DISCOUNTED GIFT & INCOME TRUST CREATING FIXED TRUST INTERESTS

Transcription

1 DISCOUNTED GIFT & INCOME TRUST CREATING FIXED TRUST INTERESTS

2 PAGE 1 THE DISCOUNTED GIFT & INCOME TRUST (CREATING FIXED TRUST INTERESTS) EXPLAINED THE INHERITANCE TAX ISSUE PAGE 2 HOW THE TRUST WORKS PAGE 4 THE DISCOUNTED GIFT & INCOME TRUST (CREATING FIXED TRUST INTERESTS) IN PRACTICE A DETAILED LOOK AT THE DISCOUNTED GIFT & INCOME TRUST(CREATING FIXED TRUST INTERESTS) PAGE 5 TAXATION PAGE 6 SUMMARY OF THE DISCOUNTED GIFT & INCOME TRUST (CREATING FIXED TRUST INTERESTS) PAGE 7 TECHNICAL QUESTIONS AND ANSWERS THE TRUST SETTING UP THE TRUST PAGE 8 TRUST ISSUES TRUST BENEFICIARIES PAGE 9 INHERITANCE TAX PAGE 10 DISCOUNTS AND UNDERWRITING PAGE 11 TAXATION OF PRE-OWNED ASSETS PAGE 12 IMPORTANT NOTES

3 THE DISCOUNTED GIFT & INCOME TRUST (CREATING FIXED TRUST INTERESTS) EXPLAINED THE DISCOUNTED GIFT & INCOME TRUST MAY BE SUITABLE FOR YOU IF: you would like to take advantage of the regime for lifetime giving to reduce your inheritance tax liability you require an income from the investment for life but are willing to forego all other access to the invested funds you want to avoid the costs and complexities that will generally apply where assets are transferred to a trust you are willing to make a decision now as to who should benefit from the amount you invest and accept that you will not be able to change your decision later you are content that adult beneficiaries could choose to direct the trustees how the funds should be invested and may call for payment of the trust fund at any time. THE INHERITANCE TAX ISSUE If your estate is above the inheritance tax nil rate band, tax will be payable at 40% on your death unless you leave it to an exempt beneficiary such as your surviving spouse, civil partner or a charity. An obvious way for you to reduce your inheritance tax liabilities is to reduce the value of your taxable estate by making gifts during your lifetime. No inheritance tax is charged on lifetime gifts made outright to individuals or to trusts for the absolute benefit of one or more individuals, provided such gifts are made more than seven years before death. Such gifts are known as potentially exempt transfers (PETs). However, it is not always possible or appropriate for outright gifts to be made. The income generated by the investment of capital may be needed to maintain an acceptable standard of living. The Discounted Gift & Income Trust (creating fixed trust interests) aims to provide a solution. The trust enables you to make a reduced or discounted gift (achieving an immediate reduction in your taxable estate for inheritance tax purposes and moving capital outside your estate altogether after seven years), whilst allowing you to retain an income for life (or until the trust fund is exhausted). 1

