For advisers only. Not for use with customers. Your guide to the Absolute Loan Trust

Transcription

1 For advisers only. Not for use with customers. Your guide to the Absolute Loan Trust

2 Contents Background 3 What is the Absolute Loan Trust? 4 Who is the Trust suitable for? 4 How the Trust works 5 The benefits of the Absolute Loan Trust 5 Questions & Answers 6 Why Friends Provident International? 9 What to do next 9 Important notes 10 Important Notes We cannot give legal advice in connection with trust arrangements. This document has been drawn up with professional assistance for guidance for you and your clients. We do not accept any legal responsibility for the tax consequences of the Trust or whether the Trust will be treated as a settlement for inheritance tax purposes. The Trust and statements are based on our current understanding of UK inheritance tax law and HM Revenue & Customs practice as at June Before proceeding with this Trust we strongly recommend the Trust is referred to your client s own legal advisers to ensure it meets their needs. The Trust is therefore provided on the clear understanding that it is a draft for the consideration of your client s legal advisers. Throughout this Guide, the term spouse also includes a civil partner for UK-domiciled individuals under the UK Civil Partnership Act

3 The Absolute Loan Trust Background Many individuals underestimate the size of their taxable estate. Taking into account the value of the private residence, contents and personal effects, investments, life assurance policies, bank and building society deposits, cars and second homes, an individual can quickly have an estate worth more than the inheritance tax (IHT) nil rate band which is currently GBP325,000 for tax year On death, assets that exceed this figure passing to a person other than the deceased s UK-domiciled spouse will be subject to inheritance tax at 40%. See below for the portion of an estate which would be taken by HM Revenue & Customs should a person die leaving assets to anyone other than his/her spouse, a situation that will inevitably arise on the death of the survivor of a married couple (see Figure 1). Figure 1: IHT the effect on what you leave behind (based on figures) IHT GBP70,000 Gross Estate GBP500,000 IHT GBP170,000 Gross Estate GBP750,000 IHT GBP270,000 Gross Estate GBP1,000,000 What can be done to mitigate this problem? One effective way of IHT planning is to gift assets direct to individuals. Normally, if the donor survives the gift by seven years, there is no IHT payable. However, not everybody can afford to gift assets away, although they may wish to carry out some IHT planning. The solution To answer the needs of these people we have introduced the Absolute Loan Trust a lump sum inheritance tax plan which is designed to provide long-term benefits while giving the lender the right to receive a stream of tax-efficient cash payments. Therefore, your client, as the investor, can make a lump sum investment which will: Provide capital to them when they require it. Remove any growth from the lender s taxable estate. 3

4 What is the Absolute Loan Trust? The Trust is a bare trust, meaning the beneficiaries are nominated at outset and cannot be changed once the Trust has been set up. The beneficiaries are absolutely entitled to the Trust assets. A bare trust is not considered to be a settlement and therefore will not be subject to the relevant property regime, therefore avoiding lifetime inheritance tax (IHT) on the initial transfer as well as periodic and exit charges. Who is the Trust suitable for? The Absolute Loan Trust is suitable for your clients who are aiming to: Freeze their IHT liability without incurring tax charges under the relevant property regime which was extended to all lifetime settlements by the UK Finance Act Receive regular or ad hoc repayments of the loan. Have all their investment growth outside the estate. Provide capital for nominated beneficiaries on the death of the Lender, potentially free of IHT. Benefit from a wide range of investment funds that offer greater potential for capital growth over the medium to long term. 4

