Background

Eleanor and Felix, a couple in their mid-sixties and early sixties, respectively, are happily married with five children, several grandchildren, and possibly more on the way. They are both in excellent health and anticipate living for at least the next seven years. After moving to a smaller home, they now have a substantial amount of savings in their bank accounts and are aware that there might be an Inheritance Tax (IHT) issue upon their second passing. They haven't made any major donations before. They aim to reduce the IHT but are mindful that their everyday spending needs are higher than what their pensions can cover. Instead of giving away large sums to their family now, they simply wish for their loved ones to receive benefits after they pass away.

Advice

Eleanor and Felix -

• A potential Inheritance Tax issue that must be resolved.
• Wealthy in assets but lacking in earnings.
• Need to increase their standard of living.
• In good health and younger than 90.
• Eligible individuals can still gain advantages following the second death. FOL WEALTH suggests that they should set up a discretionary Discounted Gift Trust (DGT), detailing - • This is suitable for those facing an Inheritance Tax (IHT) obligation yet wish to retain complete control over their assets.
• Each is granted access through a sequence of predetermined capital contributions.
• Every individual can select how much they want to pay and how often.
• By examining their expected earnings and spending, we can determine the necessary payments.
• The phrase "discounted" is employed because the initial value of the trust is less than the total investment.
• As long as they remain in good health, they will be eligible for the discount, which will be immediately accessible to their estate.
• Their individual discounted gifts will be well below £325,000, ensuring they do not incur a lifetime 'entry' fee associated with the Chargeable Lifetime Transfers (CLTs)
• Should either of them be older than 90 or have a rating, the discount would be very small.
• The two flexible trusts provide the option to adjust for individuals who might receive the leftover assets following the settlor's passing. This could include future grandchildren (and great-grandchildren).

Outcome

Eleanor and Felix learn that a gift into a DGT is a transfer of value where the value is determined by the ‘loss to the estate’. That will comprise the amount invested less the value of the right to the repayments (see below). The open market value of these repayments depends on age, health and size of the repayments. 
Also Read: How the Bank of England Base Rate Affects Your Mortgage

FOL WALTH explains that HMRC’s preference is that full underwriting should be carried out prior to the DGT being effected. The actual amount of the discount may need to be ultimately agreed with HMRC, but the Insurance Company offers an indication of the value at inception based on medical evidence provided.

Both Eleanor and Felix apply for a UK Insurance Bond on a single owner, single life basis. Each then completes a DGT deed. In their deed, each selects the size of the payments and the frequency (e.g. monthly, quarterly etc.). In both cases, the withdrawals selected are within 5% limits, even accounting for ongoing adviser charging. Assuming no shortfall, both have the right to these regular payments for life, and on death that right ceases and so does not swell the value of the deceased’s estate. The trustees then have the discretion to distribute the remaining capital to any of the class of beneficiaries. This includes children and remoter descendants but excludes the settlor.

The surviving spouse is however a potential beneficiary. What this means is that when one of them dies, the survivor will still enjoy the regular payments from their own DGT but in addition, the trustees of the first deceased’s DGT have discretion to advance any remaining funds to the survivor should that need arise. Trustee obligations under the Fourth and Fifth Money Laundering directives are complied with.

FOL WEALTH Investment Bond Advice London explains that it would have been possible, instead, to have set up a joint DGT and in that event the total joint repayments would have continued after first death, and simply ceased after second death. That would be less flexible, but would probably have created a bigger discount. 

FOL WEALTH Investment Bond Advice London however clarifies that the main objective of the DGT is to mitigate IHT and carve out access to pre-determined capital payments for expenditure needs. Although the discount provides an immediate reduction in the estate, it is only relevant for death within seven years – both however are in good health.

They discover that it doesn't make sense to use up all the set-up funds just to get a bigger discount. If a settlor uses more funds than necessary for spending, it might not be a good move for the overall goal of reducing IHT, as the extra money will end up in the estate.

When one spouse passes away, the debt in their DGT will be settled if the deceased was the only person guaranteed. The taxable gain will be reported on the deceased's tax return for that year. Since their income is quite low, it's expected there won't be any tax liability, and the money can then be used as the trustees wish.

