MetLife s Trust Range. A Guide to the Bare Loan Trust

Transcription

1 MetLife s Trust Range A Guide to the Bare Loan Trust

2 MetLife s Trust Range - A Guide to the Bare Loan Trust 1 A Guide to the Bare Loan Trust 1. What is the Bare Loan Trust? The Bare Loan Trust is an Inheritance Tax (IHT) planning arrangement which is made up of three parts: a Trust; a loan; and an investment in a MetLife Investment Bond ( Bond ). It is well known that potential IHT liabilities may be reduced by making lifetime gifts of assets. It is equally well known, however, that not many individuals can realistically give up all access to their assets, in which case effective IHT planning becomes more difficult. The Bare Loan Trust has been designed for investors who wish to carry out some IHT planning but cannot afford to give up all access to the funds intended to be used in this planning. Such investors would have to be prepared to give up access to any investment growth on the assets. 2. How the Bare Loan Trust works Under the Bare Loan Trust an individual lends a sum of money to the Trustees of a Trust which he/she has established with the specific purpose of receiving such a loan. The Trustees of the Trust then use the loan to invest in a Bond. This is the Trust asset held by the Trustees for the Beneficiaries. However, the Lender (who is also the Donor of the Trust) retains the right to have their loan repaid at any time. There is no initial gift and so no immediate reduction in the Donor s estate for IHT purposes. However, as the Trustee investment grows in value, all the investment growth will be outside the Donor s estate for IHT purposes and held for the Beneficiaries under the Trust. The Donor can request the repayment of the whole outstanding loan, or a part of it, at any time and as repayments are made by the Trustees, and spent by the Donor, the Donor s taxable estate will also reduce for IHT purposes. Thus the Bare Loan Trust enables investment growth to accrue free of IHT outside the Donor s taxable estate and also enables a gradual reduction in the potential IHT liability on the Donor s estate to take place. A Trust is a legal relationship which exists when an asset is held by a person or persons (called the Trustees(s)) for the benefit of another person or persons (called the Beneficiary(ies)). The Trustees have the control and legal ownership of the asset but must use it for the benefit of the Beneficiaries. In order to ensure that the Trust is effective for IHT, the Donor cannot benefit from the Bond in any way under the Bare Loan Trust. The Donor will, however, be one of the Trustees. The main objectives of the Bare Loan Trust are the gradual reduction of the Donor s estate as loan repayments are made to them which they spend and the IHT-free growth of the Bond investment outside of the (inheritance) taxable estate of the Donor. 3. You should consider using a Bare Loan Trust if you: wish to make an investment in a MetLife Investment Bond but do not wish to make a gift of your investment; have total assets in excess of 325,000 and are concerned about future IHT liabilities; need to retain access to the capital you intend to invest for your own benefit, but can afford to give up access to the investment growth; and are certain who is to benefit from the Trust, i.e. you do not wish to retain any flexibility over the choice of your Beneficiaries. 4. The Bare Loan Trust should not be used if you: are not interested in IHT planning; or can afford to make a gift of the capital used in the planning without the need to retain access to it; or wish to retain total control and access to the whole investment, not just the original capital; or wish to retain some flexibility or control over who will benefit from the funds. MetLife offers other Trusts which may be suitable depending on your needs.

3 2 MetLife s Trust Range 5. How is the Bare Loan Trust established? The Bare Loan Trust is based on three elements. First, the Bare Loan Trust deed is executed with the intention that the Donor will make a loan to the Trustees. No gift is made. The Bare Loan Trust deed contains the terms of the loan. The Bare Loan Trust is suitable only for a single Donor, i.e. it cannot be set up jointly by two people. The Trust is established by the Donor and the additional Trustees completing the Trust Deed. The Donor is one of the original trustees together with the additional trustees. Second, the Donor will usually write a cheque payable to MetLife Europe Limited for the amount of the loan specified in the Bare Loan Trust. The Donor will then hand over that cheque to the trustees. It is not possible to lend an existing MetLife bond to the trustees. Third, the trustees will make an application for the bond. This might be on the lives of some of the Beneficiaries. Once the bond is purchased by the trustees any subsequent dealings with the Bond will be between the Trustees (as the legal owners) and MetLife. 6. Key Provisions of the Bare Loan Trust The Beneficiaries named in the Trust are entitled to the benefits absolutely. This means that if a Beneficiary is aged 18 or over they can demand that the Trustees pay over the benefits to them. Nobody other than the named Beneficiary(ies) can benefit from the Trust in any circumstances (the Lender is, of course, entitled to have their loan repaid to them). The Lender names, as Beneficiary(ies), the individual or individuals who are to benefit from the Trust Fund and, if more than one, the shares in which they are to benefit. For tax purposes each of these Beneficiaries is treated as owning an appropriate share of the Trust property. Beneficiary(ies) under age 18 can be named (subject to the Lender considering the implications of such a Beneficiary dying whilst still a minor so that the intestacy rules apply). If there is more than one Beneficiary, the Lender must decide the shares in which they are to benefit, otherwise they will benefit equally. The value of the Trust Fund available for the Beneficiaries will increase as the value of the Bond grows. The Lender remains entitled to have their loan repaid at any time and the amount of the outstanding loan remains in their estate for IHT purposes. To be IHT effective the loan must be repayable on demand and interest-free. From time to time the Lender will request part repayments of their loan which will be made by the Trustees after making withdrawals of capital from the Bond. The Lender would normally spend these loan repayments so their taxable estate would reduce at that time. A Bond is particularly well suited to this type of arrangement as it does not produce any real income the use of an income-producing investment would have potential tax and practical drawbacks. 7. The Law of the Trust The trust will be governed by the law of England and Wales. 8. The Trustees It is important for the Donor to choose their trustees carefully. The Donor is automatically one of the Original Trustees. At least one additional Trustee must be appointed at outset. The additional Trustee(s) executes the Trust Deed with the Donor. The trustees must be UK residents, over the age of 18 and of sound mind. The Donor can appoint further Trustees after the creation of the trust and the Donor may also dismiss a Trustee provided at least one Trustee other than the Donor, or Donor s spouse, remains. The Trustees must act unanimously. 9. UK Tax implications of the Bare Loan Trust In what follows it is assumed that the Lender, the Beneficiaries and the Trustees of the Trust are all UK resident and domiciled. Special rules apply where this is not the case. 9.1 Inheritance Tax (IHT) As no gift is made when the trust is established, there are no IHT implications at that time. The loan made to the Trustees also has no IHT implications provided it is interest-free and repayable on demand (as is the case when using the Bare Loan Trust documentation provided by MetLife) Death of the Beneficiary The Beneficiaries are treated as owning the Trust property for IHT purposes. On the death of a Beneficiary the value of that Beneficiary s underlying interest in the Trust property (the Bond less the amount of the outstanding loan) will be included in the estate of the Beneficiary. If there is more than one Beneficiary then the value included will be the value of their share. In the event that the Beneficiary is under the age of 18, unmarried and not in a civil partnership, the assets will usually pass to the deceased Beneficiary s parents under the rules of intestacy.