4 HOW THE TRUST WORKS The Discounted Gift & Income Trust (creating fixed trust interests) is usually established in conjunction with a new investment into an onshore life insurance investment bond. For more information on our onshore bonds, please refer to your financial adviser or the relevant Key Information Documents (KIDs) and/or Additional Information Documents (AIDs). Under the trust, you are absolutely entitled to a series of fixed monetary sums determined by you at outset. These sums will be payable at pre-selected dates during your lifetime to provide you with a regular income for as long as you are alive (provided that sufficient funds are available to the trustees in the trust fund to meet these payments as they fall due) and will usually be satisfied by withdrawals, made by the trustees, from the underlying investment bond. You should think carefully about the level of income you require as the amounts cannot subsequently be increased. Equally you will need to take into account the possibility of eroding trust capital, ie the growth on the investment does not keep up with withdrawals resulting in a shortened income stream. Subject to your overriding entitlements, the investment will be held under bare trust. This means that your chosen beneficiary (or beneficiaries) have a fixed and absolute interest in the trust fund. Your initial gift will be a PET which means that no inheritance tax will be payable when the gift is made and, if you survive the subsequent seven year period, your gift will be exempt from inheritance tax. For inheritance tax purposes the amount gifted into the trust (the PET) will usually be less than the amount invested. This is because you are giving away less than the whole investment by virtue of the income rights you retain. Example discount factors To calculate your discount factor, we have to take account of the total amount of income that you are likely to receive before you die. If you are relatively young or you are taking high levels of income, your discount will be higher (and your PET correspondingly lower) reflecting the fact that you have retained a greater proportion of your investment. For example: Investment of 250,000 by a non-smoker in normal state of health requiring an income of 1,000 each month: Age Value of discount Potential tax 40% ,758 69, ,562 62, ,340 54, ,583 46, ,103 37, ,102 29,241 Actual figures may need to be negotiated with HMRC if you die within seven years of making the gift and it is important to realise that the example discounts shown will only be achievable if your state of health is normal for your age. If this is not the case, then a lower discount will apply. The example discount figures are based on interest rates set by HMRC on 1 December Any change to these rates will affect the discounts available. Further, as this income will not usually have a value on death, the value of your estate is immediately reduced for inheritance tax purposes, achieving a discounted gift. In the event of death within seven years of creating the trust, then the value of your gift will be added into your estate for the purposes of the inheritance tax calculation. In determining the value of your gift, HM Revenue & Customs (HMRC) will normally accept that the amount invested is reduced by a discount factor that reflects the value (if any) of your retained rights. 2

5 To ensure that agreement can be reached speedily and at minimum cost, we offer you the option of full underwriting at no extra charge. Assessing your state of health when you make the investment may save both time and legal bills. The method we use to determine our discount factors has been agreed with HMRC. This means that if a discount is based on our discount tables and underwriting, there is less likelihood of any dispute about the value of the gift on your death within seven years. Where you select the full underwriting option, underwriting may take place in advance of, or concurrently with, your application. You should discuss the merits of each option with your financial adviser before deciding how to proceed. Joint settlors Where the Discounted Gift & Income Trust (creating fixed trust interests) is created by joint settlors, income will be payable for your joint lives and for the lifetime of the survivor of you. This will usually have the effect of increasing the total available discount to reflect the fact that a greater benefit has been retained. The discount obtained will be apportioned between you, based upon your age and state of health. Where there is a significant disparity in age and/or state of health between you and your spouse/civil partner, the discount will be applied wholly or mainly to the gift made by the younger and/or fitter investor. If you do not wish to take the full underwriting option, it is possible for you to proceed on a no underwriting basis. However you need to take into account that your executors may have more difficulty agreeing the discount figure with HMRC in the event of your death within seven years of establishing the trust (unless other authoritative evidence of your state of health at the date of the gift is available). This may lead to additional costs in your estate. Note that if you select the full concurrent underwriting option, we will be able to issue a certified discount letter only if this can be provided on the basis of a report obtained from your GP alone. The size of the gift, your age and/or any ongoing investigations into any pre-existing medical conditions could all prejudice the availability of a discount on this basis. This option should not be selected if your doctor does not have up-to-date information on your state of health. 3