Summary

Eleanor and Fred are establishing a tax-efficient plan that promises consistent, predetermined payments for life, which they need to supplement their earnings. They can immediately receive a reduction in Inheritance Tax due to the fact that the initial value transferred to set up the trust is less than the total amount invested. Upon the first death, the surviving spouse can enjoy any remaining assets in the deceased's trust, subject to the trustees' discretion.

Please note that this is merely a general example and not tailored to the specific situations of your clients. The needs, circumstances, and tax situations of each client will differ.

For More Information Contact Us Today

At FOL Wealth Investment Bond Advice London, we work with big providers like M&G, HSBC Life, and Royal London. Get in touch to know more about how we can help.

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.

Also Read: Financial Protection for Millennials

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.

For More Information Contact Us Today

At FOL Wealth Investment Bond Advice London, we work with big providers like M&G, HSBC Life, and Royal London. Get in touch to know more about how we can help.

Background

For the past decade, Michael has lived in the United Kingdom, although he is not officially considered a UK citizen or resident at the moment. He possesses a wealth of £3 million that he intends to distribute among his nieces and nephews living in the UK. Despite not being legally married or in a domestic partnership, and not owning a property that qualifies for the Residence Nil Rate Band, he is seeking a way to minimize his Inheritance Tax (IHT) liability while ensuring he can have complete access to her assets.

Advice

FOL Wealth Investment Bond Advice London evaluates the circumstances and highlights these key points about Michael -

• The property that Michael owns completely is not subject to IHT if it's situated outside the UK, since it's considered 'excluded property'.
• This IHT status also applies to Michael's shares in an Authorised Investment Fund, or in other words, Open-Ended Investment Companies (OEICs).
• Should Michael continue to live in the UK, he will be considered a UK resident and therefore his overseas property will also fall under IHT.
• However, if Michael buys an investment abroad at this moment and later becomes a resident of the UK, then this investment will be liable to IHT should he still be the sole owner at the time of the transaction or upon his passing.
• Considering the intricacies involved, FOL Wealth advised Michael to seek proper legal counsel prior to making any decisions. In light of this, our suggestion is that he proceeds with applying for a £2,675,000 International (Offshore) Capital Redemption Bond, after which he should finalize setting up an Excluded Property Trust (EPT).

Michael discovers that -

• He needs to be established outside of the UK when he begins.
• If he moves to the UK, he should refrain from increasing the Bond within the trust or adding any additional assets to the trust.
• The board of trustees is required to maintain the property that is being left out.
• The EPT type of trust allows her to be considered a possible inheritor.
• Setting up the trust will not trigger a taxable lifetime gift, and there will be no fees associated with withdrawing the assets or reaching the ten-year mark.

Outcome

Michael comes to a deeper understanding of the idea behind domicile, discovering that it's not exclusively tied to tax but rather pertains to a broad area of law, which categorizes domicile into three types. The first type is a domicile of origin, which Michael inherited from her father at birth, marking her as having an international domicile. The second type could potentially be swapped for a domicile of choice in the UK if he chooses to be a permanent resident here, although that option doesn't currently apply to Michael's situation. The third type, artificial deemed domicile rules, concerns long-term residents of the UK. According to these rules, Michael would be considered domiciled in the UK for all tax-related purposes once he has been a resident for 15 of the last 20 years. Domiciles in the UK are liable for Inheritance Tax on worldwide assets, though any property placed in an EPT (Excluded Property Taxation Scheme) set up for the UK by someone not domiciled there upon setup will be exempt from Inheritance Tax.

Michael submits a request for a £2,675,000 International Capital Redemption Bond. Following that, he finishes the discretionary Execution of Promissory Note (EPT), leading to the immediate placement of the Bond in the trust. This process is simply accomplished by adding the date of his application to the deed. He becomes a trustee by default and selects two more trustees who reside in the UK and are familiar with her specified distributions of the trust's assets upon her demise. He retains the option to change the trustees at any time if required. The responsibilities of being a trustee adhere to the Fourth and Fifth Money Laundering directives.

Also Read: Financial Protection for Millennials

The trust's documentation features pre-drafted potential beneficiaries, but this category does not encompass nieces and nephews by default. Initially, the trustees have the authority to include nieces and nephews in this category, provided Michael consents or requests this inclusion in a written agreement.

Throughout her life, Michael has access to the funds within the EPT, as he is among the potential beneficiaries. Once these funds exit the EPT, they are no longer subject to Inheritance Tax (IHT) within the trust's framework.

