Customer Guide Prudence Inheritance Bond

Transcription

1 Customer Guide Prudence Inheritance Bond Prudence Inheritance Bond

2 Inheritance tax might be called the voluntary tax as there is much that you can do to reduce it or not pay it at all. Inheritance Tax a tax on personal wealth Inheritance Tax is paid if a person s estate (their property, money and possessions) is worth more than a certain amount when they die. This is called the Inheritance Tax threshold or 'Nil Rate Band'. The Inheritance Tax threshold is expected to remain unchanged at 325,000 until April In addition, the Government introduced an additional 'main residence nil rate band' for the 2017/2018 tax year starting at 100,000. This will increase to 175,000 in the 2020/2021 tax year. This will be available if the owner dies on or after 6 April 2017 and the deceased's residential property, which has been his or her residence, and is included in the estate, is left to one or more direct descendants on death. Rules will also be introduced so that the main residence nil-rate band will be available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to the value of the additional nil-rate band, are passed on death to direct descendants. Where the value of the deceased s estate exceeds 2m (after deducting liabilities but before reliefs and exemptions) the main residence nil rate band will be reduced by 1 for every 2 excess value. The 2m threshold and the main residence nil rate band are due to increase in line with the Consumer Price Index from 6 April Any main residence nil rate band that is not used on first death will be able to be transferred to a surviving spouse or civil partner. The unused proportion will be applied to uplift the survivor s main residence nil rate band entitlement on second death. Any portion of the main inheritance tax allowance can be transferred to a surviving spouse or civil partner on your death. This means that the nil rate band that is available when the surviving spouse or civil partner dies will be increased by the proportion of the nil rate band that was unused. If your estate is liable to IHT it will be over and above all of the income tax that you will have paid throughout your life. With the rate of IHT set at a flat 40% of the amount of your estate valued at over your personal IHT allowance it could make you the equivalent of a higher rate income tax payer when you die. A tax you can legally plan to not pay Accountants have been known to call inheritance tax the voluntary tax as there is much that you can do to reduce it. By following a few simple steps and a little planning you could avoid HM Revenue & Customs (HMRC) potentially becoming your largest single beneficiary. The tax information in this guide is based on Prudential's understanding of taxation rules and regulations, all of which may change without notice. The tax impact will depend on your individual circumstances. 02 Prudence Inheritance Bond

3 What inheritance tax might I have to pay on my estate? Under current legislation, you don t pay inheritance tax to HMRC on the first 325,000 of your estate but anything over this amount will be subject to IHT at 40%. IHT can also apply to certain gifts you ve made during your lifetime. When you die, IHT will need to be paid on the value of your estate and on certain lifetime gifts you ve made in the seven years prior to your death. Your estate includes: > everything owned in your name; > your share of anything you own jointly with someone else; > any gifts from which you keep back some benefit such as a home you live in and maintain, even though you ve given it to someone else; > any assets held in trust from which you might get some personal benefit such as an income. This can include bank accounts, shares and land & buildings such as a house. Some gifts are exempt, such as wedding gifts of up to 5,000 to each of your children, other gifts of up to a value of 3,000 each tax year and maintenance payments. There are others; your adviser will be able to go through these with you. Some transfers on death may also be exempt from IHT such as transfers of assets between a husband and wife or civil partners. As mentioned earlier, it is possible to transfer any unused percentage of the IHT nil rate band from a deceased spouse or civil partner to the surviving spouse or civil partner. However it is important not to ignore IHT by planning to give or leave everything to your spouse or civil partner as your assets may increase by more than the increases in the IHT tax band. Example This is just an example designed to represent a typical situation, and does not relate to any particular individual. You should not look upon this as financial advice or a recommendation of a particular course of action. You should consider your own circumstances fully, and may wish to consult a Financial Adviser to help you make a decision. Assets The family home 267,000 Contents and personal possessions 63,000 Bank/building society accounts 60,000 Savings plan 30,000 Investments 105,000 Non-exempt gifts made in last 7 years 10, ,000 Liabilities Outstanding mortgage 30,000 Outstanding income tax 5,000 35,000 Value of estate for IHT calculation 500,000 Less the residence nil rate band 100,000 Remaining value 400,000 Less nil rate band 325,000 Balance on which IHT is due 75,000 IHT payable on 75,000 at 40% 30,000 IHT liability 30,000 Prudence Inheritance Bond 03