6 THE DISCOUNTED GIFT & INCOME TRUST (CREATING FIXED TRUST INTERESTS) IN PRACTICE AN EXAMPLE OF HOW THE TRUST WORKS Example Mrs S is a 70 year old widow with four children. Her estate is valued at 725,000 and includes funds on deposit. Although Mrs S is aware that there may be a liability to inheritance tax on her death (there is no available nil rate band to claim from her late husband s estate), she feels unable to make lifetime gifts, as she requires the income from her investments to maintain her standard of living. She is also worried about funding care costs should this prove necessary. If no action is taken, her estate, above the available nil rate band, will be subject to inheritance tax at 40% on death. Under current rates this would mean that each of her children will inherit a smaller sum than the tax payable to HMRC. Solution Mrs S invests 300,000 into a Discounted Gift & Income Trust (creating fixed trust interests) and reserves the right to an income of 1,000 each month. As her health is normal for her age, Mrs S s gift is likely to be discounted by 136,340 to reflect the anticipated value of the rights retained. This means that, assuming the discount quoted is accepted by HMRC, her potentially exempt transfer will be reduced to 163,660 for inheritance tax purposes. In the event of Mrs S s death five years later, her estate is valued at 588,660 (that is, 425,000 remaining estate plus the discounted gift of 163,660). After allowing for the nil rate band, use of the Discounted Gift & Income Trust (creating fixed trust interests) has resulted in a tax saving of around 54,500 at current rates. Had Mrs S survived for seven years, the entire trust fund could have been appointed to her children, free of inheritance tax a tax saving of 120,000 while still securing a reasonable level of income. A DETAILED LOOK AT THE DISCOUNTED GIFT & INCOME TRUST (CREATING FIXED TRUST INTERESTS) The Discounted Gift & Income Trust (creating fixed trust interests) creates a type of trust which is in technical terms a bare trust. Under the trust the trustees hold the trust fund as nominees for your chosen beneficiary or beneficiaries who are absolutely entitled to the trust fund (subject to your absolute and overriding lifetime entitlement to a pre-defined income ). Transferring property into a bare trust is a PET for inheritance tax purposes (see pages 9 and 10 for further details). There are inheritance tax benefits of creating a bare trust over some other types of trust as they are not subject to the more onerous tax or reporting requirements associated with flexible trusts. However they do lack the flexibility and element of continued control over the ultimate distribution of any growth on your capital which these other types of trust provide. In making the gift you declare an outright irretrievable gift to your chosen beneficiaries and then give up control. You may be a trustee but adult beneficiaries could chose to direct the trustees how to deal with the trust fund and may call for payment of the trust fund at any time. However when complying with a beneficiary s request for his share of the trust fund the trustees would have to ensure that sufficient funds were retained to meet your overriding right to your income payments. You will also need to recognise that the beneficiary s share of the trust fund will be treated as an asset in his or her own estate for inheritance tax purposes and in the event of the beneficiary s death, would be dealt with in accordance with the beneficiary s will or the rules of intestacy. It would also be taken into account in the event of the beneficiary s divorce or insolvency. However, in many family situations the Discounted Gift & Income Trust (creating fixed trust interests) will allow you to take steps to reduce your inheritance tax liability and retain a regular income from your gift whilst also knowing that your chosen beneficiaries will be content for the funds to be invested and managed by the trustees until it is appropriate to take control of the trust fund. If you do not feel this type of trust meets your requirements ask your financial adviser about our Flexible Discounted Gift & Income Trust, which is based on a discretionary trust. 4

7 TAXATION Income tax and capital gains tax Where the only trust asset is a non-income producing life insurance investment bond, such as an onshore bond, there will be no capital gains tax to pay by either yourself or the trustees. Nor will there be any income tax liability unless and until a chargeable event occurs and a gain has been made. A chargeable event will most commonly occur on final termination of the plan (such as death of the last life covered or earlier encashment by the trustees) or where amounts are withdrawn from the plan in excess of the allowable limit. The allowable limit is a cumulative amount of 5% of your original investment each year up to a total of 100% of the original investment amount. If one of these chargeable events occurs, any gains will be assessable to income tax on the beneficiaries unless the bare trust was created by a parent and is subject to the parental settlement rules. Parental settlement rules The parental settlement rules will apply if one or more of the beneficiaries is your minor child and a chargeable event occurs whilst you are alive. Any gain or excess arising in respect of that child s share of the trust fund, is deemed to form part of your income for the tax year in which the chargeable event occurs (to the extent that all income arising, including the chargeable event gain, from all parental settlements created by you for that child exceeds 100 in the same tax year). Tax will be payable only if, when the gain is added to your total income for that year, it falls partly or totally within the higher or additional rate tax bracket. This is because any liability to the basic rate of income tax is deemed to be covered by the tax paid in the underlying funds. If, immediately before the chargeable event, you are deceased, then any chargeable event gain assessable to income tax may be apportioned between the beneficiaries and yourself. Please note: Where a gain or excess is deemed to form part of your income: 1. The gain or excess is added to your income to determine if any income or age-related allowances should be reduced; this may increase your tax liability, even if the gain or excess itself is not subject to further tax. 2. Any gain or excess may also affect eligibility for tax credits, pension credits and other state benefits. Where the trustees contemplate investment in income producing assets or assets chargeable to capital gains tax, advice should be sought before proceeding. Inheritance tax Where property such as a life insurance investment bond is transferred to, or held within, a bare trust such as the Discounted Gift & Income Trust (creating fixed trust interests), the initial discounted gift will be a PET. This means that there is no immediate charge to inheritance tax and the PET will fall out of account, and so become exempt, on your survival for seven years from the date of the gift. If you die within seven years of making the gift then the discounted value of the gift will use up part or all of the nil rate band which would otherwise have been available to offset against the death estate. Where the amount gifted is more than your nil rate band, your death within seven years of creating the trust may result in inheritance tax becoming due on the amount of the discounted value of the gift above the nil rate band. The value of the tax benefits will depend on your individual circumstances. Your circumstances and tax rules may change in the future. 5