For tax planning regarding Inheritance Tax (IHT), there are no tax consequences for -

• Transferring assets into a trust
• Passing away within a seven-year time frame
• Tenth milestone
• Funds leaving the trust

Regarding the International Bond, Michael discovers that it will benefit from a gross roll-up, subject to any taxes that cannot be recovered. However, there will be no tax obligations unless a taxable event occurs, after which any gain from that event would be subject to taxes. The advisor clarifies that a Capital Redemption Bond doesn't have any guarantees linked to specific lives, which means it cannot disburse funds upon the death of the last guarantee but will instead continue until it matures over a 99-year period. This arrangement empowers the trustees to decide when a taxable event happens, typically leading to the bond being surrendered before that event.

For tax on bonds, Michael is the settlor of a discretionary trust located in the UK with trustees in the same country. He is subject to taxes as long as he is alive and living in the UK during the year the gain is realized. Should the gain materialize after her death, the trustees will be taxed at trustee rates. It's made clear to Michael that there is no opportunity for top slicing relief for trustees.

Following her demise, the bonds can be transferred to the beneficiaries, who become liable for taxes if they cash them in. It's mentioned that once the beneficiaries reach the age of 18, the trustees have the authority to assign portions to them, allowing the gain to be allocated to the appropriate beneficiary. Until then, it's possible to irrevocably assign portions to a bare trust for the sole benefit of a specific beneficiary. Under the current tax regulations, any gain can be deducted against other taxes.

• Money not used from your personal allowance
• Money not used from your £5,000 0% Starting Rate for savings

• Money not used from your Personal Savings Allowance

Summary

Putting an International Bond in a discretionary EPT that he could benefit from offers Michael a versatile, tax-effective option. If he passes away while being a resident of the UK, the assets held outside the trust (which amount to £325,000 at present) could be protected by her Nil Rate Band. The property not included in the EPT will not face IHT tax.

For More Information Contact Us Today

At FOL Wealth Investment Bond Advice London, we work with big providers like M&G, HSBC Life, and Royal London. Get in touch to know more about how we can help.

The scenario

Gita is establishing a discretionary Gift Trust with the goal of using it for tax planning, specifically to assist her grandchildren, including those yet to be born, with their college expenses in the future. While she is initially a trustee, she plans to step down and has requested that her two children, Krishna and Dolly, take over as the trustees moving forward.

Krishna and Dolly are relatively new to handling financial issues and have no background in trusts at all. They're both very busy, managing demanding careers along with raising young children. They feel both grateful and nervous about the idea of becoming trustees and have sought guidance on what their duties will entail.

The responsibilities and duties

Generally, trustee responsibilities can be split into these main categories

• Duties to be performed on appointment 
• Investment duties 
• Protecting the interests of beneficiaries 
• Keeping accounts and records 
• Distributing property to beneficiaries
• Trust Registration

Duties to be performed on appointment

Obtain a copy of the trust deed and read it.

The trust agreement will detail the authority and responsibilities entrusted to the trustees by Gita (the person who established the trust). These authorities will include "dispositive powers," which define the conditions and methods for the distribution of trust earnings and/or principal, and "administrative powers," which outline the management of the trust.

Assess and comprehend the preferences of the beneficiaries

The trustees are required to act exclusively for the benefit of the possible beneficiaries. The trust must be managed, the assets of the trust should be invested, and the money should be allocated following the guidelines of the trust.

Make sure that the trustees were properly appointed and that they are the rightful owners of all the assets in the trust.

The trust agreement will establish a process for selecting trustees. This process must be adhered to – if it requires the selection to be made through a formal document, then a properly signed document is necessary. All investments should be held by the trustees, meaning a trustee application will be necessary.

Manage where appropriate

Some sections of the trust fund might need oversight. For instance, if a property is rented out, then the trustees must make sure that the rent is paid, the property is properly looked after, and so forth.

Ensure that the trust fund is invested

Trustees have a crucial responsibility to allocate the trust assets in a way that benefits the beneficiaries, either by increasing their income or the value of their investments. Their role in managing investments is to exercise their authority for the benefit of both present and future beneficiaries.

Also Read: How the Bank of England Base Rate Affects Your Mortgage

Trustees ought to also think about if they have any obligation to part with any portion of the trust assets.