5 How the Trust works Getting started Your client creates a trust, appointing trustees and naming their chosen beneficiaries. Neither the beneficiaries nor their individual shares can be changed at a later date. Your client then makes a loan to the trustees of his chosen investment amount. The trustees invest this capital into one of our single premium investment products (this trust can be used with more than just Reserve/Reserve Advance). The Trust Deed and an application form for the policy are available from us. The loan and repayments Once the trust has been set up, your client makes an interest-free loan to the trustees for the amount they wish to invest. However, your client may send the money direct to us. Your client can choose to have the loan repaid in regular instalments or by ad hoc payments. Either way, any capital growth on the policy accumulates outside your client s estate and is therefore free of IHT. The loan amount not repaid will form part of your client s estate should they die. The value of an investment is not guaranteed and all trustees assume responsibility for repayment of the loan. Tax-efficiency of policies held in an Absolute Loan Trust Your client is able to take 5% withdrawals from a policy each year, free from an immediate charge to income tax. Each withdrawal is a part-repayment of the loan. If withdrawals of 5% per year are chosen, the loan would be repaid after 20 years. Please note that if more than 5% per year is withdrawn, the excess could be subject to income tax and may reduce any personal allowance or tax credit available if your client is resident in the UK for tax purposes. Investment switches within an investment product create no liability to Capital Gains Tax, either for the lender or the trustees. Life policies are deemed to be non-income producing assets and therefore considerably reduce the administrative duties of the trustees. The combination of these tax benefits make our Investment products the ideal investment choice for an Absolute Loan Trust. The benefits of the Absolute Loan Trust The Trust can provide your clients with: A means of gradually reducing their IHT liability. The ability to receive regular or ad hoc payments from their funds. Access to their original capital during their lifetime through regular or ad hoc loan repayments. Protection of any capital growth so that it can pass to their beneficiaries following their death, free from IHT. A way of deciding who will finally benefit from their investment when they die. A wide range of investment funds to choose from. 5

6 Questions & Answers The following questions and answers should help to address your queries about the Absolute Loan Trust. Who is the Absolute Loan Trust suitable for? What are the main benefits of the Absolute Loan Trust? How is the Trust set up? Can an existing policy be assigned to the Trust? Can the loan be made by way of an in specie transfer? Who is the Lender? Can spouses set up their own Trust? Can spouses set up the Trust jointly? Can spouses set up a Trust for the benefit of each other? When and whom should the Lender appoint as Trustees? What is the role of the Trustees? Can Beneficiaries be appointed Trustees? Can new Trustees be appointed? The Trust is suitable for individuals who wish to ensure that some IHT mitigation is achieved on their death, whilst also requiring access to the invested capital. It enables your clients to: Retain access to the original invested capital through loan repayments Provide long-term benefits in any investment growth to that person s chosen beneficiaries Invest a lump sum payment via a loan Ensure all growth from the investment is free of IHT. The Lender sets up the Trust and the trustees apply for one of our single premium investment products. The lender pays the premium for the policy, the loan amount, direct to us. The combination of these tax benefits make our Investment products the ideal investment choice for an Absolute Loan Trust. No. The Trust is only suitable for new policy applications. No. Loans must be made in cash. In specie transfers will not be accepted. The person who is lending the money to the Trustees for investment and who sends payment to us. Yes, as long as the beneficiary of each Trust is not the other partner. No, there is only one Lender so two separate Trusts would be required. No, this is not recommended as HM Revenue & Customs could regard it as an Associated Operation and treat both arrangements as one. This could be treated as a gift with reservation and be subject to inheritance tax. The Lender must name the other Trustees when he executes the Trust document. The appointed persons must be aged 18 or over, of sound mind and not bankrupt, and must have the confidence of the Lender these are normally trusted family members or a corporate trustee. It is essential that at least two Trustees, and a maximum of four, are appointed. The Trustees are responsible for administering the Trust fund in accordance with the terms of the Trust. The Lender is automatically a Trustee. Yes, so long as they are aged 18 or over, of sound mind and not bankrupt. However, care should be exercised in advance, as the Beneficiary would then have a say in how the Trust is administered. The Lender has the power to appoint and retire Trustees, provided at least two remain. Any additional Trustee(s) (up to maximum of four) will assume joint responsibility. 6