8 SUMMARY OF THE DISCOUNTED GIFT & INCOME TRUST (CREATING FIXED TRUST INTERESTS) The Discounted Gift & Income Trust (creating fixed trust interests) offers you: Regular income at a level and frequency fixed by you at outset. Potential for an immediate reduction in your taxable estate for inheritance tax purposes. Any investment growth outside your taxable estate from day one. No inheritance tax on creation of the trust and the entire investment will be outside your taxable estate should you survive for seven years. Tax-efficient investment vehicle for the trustees. Easy to complete documentation. No cost underwriting to help save time and money. Please note: The value of the investment will go up and down and the value of the trust fund at any time may be less than you initially invested. Future changes to inheritance tax legislation may impact on the effectiveness of inheritance tax planning with the Discounted Gift & Income Trust (creating fixed trust interests). You will select your required level of income at outset. There is no possibility of increasing this amount at a later date and you have no further possibility of benefiting from the trust fund. Any adult beneficiary may call for the trust fund, or their share of the trust fund, to be paid to them at any time. If you would like more information about making an investment in conjunction with the Discounted Gift & Income Trust (creating fixed trust interests), please contact your financial adviser who can arrange to provide you with a personal illustration. 6

9 TECHNICAL QUESTIONS & ANSWERS THE TRUST 1. What is the Discounted Gift & Income Trust (creating fixed trust interests)? In simple terms, the Discounted Gift & Income Trust (creating fixed trust interests) is an arrangement that allows you to make a gift for inheritance tax purposes whilst providing you with an effective income to meet your requirements. SETTING UP THE TRUST 2. How is the Discounted Gift & Income Trust (creating fixed trust interests) established? Where you are making a new investment into an onshore bond, you should complete the Discounted Gift & Income Trust at the same time as you make your application. The bond will be issued to the trustees to hold as nominees for your chosen beneficiaries. The trust is established as soon as the bond comes into force. If your policy is already in existence, completion of the Discounted Gift & Income Trust will transfer ownership of your policy to the trustees. 3. Who can be the settlor? The settlor is the person who establishes the trust. The settlor must be over 18 years of age and of full mental capacity. We will not normally accept a trust created under a power of attorney. For tax purposes, a person will be regarded as the settlor where he or she provides assets to the trust either directly or indirectly. The Discounted Gift & Income Trust can be established by joint settlors if the investment application (or the existing policy) is also in joint names. 4. Can a joint cheque be used to establish the Discounted Gift & Income Trust (creating fixed trust interests)? In inheritance tax planning it is very important that any assets being put into trust are in the ownership of the settlor, the person who creates the trust. Provided, therefore, that the Discounted Gift & Income Trust (creating fixed trust interests) is established by joint settlors who are legally married to, or in a civil partnership with, each other, a cheque for the initial investment drawn on a joint account is perfectly acceptable. In other circumstances, HMRC could attack the arrangement unless the party who is not an intended settlor is expressly excluded as a beneficiary under the trust. 5. Can existing investments be transferred to the Discounted Gift & Income Trust (creating fixed trust interests)? Yes. The existing investments can be included in Part B of Box D of the trust form and will be assigned to the trust automatically once you and the additional trustees sign the trust document. 6. Is investment restricted to particular products? The trustees powers are very wide and consequently allow the trustees to realise the initial trust investments and reinvest in any Scottish Widows or other lump sum product at any time. It should be noted, however, that there may be tax implications where income-producing investments (or assets chargeable to capital gains tax) are added to or held within the trust. Trustees should bear in mind, when making or reviewing investments, their duty of care and the requirement to obtain and consider proper advice. It should be noted that although the need to diversify is specifically excluded by the trust document, trustees should nevertheless have regard to the suitability to the trust of the proposed investments. Of course, the professionally managed collective funds available under Scottish Widows products may be particularly suitable for trustees wishing to diversify the trust fund, so as to control and manage investment risk in the interests of the beneficiaries. When considering the investment of the trust fund, the trustees will also need to take into account your entitlements under the trust and the fact that liquid funds will need to be available at the appropriate times. 7