Investment duties

Trustees possess broad investment authority under the Trustee Act 2000 (England & Wales), Charities and Trustee Investment (Scotland) Act 2005, and Trustee Act (Northern Ireland) 2001. Consequently, they are able to invest in any kind of asset, provided the trust deed does not limit the investment options.

When selecting suitable investments for the trust, the trustees need to think about the trust's goal and the requirements of the beneficiaries, and then apply the usual investment standards as needed.

• The appropriateness of the investments for the trust (considering both the appropriateness of the investment type and the appropriateness of the specific investment); and
• The requirement to spread out the investments of the trust, as suitable for the trust's situation.

The trustees are required to periodically assess the investments and determine if there is a need to diversify them.

Krishna and Dolly need to seek and evaluate guidance from a unbiased Financial Adviser to make sure the required investment standards are achieved.

Safeguarding the rights of beneficiaries

A trustee cannot position himself or herself in a way that puts their responsibilities as a trustee at odds with their personal interests.

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 trustee is generally required to avoid any earnings from their role as trustee. However, in certain situations, professional trustees might be allowed to charge for their services.

• If there's a specific charging clause outlined in the trust deed. 
• In some situations as long as the agreeing trustee also signs off on it.
• If deemed suitable with the consent of all the beneficiaries

Keeping accounts and records

The HRMC has made it very clear that when necessary, a record of trust earnings and expenditures should be maintained to finalize the trust and estate tax form and transmit details to the beneficiaries.

The HMRC guidance details:

• Records that must be kept 
• Records of income payments to beneficiaries 
• How long to keep records 
• What happens if records are lost or destroyed

Unmistakably a type of Insurance Bond that does not generate income will make the task of managing accounts and maintaining records easier.

Distributing property to beneficiaries

In a trust designed for discretion, the trustees possess the ability to gather income. This process, called accumulation, involves the condition under which, according to the trust's rules, the trustees are given the power or are obligated to gather income, transforming it into assets.

Trust Registration

In terms of Trust Registration Service (TRS) guidelines, it's the trustees' duty to ensure registration and make necessary updates. However, the trustees are free to designate an agent if they choose to do so. It's also important to mention that a common bond in a direct trust setup may have trustees from the UK, but the bond itself could be issued in Ireland. In this case, the trustees are required to submit information to Ireland's Central Register of Beneficial Ownership of Trusts (CRBOT), even though the trust might not owe any UK obligations unless the bond qalifies for one of the UK's exemptions. In any case, the trustees must also register their details on the TRS if the trust is liable under UK law.

The outcome

At first glance, the list of tasks seems overwhelming, but Krishna and Dolly understand that many of these duties are just basic common sense tasks like studying the trust document, ensuring the beneficiaries' best interests are always a priority, and staying within their authority. However, they do feel uneasy about managing investments, maintaining financial records, and addressing the financial matters of the trustees

Krishna and Dolly find relief from their worries following guidance from FOL Wealth, who highlight a fund offered within an Insurance Bond 'wrapper' designed to shield the trustees from market fluctuations through a smoothing mechanism. The possibility of steady and more predictable returns over an extended period, thanks to a diversified portfolio, attracts Krishna and Dolly who seek an "investment with peace of mind." This investment aligns perfectly with their obligations to behave as a responsible and cautious investor would when handling other people's money.

FOL WEALTH Investment Bond Advice London informs them that one benefit of an Insurance Bond is its status as a non-dividend-yielding investment that lessens the need for self-assessment tax filings.

FOL Wealth Investment Bond Advice London then further clarifies to them the '5% rule' as it pertains to trustees, detailing the possibility of gifting portions to grandchildren upon their 18th birthday, at which point they could be in a favourable tax position due to their personal income status, including any unused Personal Allowance, Personal Savings Allowance, and 0% Savings Rate Band. Considering this, the trustees decide to allocate their funds into an Offshore Bond.

To sum up, Krishna and Dolly are pleased to serve as trustees and could potentially find joy in the duties of protecting and managing the trust fund for the advantage of their mother's grandchildren in the future.

For More Information Contact Us Today

At FOL Wealth Investment Bond Advice London, we work with big providers like M&G, HSBC Life, and Royal London. Get in touch to know more about how we can help.