 40010 of HMRCs Trust Registration Manual.
Q. If married client puts £500,000 into a bond using a vulnerable persons trust (discretionary) for their disabled daughter, will it use up most of their NRB?
A. A gift into a qualifying trust for a vulnerable beneficiary is a potentially exempt transfer (PET). If the settlors survive 7 years their gifts are exempt and will use no nil rate band. If death occurs within 7 years, the deceased’s nil rate band is offset against gifts in the 7 years before death in chronological order, oldest first.
For further guidance please refer to our Trusts for disabled persons article on our Tech Matters site.
Q. I have a client who has received £1m from her late husband's life policy. Is it possible to enact a deed of variation, as you can with a will, to direct this money to her children (aged 12 and 14)?
A. It won’t be possible to use a deed of variation if the policy proceeds did not form part of the late husband’s estate. It’s unclear from the question why the proceeds were paid to the wife.
If you have more details then we can consider the query further. You can do this by contacting your M&G account manager directly or you can use the “Ask-an-expert” option on our Tech Matters site
Your account manager will then get in touch with our team.
Q. For the same client with £1m proceeds from her late husband's life policy, who has an intact Nil Rate Band, how much would you recommend settling to a Discretionary Gift Trust allowing for growth and taking into account the 10 year periodic charge?
A. This is too wide a question and with limited client information. If you would like to discuss this client’s circumstances in more detail with someone from our team then please get in touch with your M&G account manager who will be able to set up a call with us.
Q. When would you use a probate trust for an existing bond?
A. Please see details here regarding probate trusts being used for new or existing bonds owned by a single individual.
Q. Can you take into account the £3000 annual exception when paying money into a trust if unused elsewhere?
A. Yes. You should find our article on the annual exemption helpful
Q. Parent invests via a discretionary trust in an investment bond for the benefit of their child. Parent now wishes to make a withdrawal and pass funds to a child who is a minor. Is the parent who was the settlor subject to income tax on any gain?
A. Correct. Under ITTOIA/S629, where the settlor is a parent, then the income is taxed on the parent whether or not it is paid to the child. In this respect, 'child' refers to a minor child or step child of the settlor (who is neither married nor in a civil partnership).
Q. For a new payment into an offshore bond within an existing Bare trust is it better to add to the existing trust within the 7 year window or set up a new bond and Trust?
A. There is no difference from an IHT perspective as the gift will be treated the same either way and there are no periodic charges on the trust fund. Having an extra trust might involve additional administration by the trustees e.g. trust register, however setting up a new bond could offer more flexibility or planning benefits in the form of more segments or different lives assured.
Q. Also if the settlor and the beneficiary pass away in the 7 year window who pays the IHT from a bare Trust?
A. If the settlor dies within 7 years of making a potentially exempt transfer (PET) into a bare trust, the PET fails and becomes chargeable. If there is IHT payable on the failed PET, any IHT should be paid by the trustees of the bare trust. If the beneficiary of the trust also dies their share of the trust forms part of their estate. If IHT is payable then the executors must pay this from the estate and could use the trust fund if required. If the settlor and beneficiary bother died in such a short timeframe then “quick succession relief” might apply to any IHT due on second death.
Q. How are gifts out of regular income into a trust viewed, does the 7 year rule come into effect or are they already out of the estate? Secondly would they be subject to periodic charges?
A. As they are exempt they are immediately outside of the settlors estate. However, if the gift is to a discretionary trust the amount gifted becomes relevant property and is therefore potentially subject to periodic and exit charges.
Q. In regards your Onshore Bonds you are only able to have 2 lives assured so limits the flexibility of encashment as the bond ceases on 2nd death. Are there plans to increase the number of lives assured to increase the flexibility?
A. No.
Q. If money is gifted to a BPR scheme is the £325k NRB available after 2 years instead of 7?
A. You don’t gift money to a Business Relief scheme. Gifts are made into trust or to individuals. If money is invested in a Business Relief scheme then it could qualify for Business Relief once the investment has been held for 2 years. If you then make a gift of the investment and the donor dies within 7 years there are conditions that need to be met for deciding whether business relief is due on the gift. The article below gives more detail on how business relief applies to lifetime transfers.
Q. Morning, I don't know if you will cover it or not but are there preferred methods for nursing home fees please including cash and property?
A. This isn’t something that was covered in today’s session. Care/nursing home fee planning is not an area we specialise in but we would be happy to have a general discussion with you if you think it would help. You can arrange a call with a member of our by getting in touch with your M&G account manager.
Q. Can segments of a Bond be assigned to anyone?
A. On the assumption it’s a gift assignment, then a gift assignment can be used to assign a bond (or segments of the bond) to another individual (assignee) so long as the assignee is not a minor child.
It is also possible to assign the bond (or segments) into certain types of trust.
It would not be appropriate to assign the bond (or segments) to a charitable company or charitable trust as bonds are not qualifying investments for charities and could therefore create tax implications for the charity.
Q. I have clients who are POA for their grandmother who has just entered a council run home Her current residential property is being sold for £600,000's . Can the POA's invest funds into a bond to make use of the 5% withdrawal option?
