Background (Change Peggy to a man)
Peggy, a woman in her late sixties who has outlived her husband, is facing a possible Financial Aid Tax (FAT) obligation. She hasn't given away much money previously but consistently makes use of her yearly FAT allowance. Peggy has reserved £325,000 to assist her grandchildren with their future college expenses.
She presently possesses four young grandchildren but is seeking a tax-smart strategy that offers versatility to also advantage any forthcoming grandchildren.
She needs no immediate access.
Advice
FOL Wealth Investment Bond Advice London analyzes the circumstances and notes these key details about Peggy -
- Potential future grandchildren should be included as beneficiaries, indicating that a discretionary trust is necessary instead of an absolute trust.
- There's no need for Peggy to have access to the trust fund during her lifetime.
- Peggy's estate is greater than the current Nil Rate Band and Residence Nil Rate Band.
- No prior Chargeable Lifetime Transfers (CLTs) have been recorded, allowing Peggy to give away up to £325,000 without incurring any lifetime Inheritance Tax (IHT).
- Seeking a tax-efficient approach involves looking into Inheritance Tax (IHT) and any additional taxes relevant to the case, in this instance, Income Tax.
Fol wealth advises her to put her money into an International Bond and transfer it to a Special Trust, which she discovers is suitable for people needing no direct control over the bond, and those desiring the ability to adjust the individuals who might gain from it later.
Outcome
Peggy submits an application for a £300,000 Offshore Capital Redemption Bond and subsequently finalizes a discretionary Gift Trust deed, ensuring that the Bond is introduced into the trust from the beginning. This process involves adding the application date to the deed, making her a trustee upon submission. She designates her son and daughter as co-trustees and has the option to replace them at any time. The trust is in compliance with the obligations mandated by the Fourth and Fifth Money Laundering Directives
The legal document names her kids and grandchildren as potential beneficiaries who are pre-determined. Any future grandchildren will automatically be part of this list.
For the purpose of Inheritance Tax (IHT), a gift of £300,000 into the trust results in a Charity Life Trust (CLT), but no immediate tax is due since she's still well under the £325,000 threshold. The funds held by the trust will fall under the applicable property regulations. However, there will be no 'exit' fees during the initial 10 years of any withdrawals, provided that the Nil Rate Band (NRB) doesn't drop below £300,000. Additionally, for the trust's 10th anniversary, Peggy hasn't set up any other Charity Life Trusts in the seven years leading up to this one that would reduce the NRB available to the trustees.
Concerning the Offshore Bond, Peggy discovers that there will be no tax liabilities for any earnings received or profits realized from the investments held within the offshore bond. However, it's important to note that there might be some taxes that cannot be recovered. Taxes will only be owed if a taxable event occurs and a profit is assessed on that event. This simplifies the trustees' responsibilities for Self-Assessment. FOL Wealth clarifies that a Capital Redemption Bond lacks guarantees on its lives and, therefore, cannot issue payments upon the death of the last life guaranteed. Instead, the bond will continue until it matures after 99 years. In reality, it's quite probable that the bond will be canceled well before that date. This arrangement allows trustees more flexibility in deciding when a taxable event occurs.
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Peggy was also informed that when the grandchildren turn 18 and begin their university education, the trustees have the authority to divide their inheritance among them, ensuring each receives their share as their portion of the inheritance. For anyone under 18, the trustees might opt to create a permanent legal document to permanently transfer parts of the inheritance to a trust for the exclusive use of one chosen beneficiary. According to the latest rules on income tax, any profits made can be reduced by -
- Any leftover personal allowance
- Any unused allowance for savings starting at 0%
- Any unused savings allowance
Summary
The optional gift trusts provide a versatile structure that is both tax-efficient for Inheritance Tax and for income tax purposes.
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