10 TRUST ISSUES 7. Will probate (or confirmation in Scotland) be required on my death? Probate will not be required in relation to the Discounted Gift & Income Trust (creating fixed trust interests) on your death (provided there is at least one surviving trustee) as no change of ownership occurs. The legal owner will be the surviving trustees or trustee and the assets will remain subject to the trust terms upon the death of the settlor. 8. Who should be appointed as trustee? The Discounted Gift & Income Trust (creating fixed trust interests) has been designed so that you, as the settlor, will automatically be one of the original trustees. It is, of course, your decision who should be the other trustees to act with you. The other trustees will generally be members of your family. Trustees must be adults of sound mind and should ideally be living in the United Kingdom. You must appoint at least one other person to act with you. In some circumstances it may be appropriate to appoint a professional person (such as a solicitor or accountant) as a trustee, although such a trustee may charge for his or her services (and there will be no trust income from which the fees can be met). It is a requirement of the Discounted Gift & Income Trust (creating fixed trust interests) that there be at least two individual trustees or a corporate trustee. 9. Can trustees be removed and new trustees appointed under the Discounted Gift & Income Trust (creating fixed trust interests)? Yes, during your lifetime you are able to appoint new or additional trustees and, by giving 30 days notice in writing, to dismiss any trustee (provided at least one corporate trustee or two individual trustees remain). 10. What happens if one of the trustees no longer wishes to be trustee? Any trustee who no longer wishes to act, may retire as long as a replacement is appointed simultaneously or, if no replacement can be found, there are at least two trustees or a corporate trustee remaining after the retirement. TRUST BENEFICIARIES 11. Can I access the trust fund during my lifetime? Under the terms of the Discounted Gift & Income Trust (creating fixed trust interests), you will have a lifetime entitlement to a pre-determined income. This income interest will be satisfied by a series of fixed monetary sums, which must be set out in the trust declaration at outset and will be paid to you on pre-selected dates during your lifetime (provided that sufficient funds are available to the trustees to meet these payments as they fall due). You have no other access to the trust fund. 12. On what terms do the trustees hold the balance of the trust fund? Subject to your entitlements, the trustees hold the trust fund as nominees for the trust beneficiary or beneficiaries under bare trusts. This means that a beneficiary has a fixed and absolute interest in the trust fund and an adult beneficiary is able to direct the trustees how to deal with the trust property. 13. Can the trust be written for a class of beneficiaries for example, all of my grandchildren born in my lifetime? No. All beneficiaries must be identified and named at outset. Otherwise the trust fund would be treated as settled property for inheritance tax purposes and would then be subject to the more complex tax and reporting regime which governs such settlements. 14. Can my spouse/civil partner benefit from the trust fund? No. A spouse or civil partner should not be named as a trust beneficiary as transfers to a spouse or civil partner would, in any event, normally be exempt from inheritance tax. 15. Is it possible for me to waive my right to one or more income payments during my lifetime if I decide that it is not required? You may advise the trustees in writing that any one or more impending payment amounts is not required and instead should be held for the trust beneficiaries or transferred to a specific individual or charity. Where you direct that the payment is to be paid to a specific non-exempt individual, you will be making a PET for inheritance tax purposes. No tax will be payable provided you survive for the next seven years. 8