4 The Elements of a IHT bond Inheritance tax planning is not just about planning to protect your lifetime s accumulated wealth from the taxman. It s also about making long-term decisions about your finances and your family and how you want to arrange any transfer of your assets. To do this effectively you must consider a few basic things: > your own financial security, > the future needs of your family, and > the value of your assets now and how this could change in time. An IHT bond will help do this. Your needs Good IHT planning Ongoing flexible payments Essential requirements: > adequate funds to cover your living expenses Desirable requirements: > funds protected against inflation > tax-efficiency Capital for your beneficiaries Essential requirements: > gift to reduce the IHT bill on your estate Desirable requirements: > immediate reduction in your IHT liability > prospects for capital growth to help protect capital against inflation How can Prudence Inheritance Bond help? We ve designed the Prudence Inheritance Bond as an investment bond that can help you reduce your inheritance tax liability, whilst providing you with regular payments. It offers a combination of benefits. Access to regular payments is one of the major benefits of using the Prudence Inheritance Bond to help in your IHT planning. Traditional IHT planning makes use of gifts to remove money from your estate during your lifetime and so reduce the value of your estate on death. But using traditional IHT planning means that you are unable to retain any benefit such as regular payments from your gift. The bond also offers the potential for growth in its capital value outside your estate. Prudence Inheritance Bond is an investment-linked bond. This means that your investment buys units in the underlying funds whose values rise and fall with investment conditions. The value of an investment can go down as well as up and is not guaranteed. You could get back less than you have paid in. More information on distributions can be found on page Prudence Inheritance Bond

5 Prudence Inheritance Bond We ve designed a product specifically for efficient inheritance tax planning Prudence Inheritance Bond to help you meet all these IHT planning needs. > It s an IHT planning package, which could be suitable for basic, higher rate and additional rate taxpayers. > It can reduce the value of your estate for IHT purposes immediately. The amount of any reduction will depend on your age and your state of health at the time the bond is taken out. > You can take natural income payments from the bond throughout your lifetime. > Any natural income taken does not erode the capital available for your beneficiaries. > The bond offers the prospect of capital growth on your investment, to try to help protect the sum payable to your beneficiaries against inflation. > You have a choice of trusts: absolute or discretionary. You will find more information on page 6 about the income that can be taken from the bond. Prudence Inheritance Bond works cleverly by combining two types of plan with a Discounted Gift Trust, in order to provide flexible payments for you, whilst providing the opportunity for you to gift capital to beneficiaries and thereby the potential to reduce the value of your estate for IHT purposes. Whilst the underlying processes may appear complicated, taking out your Prudence Inheritance Bond is fairly simple, with minimal forms to complete and no requirement for a medical examination (although we will always request a general practitioner's report). Prudence Inheritance Bond consists of two single premium investment-linked plans a Whole of Life Plan written under trust and an Endowment Plan. Working together, this combination lets you pass on wealth to your chosen beneficiaries by gifting capital (under the Whole of Life Plan) while you retain regular payments and maturity benefits (from the Endowment Plan). The value of your plan may go down as well as up and there could be times when your beneficiaries might not get back the full amount of your investment. Information about the available investment funds, their aims, risk profiles and charges can be found in the Fund Guide, available from your adviser. Prudence Inheritance Bond 05

6 How it works You invest a minimum of 15,000 into your bond which is split into 2 parts. One part holds the capital which you have gifted, and is held in trust for your beneficiaries. The other part holds the income units for you. Capital Fund Written under trust for your beneficiaries Prudence Inheritance Bond Income Fund Distributions paid to you or redirected Capital Fund Part of your investment buys Capital Units. This forms the Whole of Life plan and is held in trust for your beneficiaries. Since it is a Whole of Life plan, it is not possible to cash this in. It will only pay out on death, and has no value at any other time. Income Fund Part of your investment buys income units. This is the endowment plan and provides you with access to any returns earned on the underlying investments which can be paid out to you as regular distributions (in this document we refer to this as natural income). As the regular distributions consist only of the returns from the underlying investments this means they do not erode the capital of the premium invested in the endowment plan or the capital held in trust for the beneficiaries under the Whole of Life plan. Currently you can receive regular distributions totalling no more than an amount equal to 5% of the investment into the Endowment plan, each year without creating an immediate tax bill. If you don t use any or all of this tax deferred allowance in any year, the unused portion can be carried forward to future years until you have received an amount equal to 100% of your original investment into your endowment plan. When are distributions paid? Distributions are paid every three months on 1 March, 1 June, 1 September and 1 December. We issue payments at the start of the month but it may take a few days for the money to reach your bank account. You can choose to take regular distributions in full, but if you are a higher rate or additional rate taxpayer, any distributions over your accumulated tax-deferred allowance may be liable to income tax. Any excess can affect your entitlement to income tax allowances and certain tax credits. You can therefore choose to cap your distributions at 5% a year and redirect any amount over this into your choice of up to 3 of our investment-linked funds. If you prefer, you can redirect all distributions into your choice of up to 3 of our investment-linked funds which are managed by some of the UK s leading investment managers. You may wish to do this if, for example, you don t have immediate need of regular payments. You can take regular or one-off withdrawals from any distributions previously re-invested. If you decide to redirect distributions, any future withdrawals may be offset against your unused 5% tax deferred allowances before any immediate income tax is due. The value of the Endowment Plan at your death will be part of your estate for inheritance tax purposes. If you are a basic rate taxpayer and remain so, there will not be any income tax liability on this plan. If you are a higher rate or additional rate taxpayer, then there may be a liability if the payments you take are in excess of the tax deferred allowance, or when the endowment plan ends either through maturity or on death. Distribution options Take full distribution payments. These are paid every three months on 1 March, 1 June, 1 September and 1 December. Distributions capped at 5% a year and redirect balance. Redirect full distribution payments > make one off withdrawals > take regular withdrawals 06 Prudence Inheritance Bond