7 Who should be the Beneficiaries? Can Beneficiaries be changed? On whose lives is the Policy written? What is the maximum number of lives assured permitted under the Policy? What if a Beneficiary dies whilst the Trust is still in operation? Are further investments permitted? What are the inheritance tax benefits of the Trust? How does the Trust provide the Lender with an income? How are the loan repayments paid to the Lender? What if the Lender no longer requires loan repayments? Why is the loan interest-free? Can the beneficiaries benefit whilst the Lender is still alive? Can monies be lent to the Beneficiaries? What if the Policy loses value so the Lender cannot be paid his entitlement? The Lender names the person(s) he wishes to benefit from the Trust. No, this is a bare trust so the beneficiaries are fixed at outset and cannot be changed. Furthermore, each Beneficiary s percentage share of the trust fund cannot be altered at any time. We recommend the Policy is written on the lives of the named Beneficiaries. This has the advantage of enabling the Policy to remain in force for as long as possible and therefore helps provide both income tax and inheritance tax efficiency. Subject to the limit explained in What is the maximum number of lives assured permitted under the Policy? below, clearly the greater the number of nominated Beneficiaries who are lives assured the greater the flexibility. Neither the Lender nor the Lender s spouse can be a nominated Beneficiary. We will permit up to 10 lives assured, depending on product on a last-survivor basis which will normally enable all the nominated Beneficiaries to be included. The deceased Beneficiary s interest in the Trust would then terminate and the value of the capital in which he had a proportionate interest will be included in his taxable estate. The deceased Beneficiary s share will pass in accordance with his Will or the intestacy provisions. The proportionate Beneficiary s share will be the interest in the Trust Fund less any outstanding loan entitlements of the Lender. Yes. Please contact our Technical Services Department for further information. The Lender is able to make a loan to the Trust and receive loan repayments when required. Any investment growth is free of IHT. Income is provided via loan repayments to the Lender by means of withdrawals from the Policy. These can be on a regular or an ad hoc basis when the Lender so wishes. Payments in satisfaction of the Lender s loan entitlement are made from the Policy by us direct to the Lender. The Trustees should keep records of all such payments. The Lender can release his entitlement. This is likely to be treated as a potentially exempt transfer, to the extent they are not covered by the annual exemption of 3,000. To allow capital growth on the Policy to accumulate outside the Lender s estate and for the benefit of the Beneficiaries. Although the Trust is written as a bare trust and the Beneficiaries become absolutely entitled at 18, the Trustees still have a liability to the Lender for any outstanding loan repayments and must therefore take this into account. No. The Absolute Loan Trust is a simple bare trust, so the Trustees do not have the power to lend money to Beneficiaries. The Lender s entitlement is subject to the Trust fund being sufficient to meet that entitlement. The Trustees have no personal liability to the Lender in cases where the investment reduces in value. 7

8 Is the Lender immediately taxed on the loan repayments? Who is taxed? Is the Trust caught by Preowned Assets Tax? Can the arrangement be wound up? Can the Policy be surrendered while the Lender is still alive? What are the IHT implications on the death of the Lender? Not if withdrawals/loan repayments are kept within the bond s 5% tax deferred withdrawal allowance. These payments would be deemed return of capital and therefore not immediately taxable. If the Beneficiaries are over 18 and resident in the UK, they will be liable to UK income tax on any gains. If the Beneficiaries are under 18 and resident in the UK, they will be liable to income tax on any gains, unless a parent is the settlor, in which case the parental settlement rules will apply, which means the parent will be assessed whenever a chargeable gain arises, and the income of the trust exceeds GBP100. No, it is not thought so as HM Revenue & Customs have confirmed in writing to the Association of British Insurers that Pre-owned assets tax will not apply to loan trust schemes. We have also taken legal advice to confirm this. No, the Trust is irrevocable and so cannot simply be wound-up by the Lender, as he only has the right to recover any outstanding loan amounts. Yes, subject to chargeable event legislation. However, the Trustees still have a liability to the Lender for any unpaid loan amounts. Any loan repayments not made will form part of the Lender s estate for IHT purposes. The Beneficiaries will become entitled to the remainder of the Trust fund absolutely. Please note it is important that the Trustees keep accurate records of any loan repayments made to the Lender. These can be in the form of a receipt sent by the Lender to the Trustees every time he receives a repayment, which the Trustees retain. For your client s convenience, we have provided a draft receipt with the Absolute Loan Trust for this purpose (Form E). 8

