Utilising Trusts To Give Wealth Away But Still Retain Access
The Transact service and proposition is designed with inter-generational planning at its core. This article aims to cover some common queries our Technical Team receive around a key consideration for advisers when planning their clients’ tax strategy – inheritance tax (IHT).
As you probably know, it is a core rule of IHT planning that you cannot make a gift and retain access to the gift – to do so would disallow the gift from a tax planning perspective as it would be treated as still within the donor’s estate. That said, there are mechanisms whereby funds can be paid into a trust from which the donors can withdraw funds without disallowing the inheritance planning benefit of making the gift.
Loan trust
The loan trust does not include any gift by the donor but is in the form of a loan made by them to the trustees. Any growth on the loan amount is immediately outside the donor’s estate thus capping any potential IHT liability based on the loan amount only. The donor can request withdrawal of some or all of the loan at any time and quite often this will be as regular payments. On death any outstanding loan remaining in the trust is returned to the donor’s estate whilst any growth is available for distribution to the beneficiaries.
The donor can at any time during their lifetime forego some or all of the loan to the trustees or other nominated party if they feel they no longer require access to the funds. This will be a gift at this point – a potentially exempt transfer (PET) if it is an outright gift to the trustees of a bare loan trust or an individual, or a chargeable lifetime transfer (CLT) if to the trustees of a discretionary loan trust – which will pass out of their estate after seven years. Any outstanding loan could also be dealt with in the will of the donor following their death.
Discounted gift trust (DGT)
The DGT does not allow the flexibility of accessing funds in the way the loan trust does but it does provide the donor with a right to regular payments for life (or the exhaustion of the trust funds if that were to occur first) and a discounted value of the gift being made for IHT purposes. The trust deed will show the amount and frequency of regular payments that must be made to the donor on the due dates. The amount of these payments, the donor’s age and their state of health then determine the amount of discount that can be applied to the gift reflecting the amount that will be returned to the donor over time. For this reason, payments should not be missed and cannot be varied as the discount is based on the regular payments stated at outset.
Should the donor no longer require the regular payments, or wish to reduce them, then an actuary will be required to calculate the amount of gift that the foregoing of the future stream of payments will equate to. Again, this gift will either be a PET or CLT to the trustees depending on whether the trust is on a bare or discretionary basis.
Flexible reversionary trust (FRT)
When the FRT is established the settlor will specify a schedule of withdrawals they intend to take from the trust in the future. Unlike the DGT, they do not have to take the withdrawals provided the decision not to do so is made before the date specified at outset, and this does not constitute a further gift by the settlor. It is not possible, however, to bring forward the dates on which the specified withdrawal is to be made. So there is greater flexibility with regard to the taking of the specified payments but there will therefore be no discount applied to the initial gift.
The FRT is a discretionary trust with the initial gift, which is a CLT, passing out of the settlor’s estate after seven years. The trust may be liable to a periodic charge every ten years and when capital is withdrawn from the trust.
These different mechanisms offer those who may be apprehensive about making gifts a means of retaining access to their funds. The loan trust and FRT give the donor a more flexible option in that they do not have to take payments from the trust, although in the case of the loan trust the amounts remain in their estate unless gifted. The DGT provides a fixed regular payment pattern but with a discount being applied to the gift in most cases (subject to underwriting of the donor’s health).
Investment bonds are ideal for using with these trusts. Segmentation into multiple identical policies enables distribution of funds to beneficiaries by way of assignment whilst the annual 5% tax deferred allowance is ideal for providing regular withdrawals to the donor. Both the Transact Offshore and Onshore Bonds offer up to 1,000 individual policies, which helps with achieving intended withdrawal and distribution amounts, and provide access to a wide range of permissible investments including unit trusts, OEICs, approved investment trusts and appropriately structured ETFs whilst a robust assignment process helps with the efficient distribution of funds to beneficiaries.
The above summary is base on our current understanding of applicable law, but isn’t intended to be a substitute for a comprehensive tax planning strategy tailored to individual clients’ needs.
1. Introduction
2. TOL Recent Enhancements
3. Integrations – It Wasn’t A Quiet Summer!
4. Transact Transfer Specialists
5. Fraud Risks to Be Aware Of
6. Transact And Letters of Authority
7. Transact – BlackRock MPS
8. Utilising Trusts to Give Wealth Away But Still Retain Access
9. Interest on Cash Deposits
10. Transact Events 2024