7 Calculating the discounted value Because you are entitled to payments from your bond, the value of your initial gift may be discounted for inheritance tax purposes. The way you make a gift is by way of a trust. The discounted value takes into account the payments you could expect to receive during the rest of your lifetime. This means that the value of the gift you made could be reduced by the discount, which reduces the amount potentially liable to IHT. This will depend on a variety of factors, such as your age and your state of health. The longer your life expectancy, the more payments you could expect to get, so the discounted value is likely to be less. On the other hand, if you are in poor health at the start, the value may not be discounted by very much and there could even be no discount at all. We will obtain a General Practitioner's Report (GR) before finalising your application. This will allow us to assess your health and be able to provide an estimate of the discount. You will find more information about Trusts on pages 8 and 9. What benefits are normally paid when I die? Payable to your beneficiaries: > 100% of the value of units in the Prudence Inheritance Bond Capital Fund. Payable to your estate: > 100% of the value of units in the Prudence Inheritance Bond Income Fund (distributions arising in the fund since the last payment), > plus the value of any redirected distributions, > plus 100. What benefits are paid on maturity? Your Endowment Plan will mature if you survive to the anniversary of your bond after your 105th birthday (of the younger life in a joint life bond). Your three monthly distribution payments will cease when the Endowment Plan matures. At this point we d pay to you: > an amount equal to 100% of the value of units in the Prudence Inheritance Bond Capital Fund, > plus 100% of the value of units in the Prudence Inheritance Bond Income Fund, > plus the value of any redirected distributions. The Whole of Life Plan would stay in force when the Endowment Plan matures. This means that if you die after your Endowment Plan has matured we ll pay to your beneficiaries the value of units in the Prudence Inheritance Bond Capital Fund. Prudence Inheritance Bond 07

8 Choice of trust Prudence Inheritance Bond offers you a choice of trust absolute or discretionary so you can decide which better suits your needs. Absolute trust With the absolute trust, you must select both the beneficiaries and their share of the trust fund at the time you set up the trust. The important point to remember about an absolute trust is that you cannot change the beneficiaries or their share of the trust fund once the trust has been set up. If you are sure of how you want the trust assets to be distributed, this could be the appropriate choice for you. All capital growth on the trust investment will be immediately outside your estate. The trust itself will not be subject to any periodic or exit inheritance tax charges, although each beneficiary's share of the trust fund will be treated as forming part of their estate. The bond cannot be cashed-in during your lifetime to pay any tax charges that may arise. With an absolute trust, the beneficiaries have the right to demand access to the trust assets at any time after they reach the age of majority. In practice, however, the whole of life policy cannot be cashed-in during your lifetime, whether in trust or not, and neither you nor the trustees are obliged to make any other payments to beneficiaries. Currently, details of an absolute trust do not need to be reported to HMRC. Inheritance tax survival for seven years The gift you make into the trust is called a potentially exempt transfer (PET). If you survive for seven years after making the gift it becomes an exempt transfer. This means that the whole of the trust fund, including any capital growth, will be free of inheritance tax at your death. Inheritance tax death within seven years If you die within seven years of taking out your Prudence Inheritance Bond, your gift becomes a chargeable transfer, which means that there may be an inheritance tax liability. However, this will normally be less than if you hadn t set up a trust, because the value of the gift is discounted. Discretionary trust A discretionary trust allows the trustees to alter the beneficiaries of the trust or their share of it. So if you think this might be necessary in future, this could be your preferred option. However, depending on the amount you put into the trust, there may be inheritance tax charges during your lifetime as well as at your death. These are explained in the next two sections. There are also requirements to provide details of the trust to HMRC at specified times. Inheritance tax during your lifetime There will be an immediate tax charge if the value of your gift into the trust, together with any other chargeable gifts you have made in the previous seven years, is more than the inheritance tax threshold ( 325,000 and fixed at this level until April 2021). This charge is 20% of the amount above the threshold. Joint trusts Both absolute and discretionary trusts can be set up by a single settlor or joint settlors. For tax purposes, a joint trust arrangement is treated as if it were two separate single trusts. However, for the purposes of the discounted value, we will provide figures based on joint settlors, but with reference to each individual's age and health. Where there are joint settlors, on the first death, the endowment plan passes to the surviving settlor. As a result, only spouses and civil partners should set up a Prudence Inheritance Bond on a joint settlor basis. 08 Prudence Inheritance Bond