9 Why Friends Provident International? An investment policy is a straightforward and attractive option. Based in the Isle of Man, our investment policies offer: The prospect of long-term capital growth. A comprehensive range of professionally-managed funds, both internally and externally-managed, offering a diverse mix of asset type, geographic location and management style, catering for all attitudes of investment risk. Valuable tax benefits of gross roll up, tax-free switches and tax-deferred loan repayments to the Lender via the annual 5% per annum withdrawal allowance. The political stability of assets held in the Isle of Man. The confidence of investing with one of the leading international life companies, and also a member of one of the world s largest international insurers. In summary The Absolute Loan Trust offers your clients the opportunity to reduce the impact of inheritance tax immediately and in the long term. Your client benefits from: Access to regular payments via loan repayments. All capital growth immediately outside the estate. Capital goes to the intended Beneficiaries, on repayment of the loan. Making life easier for you and your clients We have a range of trusts to suit other circumstances. With our wide range of products and trust documentation, we can help you develop a realistic strategy for your clients, as well as offering flexibility for any future changes in circumstances. What to do next Our Absolute Loan Trust contains all the documentation necessary to put the scheme into operation. This is available from our website. 9

10 Important notes The information given in this document is based on our understanding of UK and Isle of Man tax law and HM Revenue & Customs practice as at June 2013, which may change in the future. Individuals are advised to seek professional independent advice and no liability can be accepted for the personal tax consequences of this Trust or for the effect of future tax and legislative changes. It is important to appreciate that although we have sought the views of leading Tax Counsel on the tax implications of the Trust and he has confirmed that the arrangement does not, in his view, constitute a gift with reservation of benefit within the meaning of the Finance Act 1986, nor does it fall within the definition of a settlement in s43 of IHTA 1984, no guarantee can be given that HM Revenue & Customs will not take a contrary view or that tax legislation will not change in the future. As the value of units can go down as well as up, due regard must be given to the level of possible future growth in the policy when selecting the level of capital repayments required. A high capital repayment may not be thought advisable, at least in the early years following the commencement of the arrangement. Investment involves risk and each class of investment will involve its own individual level of risk. We recommend that you discuss specific risks associated with individual investments with your clients before making any investment decisions. Fund prices may go up and down depending upon the underlying investment performance or, where investments held within a fund are not denominated in the currency of that fund, simply because of movements in currency exchange rates. All fund performance is quoted net of annual charges. However, fund performance should not be viewed as an indication of future performance the value of the investment cannot be guaranteed and your clients may get back less than they paid in. Each policy is governed by and shall be construed in accordance with the law of the Isle of Man. If your client effects a policy whilst resident in the United Arab Emirates, all disputes regarding the policy shall be subject to the non-exclusive jurisdiction of the courts of the United Arab Emirates. Some telephone communications with the Company are recorded and may be randomly monitored. All policyholders will receive the protection of the Life Assurance (Compensation of Policyholders) Regulations 1991 of the Isle of Man, wherever their place of residence. Complaints we cannot settle can be referred to the Financial Services Ombudsman Scheme for the Isle of Man. A written statement of the policy terms and conditions of the products may be obtained from Friends Provident International Limited on request. Copyright 2013 Friends Provident International Limited. All rights reserved. Friends Provident International Limited Registered & Head Office: Royal Court, Castletown, Isle of Man, British Isles, IM9 1RA Telephone: +44(0) Fax: +44(0) Website: Incorporated company limited by shares Registered in the Isle of Man No Authorised by the Isle of Man Insurance & Pensions Authority Provider of life assurance and investment products Authorised by the Office of the Commissioner of Insurance to conduct long-term insurance business in Hong Kong Registered in the United Arab Emirates as an insurance company (Registration No.76) and as a foreign company (Registration No. 2013) Authorised by the United Arab Emirates Insurance Authority to conduct life insurance and savings business Registered in Singapore No. F06835G Registered by the Monetary Authority of Singapore to conduct life insurance business in Singapore XIM/ALT/ADGUIDE (38729)