A. If it’s a property and financial affairs POA the attorney’s can invest on the grandmother’s behalf. The grandmother will still be the applicant for the bond. The attorney’s will simply sign on her behalf. Normal chargeable event rules apply to the bond so the attorneys can make use of the 5% tax deferred allowance.
Q. What is the difference between a PET and a CLT. Thanks
A. Our Gifting and Inheritance Tax article explains PETs and CLTS and their interaction with each other.
Q. Client has three Investment Bonds 30 year old and taking 5% withdrawals as chargeable events. Skirts with HRT and wants income. Estate liable to IHT What is the view as what she can reasonably do to reduce taxation?
A. I assume the tax reduction relates to trust planning as that is the subject of the webinar. It really depends on the client’s specific objectives. If they can afford to give up access to some of the money while retaining enough to maintain their lifestyle, then a gift trust might be an option. A loan trust would provide access to the outstanding loan while a DGT would provide a regular payment stream until death. Any of these trusts could feasibly work. In terms of setting them up, a gift trust could be set up by assigning some of the bond segments into the trust. The loan trust and DGT generally need to be set up from cash, so if the bond money was being used, the bond would need to be encashed. Top slicing relief could help mitigate HRT on a bond gain but again it depends on the specifics of the case.
Q. Executors, being the sons of their late mother's estate have to distribute inheritance to the grandchildren being dependent minors. If the sons invest the monies into an investment bond as the parents and place in Discretionary Trust, would they be deemed as settlor's and subject to tax on gains?
A. The executors of the estate need to distribute the estate in accordance with the late mother’s Will, or the laws of intestacy. I assume this must be a legacy left in a Will given the money is for grandchildren whose parents are still alive. If a legacy has been left to a minor with no other conditions then the executors should either hold the funds until the estate beneficiaries attain age 18 (16 if its in Scotland), or if the Will allows, pass the grandchildrens’ share to their respective parents to hold instead. Either way, the inheritance should be distributed when they reach age 18 (or 16 in Scotland). Who chargeable gains are taxed against will depend on whether the trust created by the Will is bare or not bare. If its a bare trust gains are assessed on the beneficiary, if it’s not bare gains will be assessed against the trustees. Our Important Information about Trusts guide goes into more detail on who is assessed on bond gains where the bond is held in trust.
Q. Where a someone has held a bond for 15 years and drawing 5% and want to continue to do so, what would be the best forward planning. I was thinking selling down 20% of the bond over 5 years and reinvesting thereby rebasing the investment.
A. It will depend on the circumstances. The 20 year rule for the 5% tax deferred allowance (TDA) only relates to the accumulation of unused 5% TDA. It doesn’t mean something needs to happen with the bond before the end of the 20th policy anniversary. If the client continues to take 5% withdrawal then there would simply be an excess event each year from the 21st policy anniversary onwards. For example, if it was £100k invested, at the end of policy year 21 there would be an excess gain of £5k and the same again at the end of the following policy year and so on.
Whether or not the excess gain causes a liability to tax will depend on the owners individual tax position. All excess gains will be taken into account when there’s a final gain calculation.
What we would say is that it’s important to consider managing the overall gain on a bond and consider the impact of a future final gain on surrender, death of last surviving life assured or maturity on a offshore capital redemption basis (although maturity is rare). If the bond is just left to grow it could lead to large gains which are more difficult to manage without a tax impact (including tax traps such as high income child benefit tax charge or loss of personal allowance) as it’s the full gain that’s included for adjusted net income purposes (not the sliced gain).
If there are large gains built up on the bond in question, then it would be appropriate to consider managing those gains tax efficiently over a period of time by carrying out a surrender and reinvest strategy over a number of tax years. And also consider tax wrapper management at the same time e.g. some of the proceeds could be reinvested via pensions or ISA.
Q. Wanted to ask about age and underwriting in terms of what age would be a good age to start the set up of a DGT or Loan Trust? What would prevent someone from setting up a bond?
A. There’s no one size fits all answer but the younger the better from a general IHT perspective but that obviously has to be balanced with a clients needs and objectives.
With a DGT the settlor is gifting a lump sum and restricting themselves to a set level of payments for life so it can sometimes be difficult to forecast the right level of gift and the level of payments they will require for the rest of their life when they are younger. From an underwriting point of view the younger you are then for most clients their health will be better which in turn should lead to a higher level of discount (as they are expected to live longer). A larger discount is beneficial from an IHT perspective if they were to die unexpectedly in the first seven years (as the reduction in the value of their PET or CLT is outsider their estate immediately).
From a loan trust perspective there’s no underwriting carried out and as the client will have full access to the capital amount they loan to the trustees they might be prepared to start doing some IHT planning at a younger age. If there are large sums involved then obviously the growth on the funds could be substantial over a longer period so a loan trust could be a good starting point.
DGTs and Loan Trusts are generally always set up in a conjunction with an investment bond so I wouldn’t say there would there would be something to prevent them from using a bond other than the settlor not being UK resident as most Loan Trusts and DGT providers only make their trusts available for UK resident and UK domicile settlors. For a loan trust, the trust is normally set up first with the trustees applying for the bond so if the trustees were not UK resident the bond provider might not accept an application if there are overseas trustees (depending on the bond providers stance on overseas trustees).
Submit your details and your question and one of your Account Managers will be in touch.