11 16. What is the position of a beneficiary? The beneficiary or beneficiaries are fixed at outset and their entitlement cannot be changed at a later date. The trustees hold the fund as nominees under bare trusts and as such a beneficiary who has full legal capacity may direct the trustees how to deal with the trust fund and may call for payment of the trust fund at any time. As each beneficiary will have a fixed and absolute trust interest, this also means that: the beneficiary s share of the trust fund will be treated as an asset in his or her estate for inheritance tax purposes the trust interest would be taken into account in the event of the beneficiary becoming divorced or insolvent the trust interest passes under the beneficiary s will or intestacy (and in some circumstances may thus become comprised again in the estate of the settlor if the beneficiary pre-deceases the settlor) if a chargeable event arises under the investment bond, any chargeable event gains will be assessable to income tax on the beneficiaries unless the bare trust was created by a parent and is subject to the parental settlement rules. 17. Can beneficiaries be removed from the trust or new beneficiaries added to the trust? No, the beneficiaries and their share of the trust fund are fixed at outset and cannot be changed. INHERITANCE TAX 18. What is the inheritance tax effect of setting up the Discounted Gift & Income Trust (creating fixed trust interests)? On setting up the Discounted Gift & Income Trust (creating fixed trust interests), you will be making a PET for inheritance tax purposes. This means that provided you survive for at least seven years after making the gift, the gift will not be subject to inheritance tax. 19. What happens in the event of my death within seven years of setting up the Discounted Gift & Income Trust (creating fixed trust interests)? Where death occurs within seven years of the gift to the trust, the value of the gift must be included in your estate for the purposes of the inheritance tax calculation. The value of the gift will, however, normally be less than the total amount invested (see question 29). 20. Where an individual creates a trust that allows for the possibility of continued access, this is normally a gift with reservation the effect being that the trust fund continues to form part of the settlor s estate. Why is that not the case here? The gift with reservation rules do not apply to the Discounted Gift & Income Trust (creating fixed trust interests) as your interest is carved out before the gift is made. The gift of the investment to the trustees is made subject to the rights that you have retained. As you cannot otherwise benefit from the trust fund, you reserve no benefit in what is given to the beneficiaries. 21. Is there any additional or supplementary legislation that I should be aware of? Paragraph 7 Schedule 20 Finance Act 1986 is designed to supplement the gift with reservation rules contained in section 102 Finance Act It applies wherever: there is a gift which consists of or includes or is made in connection with a life policy on the life of the donor or their spouse or civil partner or on their joint lives, and the benefits which will or may accrue to the donee vary by reference to the benefits accruing to the donor or their spouse or civil partner or both of them under the policy. Although you are making a gift in connection with a life insurance policy, this piece of legislation is not relevant to the Discounted Gift & Income Trust (creating fixed trust interests) because your interests, as settlor, arise under the trust and not the policy. This view is supported by guidance previously published in the Inland Revenue procedure manual (now withdrawn) which stated that the special rule in paragraph 7, schedule 20 applies only where the benefits of the donee and of the donor and/or the donor s spouse are linked under the terms of the insurance contract(s). 9

