The WAY 'Gifts from Income' Inheritor Plan

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1 The WAY 'Gifts from Income' Inheritor Plan Immediate Exemption from Inheritance Tax on Gifts out of Surplus Income whilst retaining access to funds

2 Contents Inheritance Tax and 'Gifts from Income' An introduction to the rules relating to exempt gifts from income 5 The WAY Gifts from Income Inheritor Plan How WAY can assist investors to utilise this valuable gift exemption without giving over absolute control to the beneficiaries 6-7 Further IMPORTANT INFORMATION about the Plan Please read this page carefully 9 Other WAY Inheritance Tax mitigation arrangements A brief introduction to other WAY Plans for the efficient generational transfer of assets 10

3 Introducing the WAY 'Gifts from Income' Inheritor Plan A simple and effective strategy offering wealthy investors, who wish to augment their existing mitigation strategies, the convenience of a structured approach to making immediatelyexempt gifts from surplus income. The Government has progressively retrenched from the previous 'voluntary tax' approach so eloquently summed up by Roy Jenkins in 1986 when addressing the House of Commons - "IHT is, broadly speaking, a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue". The current philosophy is one whereby lifetime mitigation is being progressively squeezed towards extinction. Meanwhile IHT on death has become an effective wealth tax aimed at depriving successful accumulators of wealth, upon whom the UK is so dependent, of the ability to pass their hard-earned and aftertax savings and investments on to their chosen heirs. WAY Investment Services Limited offers a range of Inheritance Tax (IHT) mitigation arrangements which involve lifetime gifts (transfers) utilising each investor's available IHT Nil Rate Band (NRB), whereby invested assets can be removed entirely from ones estate over a seven year period. These arrangements will allow a typical couple to remove more than half a million pounds from their taxable estates every 7 years. The WAY Gifts from Income Inheritor Plan involves a simple and effective strategy for immediately reducing one's Inheritance Taxable estate by making instantly tax-exempt gifts into trust. The strategy offers substantial flexibility to trustees so that they may make appointments of value to beneficiaries and/or future reversions to the donor. 3

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5 Inheritance Tax and the Gifts from Income tax rules Inheritance Tax For many years HM Revenue & Customs (HMRC) has been taxing the estates of the newly-deceased at an Inheritance Tax rate of 40% of probate value, subject to an increasingly modest Nil Rate Band. This generally non-selective tax, in effect, represents a wealth tax on every UK taxpayers accumulated savings and investments at the time of death. Being both a posthumous tax and one which generally impacts in direct proportion to ones wealth, it receives less publicity than other more generalised taxes. However, in an age when the public is being encouraged to save and invest for their own retirement this penal (double) taxation seems opportunistic at best. Inheritance Tax (IHT) Mitigation The suite of WAY Inheritor Plans, described in separate literature, can reduce Inheritance Tax on amounts of gifted capital by utilising each investor s available Nil Rate Band (NRB) but without denying the donor ongoing access to the gifted funds. An investor s gift into a suitable trust will not suffer any immediate lifetime IHT and will then become totally exempt from Inheritance Tax if he/she survives 7 years - so long as the amount gifted is within that investor s presently available NRB. Thereafter the gift falls out of account and the NRB (at the then current rate) become available for further use once again. There is another often-ignored gift exemption which is even more valuable than using the NRB route since it offers immediate exemption for the amount involved. This exemption, for normal expenditure (gifts) out of income, has been available since the Inheritance Tax Act 1984 but is often overlooked The Inheritance Tax Act 1984 In IHTA 1984 Section 21 it states: A transfer of value is an exempt transfer if, or to the extent that, it is shown - That it was made as part of the normal expenditure of the transferor, and That (taking one year with another) it was made out of after tax income, and That, after allowing for all transfers of value forming part of normal expenditure, the transferor was left with sufficient income to maintain his usual standard of living. There are several caveats attached to this exemption, relating to such things as annuity purchase, but in essence the conditions stated above represent a useful summary. Translated into everyday conversational English these conditions can be described thus: A regular gift made out of surplus after-tax income is exempt from Inheritance Tax so long as - It is regular. Regularity means that gifts are made over a number of consecutive years (normally at least 3 to 4 years) The gift literally comes from traditional taxable income and not from capital, and The donor does not suffer a reduction in his usual standard of living - which must be out of income - as a result of the gifts. Subject to these conditions there is no limit on the size of such gifts and they will automatically achieve instant exemption for IHT. 5