4 MetLife s Trust Range - A Guide to the Bare Loan Trust Death of the Lender On the death of the Lender the amount of the outstanding loan will be in the Lender s estate for IHT purposes. However, the balance of the value of the Trust Fund (represented by the Bond) will be outside the Lender s estate as it is included in the estate of the Beneficiary (see above). If the Lender is married they may, in their Will, leave the right to the repayment of the outstanding loan to their spouse. In such a case, if their spouse survives them, no IHT will be due on the outstanding loan entitlement on the Lender s death and loan repayments can continue to them. Under current legislation no other IHT charges will arise under the Bare Loan Trust. In particular there will be no periodic charges or charges when payments are made to the Beneficiary such charges are only relevant to other types of Trust called Settlements. The Bare Loan Trust is not a Settlement. 9.2 Capital Gains Tax Creation of the Trust There are no CGT implications on the creation of the Trust as no assets are transferred to a Trust at outset. A liability could arise if investments are realised to make the loan. Trust Gains Provided the Trust investments remain as a Bond, there will be no CGT implications. 9.3 Income Tax Investment Income On the basis that the only investment of the Trust is an Investment Bond, there will be no natural investment income to the Trustees Chargeable event gains under a Bond Adult Beneficiaries On the basis that the Beneficiaries are adult and the Lender, the Trustees and the Beneficiaries are all UK resident, any chargeable event gains will be assessed to Income Tax on the Beneficiary in the appropriate proportion even if the Bond is still legally owned by the Trustees. A liability on a UK Bond will only arise if the Beneficiary is a higher or additional rate taxpayer (after any top-slicing relief) and then a 20% tax credit would be available to reflect the tax paid in the fund. Gains on an offshore Bond would be assessed as if they were the top slice of the Beneficiary s income. Minor Beneficiaries In the event of the Beneficiaries of the Trust being minors, then the person on whom gains will be assessed will be as follows if: the minor beneficiary is neither married nor in a civil partnership, is the child of the Lender, and the total of the chargeable gain and income from other settlements made by the same parent for that child exceeds 100 in the tax year the parent/ Lender will be assessed. In other cases, the beneficiary will be assessed The Income Tax Implications of Loan Repayments Under current legislation, the Trustees can withdraw from the Bond up to 5% of the premium, each year for 20 years, without an immediate tax charge. Any allowable amount not withdrawn in a year can be carried forward to the next year and so on. Therefore, a convenient level of capital (5% per year of the original investment) can be tax effectively accessed by the Trustees over 20 years to facilitate loan repayments. Of course, the level of repayment depends entirely on the circumstances and the wishes of the Lender. If more than 5% of the premium is withdrawn by the Trustees each year to finance loan repayments, this will mean that: - if such a level of repayment continues, the loan will be repaid quicker; and - any amounts withdrawn over and above the cumulative unused 5% annual allowances in any policy year will amount to chargeable event gains (see section for details as to whom any gain will be assessed upon for income tax). - If adviser charges are facilitated through the bond such payments count towards the 5% allowance.

5 Important note In this Guide the term spouse includes a reference to a registered civil partner under the Civil Partnership Act The information contained in this publication is based on MetLife s understanding of taxation, legislation and HM Revenue & Customs practice as at the date of this publication all of which may change in the future. While we have taken reasonable steps to ensure all information is accurate and complete, we do not guarantee the accuracy or completeness of the information nor are we responsible for any errors or omissions and we shall not be liable for any loss (howsoever caused) resulting from your use or reliance upon anything in this publication. You should always obtain your own professional advice. Want to find out more? Speak to your Financial Adviser to learn more about how this product could work for you, or call us on If you are looking for a Financial Adviser, you can find one close to you at You can also visit us at for more information Products and services are offered by MetLife Europe Limited which is an affiliate of MetLife, Inc. and operates under the MetLife brand. MetLife Europe Limited is authorised by the Central Bank of Ireland and subject to limited regulation by the Financial Conduct Authority. Details about the extent of our regulation by the Financial Conduct Authority are available from us on request. Registered address: 20 on Hatch, Lower Hatch Street, Dublin 2, Ireland. Registration number UK branch address: One Canada Square, Canary Wharf, London E14 5AA. Branch registration number BR WM l JAN 2014 l JAN 14