9 There may also be a periodic charge every 10 years. This will be a maximum of 6% of the value of the trust fund, but is likely to be less in many cases. If the trust fund is worth less than the inheritance tax threshold at that time, and you hadn t made any other chargeable gifts in the seven years before setting up your Prudence Inheritance Bond, the periodic charge would be zero. Both the immediate and the periodic charges will be based on the calculated (discounted) value of the trust fund. You should note that the bond cannot be cashed-in during your lifetime, so if any tax charges arise they would have to be met from elsewhere. The value of the trust fund is not included within the estates of your beneficiaries. Inheritance tax on death If you die within seven years of setting up your trust, the immediate tax charge will be recalculated using the full inheritance tax rate of 40% and taking certain other factors into account. There may then be an additional tax charge if the amount due is more than was already paid. Inheritance tax exit charges When benefits are paid out of the trust to your beneficiaries (which will generally be after your death, when the Whole of Life Plan pays out), there may be an exit charge. This is based on the previous periodic charge (or the charge when the trust was set up, if there hasn't yet been a periodic charge), but takes into account the inheritance tax threshold at the time. If the previous charge was nil, the exit charge will also be nil, even if the value of the trust fund has grown. Prudence Inheritance Bond 09

10 Adviser Charging Adviser Charges You agree with your Adviser how they will be paid for the advice they provide. You can choose to pay your Adviser directly or you may ask us to deduct Adviser Charges to pay your Adviser, or a combination of both. If you have instructed us to deduct Adviser Charges, full details will be shown on your personal illustration. There are different types of Adviser Charges: > Set-up Adviser Charges > Ongoing Adviser Charges Your Adviser can provide further details on these options. Set-up Adviser Charge You may ask us to deduct a Set-up Adviser Charge and pay it to your Adviser at the time your Bond is taken out. The Set-up Adviser Charge will be deducted from your payment before the premium is invested. For example if you have 20,000 to invest but you agree a Set-up Adviser Charge of 1,000, your Premium will be 19,000. Ongoing Adviser Charge You may ask us to deduct Ongoing Adviser Charges from your Bond to pay for any ongoing advice. These can be specified as a percentage of your endowment premium or as monetary amount it cannot be a combination. The charge will be taken quarterly from the natural income produced by the Bond, before this is paid to you or redirected as per your instructions. Ongoing Adviser Charges will be treated as withdrawals and will count towards your 5% tax deferred allowance. Prudential will pay these charges to your Adviser and full details will be shown on your personal illustration. Ongoing Adviser Charges can be started, stopped or amended at any time by sending us written notification. As Ongoing Adviser Charges will be deducted from the Natural Income held in the Endowment Plan, we can only pay Adviser Charges in respect of advice given to the settlor. This feature cannot be used to pay for advice given to the trustees. Maximum Ongoing Adviser Charges There are maximum limits applying to the amount of Adviser Charges that can be deducted from your Bond please speak to your Financial Adviser. 10 Prudence Inheritance Bond

11 Important information In addition to this brochure, your Financial Adviser can provide you with more detail about the Prudence Inheritance Bond as well as other information. > The Key Features booklet lays out all of the product s essential features what the bond does and doesn t do, what the charges are, and everything else you should be aware of. > Your Financial Adviser also holds other helpful guides from Prudential, on subjects such as the taxation of bonds. Your Financial Adviser will give you a personal illustration showing how Prudence Inheritance Bond could work for you, together with the booklet describing the Key Features of the bond. Full terms and conditions of the Prudence Inheritance Bond are available from your Financial Adviser.

12 "Prudential" is a trading name of The Prudential Assurance Company Limited, which is registered in England and Wales. This name is also used by other companies within the Prudential Group. Registered office at Laurence Pountney Hill, London EC4R 0HH. Registered number Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. IHTB /2017