6 The WAY 'Gifts from Income' Inheritor Plan The WAY 'Gifts from Income' Inheritor Plan is a specially designed strategy for investing regular IHT-exempt gifts into trust using collective investment funds whilst retaining an interest in the trust under which the gifted assets will, subject to the exercise of powers conferred on the trustees, revert back to the donor. WAY 'Gifts from Income' Inheritor Plan The WAY Plan offers investors the convenience of a structured approach to making exempt gifts out of income in such a way that the gifted funds remain under the influence of the donor. The trust deed is a carefully constituted instrument in which the donor selects chosen beneficiaries but then appoints trustees with extremely wide powers over how the assets are to be dealt with for the benefit of the beneficiaries. The donor selects the original trustees and may appoint new and additional trustees during his lifetime. The Beneficiaries The donor will specify the 'interest-in-possession' beneficiaries (the main beneficiaries) and the proportions in which they are to benefit. Since the trust has a maximum life of 125 years there is no compulsion on the part of the trustees to pay out benefits to beneficiaries at any particular time even after the death of the donor. Their action may well be influenced by the wishes of the donor (which may be recorded in a 'letter of wishes') who might, for instance, wish certain beneficiaries to have their share appointed over time rather than as a single lump. Additional Flexibility The trust wording also lists a second class of beneficiaries (which will generally include the main beneficiaries plus their children and remoter issue) to whom assets may be appointed at any time by the trustees on a discretionary basis. This allows the trustees to make payments to beneficiaries, to cover contingency requirements of the donor's family. The trustees are empowered to add further named beneficiaries to this appointee class at any time. The Donor Although the donor will have completely removed the gifted assets from his estate at the point of gift, he does not give up all rights to access those assets at some future time. The trust deed incorporates the right for the donor to have half of the value of his assets returned to him just before the fifth anniversary and the remaining half just before the tenth anniversary of the original gift. These 'reversions' are, however, subject to the trustees powers to reduce or postpone them, to make appointments and distributions for the benefit of the beneficiaries or even prevent them taking place altogether. The potential 'reversions' do not involve a reservation of benefit for inheritance tax purposes, although any assets which actually revert to the donor will then form part of his/her estate. Inheritance Tax Inheritance Tax will not usually become payable after the trust has been set up. There are charges to Inheritance Tax on ten year anniversaries of a trust and when property leaves a trust. HM Revenue & Customs, however, accepts that there is no charge to Inheritance Tax when property reverts back to the donor. Where assets remain within the trust beyond 10 years there may be a 10 year periodic charge to tax. While the rate can theoretically be as high as 6%, it will normally be nil unless the donor has made substantial gifts, chargeable to IHT, before the trust was established or the trust assets are sufficiently large to exceed the Nil Rate Band. Other Taxes Anti avoidance legislation deems the trust to be settlorinterested, courtesy of the reversionary interest retained by the Settlor. Consequently the donor will be the tax point for Income Tax liabilities generated within the trust during his/her lifetime. This applies to Income Tax events generated within the trust. The trustees are the tax point for Capital Gains Tax (CGT) on any disposals or deemed disposals of units within the trust. The trustees have their own annual exemption available, leaving the settlor s annual exemption available for any gains realised elsewhere in their investment portfolio. Where units are appointed to a beneficiary the trustees and that beneficiary may choose to hold-over the gain or loss on that deemed disposal. 6

7 After the demise of the settlor the trustees will need to account for CGT on any units disposed of within the trust. Please Remember It should be noted that tax legislation may change from time to time and the value of any tax relief may depend on the donor's individual circumstances. The information contained within this document is based on WAY's understanding of current law and HMRC practice as at August Donors should rely on their own tax advice. The stated tax implications cannot be guaranteed. Any reversions taken will be withdrawals of your original investment. Past performance is not necessarily a guide to future performance. The price/value of units and the income from them can go down as well as up as a result of changes in the value of underlying investments. Changes in rates of foreign exchange may have an adverse effect on the value of and on the income derived from an investment. International investment includes risks related to political and economic uncertainties of foreign countries, as well as currency risk. An investor may not get back the amount originally invested. 7

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9 Further Important Information Trustees Trust legislation requires that a minimum of two trustees are appointed because dispositive powers (the powers to appoint assets) may not be exercised by single trustees. Because of the wide discretionary powers given to these trustees they should be very well considered and probably should include a professional trustee. WAY requires that the trustees should not include the donor/settlor nor that person's spouse - this will avoid any questions of 'gifts with reservation' or complications over 'associated operations'. Combining WAY Plans Many investors find great difficulty in deciding how best to mitigate their future potential Inheritance Tax liability. The choices normally distil down to choosing between flexibility (including personal access to any capital gifted) and immediate potential IHT benefits. WAY Investment Services has a number of IHT plans offering a variety of benefits. It may well be that a combination of the plans available from WAY will best serve an individual situation, offering a suitable combination of benefits. Please see page 10 for a brief summary of two other plans available from WAY. Single Investor Plans Only The WAY Inheritor Plans are designed as single ownership plans only. This is because we passionately believe that such arrangements offer the maximum flexibility. As an example, the Inheritor Trusts empower the trustees to add further named beneficiaries to the appointee class at any time. This means that they may add a widow or widower as a beneficiary (but only) after the death of the donor - permitting appointments of capital or loans to be made to that person from their deceased partner's trust. Such a facility is of the utmost importance in long-term planning. Other IHT considerations With careful planning and the use of reversions, WAY Inheritor is unlikely to incur future periodic and/or exit charges. However even where periodic charges apply they will be at a maximum rate of 6% every 10 years, based on trust values at each 10 year anniversary. This compares favourably with the IHT death rate of 40%. Remember also that 6% is equivalent to an annual compound charge of approximately 0.6% per annum which one would hope might be covered by the underlying performance of the trust assets. Note that completion of the HM Revenue & Customs form IHT100 is compulsory where the value of the transfer into a WAY Inheritor Plan, when accumulated with previous Chargeable Lifetime Transfers made in the previous 7 years, is in excess of the Nil Rate Band. When completing 'Gifts from Income' trusts which are likely, at some early stage, to accumulate in value towards the Nil Rate Band, investors might consider at the outset splitting their gifts so that each individual trust may subsequently have its own Nil Rate Band. In this case trusts should not be established on the same days and it may be prudent to have slightly different beneficiaries (e.g. one for son, one for daughter and one for combined - in each case with full appointed class flexibility). Please Remember It should be noted that tax legislation may change from time to time and the value of any tax relief may depend on the donor's individual circumstances. The information contained within this document is based on WAY's understanding of current law and HMRC practice as at August Donors should rely on their own tax advice. The stated tax implications cannot be guaranteed. Reversions will be withdrawals of your original investment. Depending on the growth of the units concerned, any such 'drawings' may result in an erosion of your overall capital. Past performance is not necessarily a guide to future performance. The price of units and the income from them can go down as well as up as a result of changes in the value of underlying investments. Changes in rates of foreign exchange may have an adverse effect on the value of and on the income derived from an investment. International investment includes risks related to political and economic uncertainties of foreign countries, as well as currency risk. An investor may not get back the amount originally invested. 9

10 The WAY Flexible Inheritor Plan and the WAY Discounted Inheritor Plan both involve gifts into trusts with retained reversionary interests for the donor. As their names imply, the first offers tremendous flexibility with total IHT effectiveness after 7 years whilst the second offers an immediate discount on the value gifted into trust but with reduced flexibility. Most investors are drawn to the flexible option but a combination of the two can offer an attractive compromise between them. Following changes in the rules affecting the IHT treatment of gifts into trust (within the 2006 Finance Act) the establishment of WAY Inheritor Plans involves a chargeable transfer into trust. It is anticipated that investors will utilise their Nil Rate Band (NRB) for IHT purposes to make gifts without incurring any immediate tax. For those investors with no gift allowances available WAY offers the WAY Estate Transfer Plan (above) which avoids chargeable transfers. Unlike the majority of Inheritance Tax mitigation plans which are bond-based, the WAY Inheritor approach offers planholders the option of investing directly in collective investment funds. The WAY Estate Transfer Plan utilises an absolute trust to hold value for future beneficiaries and as a result the gift of that value qualifies as a Potentially Exempt Transfer (PET) and not a chargeable transfer. Chargeable transfers are (practically) limited to the NRB. However, there is no limit to the size of a PET. This means that investors can remove any amount of financial assets from their estates over the seven year period after which PETs fall out of account for IHT purposes. There would be no need of such a plan if the donor was happy to give up all rights to the gift they were making. In fact most people wish to retain at least an income from their accumulated capital and this is where the WAY Estate Transfer Plan comes into its own. The donor's access to 'income', in the form of maturing mini-policies, is established at the outset. This is done in advance and once stipulated is then fixed for the duration of the Plan. However, the precise profile of this stream of maturities is decided by the donor to best match his or her own anticipated requirements. Because the schedule of maturities is then fixed it will have a deemed value, based on the donor's likely life expectation. This value will form the 'discount' on the value of the funds invested/gifted into the Plan at inception. 10

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12 WAY Fund Managers Limited Cedar House, 3 Cedar Park, Cobham Road Wimborne, Dorset BH21 7SB Telephone: Facsimile: Registered in England No Authorised and regulated by the Financial Conduct Authority Member of IMA WAY Investment Services Limited Cedar House, 3 Cedar Park, Cobham Road Wimborne, Dorset BH21 7SB Telephone: Facsimile: Registered in England No WAY Investment Services Limited is an appointed representative of WAY Fund Managers Limited which is authorised and regulated by the Financial Conduct Authority The information in this document is for guidance only and expert financial and taxation advice should be sought before making decisions on financial products. Whilst we believe the facts to be correct, we cannot assume liability for any errors or omissions.