12 22. Should I avoid writing the life insurance investment bond on the lives of myself and my spouse/civil partner? This is not strictly necessary from an inheritance tax perspective, for the reasons outlined in question 21. However, it may be prudent to consider writing the bond on the lives of the younger beneficiaries, such as grandchildren, to increase the possibility of the bond being able to continue in force after your death. 23. Will my income rights have a value in the event of my death? To determine the value of any asset for inheritance tax purposes, the legislation requires the asset to be valued at the point immediately before death, assuming a sale in the open market. The right to income for life will therefore normally have no value in the open market at the point it is required to be valued for inheritance tax purposes. 24. Is there any possibility that my right to income for life will have a value at the point of my death if my death is sudden or unexpected? Theoretically, yes, but HMRC have advised that they currently interpret immediately before death as meaning the moment of death. This would mean that your income rights would never have a value at the point of your death regardless of the cause. 25. Could a liability to inheritance tax arise on the death of a beneficiary? Yes, if a beneficiary dies, their share of the trust fund will be included in their taxable estate for inheritance tax purposes. 26. How might the Discounted Gift & Income Trust (creating fixed trust interests) impact on other planning and vice versa? By establishing the Discounted Gift & Income Trust (creating fixed trust interests), you are making a PET for inheritance tax purposes. In the event of your death within seven years, the gift to the trust will use up some or all of your inheritance tax nil rate band. 27. Is it possible for me and my spouse (or civil partner) to each create a Discounted Gift & Income Trust (creating fixed trust interests)? Yes, as neither you nor your spouse (or civil partner) can be a trust beneficiary, separate arrangements are possible. Married couples or civil partners may also establish joint arrangements where the income continues until the death of the survivor. 28. My spouse/civil partner and I intend to set the plan up as joint settlors. How will this impact on the inheritance tax position? Where husband and wife (or civil partners) are joint settlors, the gift will be treated as having been made in equal shares. The discount will reflect the fact that payments continue until the death of the last to die but is apportioned between joint settlors taking into account the value of each settlor s rights (see also question 32). DISCOUNTS AND UNDERWRITING 29. How is the value of the PET calculated? All transfers of value must be valued by measuring the loss to the donor s estate. In the case of a Discounted Gift & Income Trust (creating fixed trust interests), you have given away less than the whole beneficial interest in the trust fund. Accordingly, the PET will be reduced or discounted to reflect the rights you retain. Your income rights are therefore valued actuarially so that a discounted value can be arrived at. The actuarial calculation will take account of life expectancy, level and frequency of income and the associated risks and costs of a purchase of the income rights on the open market. The value of your PET will be the value of your investment less the actuarial value of the rights retained. 10

13 30. When will this information become relevant? If you die within seven years of making the gift, your executors will need to be able to justify the value placed on the PET. Scottish Widows offer a full medical underwriting option at the time of application at no extra cost. If this option is taken, we will issue a certified discount letter that can be sent to HMRC as evidence. The letter will set out the anticipated discount value of the PET calculated to reflect your actual life expectancy at the time of making the gift. Taking this option will save time and costs. 31. Is the discount, set out in the letter, guaranteed? Whilst the discount cannot be guaranteed, the method that we use to calculate discounts has been agreed with HMRC. This means that if the discounted value is based on our underwriting procedures and discount factors, it is less likely to be disputed by HMRC (provided you have made a full disclosure of all relevant health matters). 32. Will the discount be affected if my spouse/ civil partner and I establish the trust as joint settlors? Yes. Where the trust is established by joint settlors, income will be payable to you for your joint lives and for the lifetime of the survivor of you. These rights are valued in their entirety but the total figure is then apportioned on the basis of the value of each settlor s rights. This will mean that where there is a significant disparity in age and/or state of health, the discount will be applied mainly or wholly to the gift made by the younger and/or fitter settlor. The total discount will be apportioned between each of you as explained in question Is it possible for a Discounted Gift & Income Trust (creating fixed trust interests) to be established if the full underwriting option is not taken? Yes. Although Scottish Widows strongly recommends that you take the full underwriting option, we will not insist upon it. 34. Why does Scottish Widows strongly recommend full underwriting at the time of application? In the event of your death within seven years, the gift to the trust will use up some or all of your inheritance tax nil rate band. Your executors will need to be able to justify the value placed on the PET. If the full underwriting option has not been taken, your executors will not have access to a personalised discount value backed up by medical evidence and based on agreed discount tables. 35. Will I need to attend a medical examination? We will often be able to provide you with a certified discount letter on the basis of your answers to the health questionnaire and a report from your own doctor. If you select in advance underwriting and an examination by an independent doctor is required, we will inform you and you can then decide on what basis you wish to proceed. 36. Can t we simply rely on the illustrative tables provided by Scottish Widows? The illustrative tables show example discounts that may be available to clients who are in normal health for their age at the time of making the gift. Unless you and/or your executors have access to sufficient medical evidence as at the date of the gift, your executors may have difficulty proving that your health warranted the level of discount set out in the illustrative tables. TAXATION OF PRE-OWNED ASSETS 37. The pre-owned assets legislation is designed to penalise people who avoid inheritance tax under arrangements that permit them to have continued free or low cost enjoyment of what they have given away. Is the Discounted Gift & Income Trust (creating fixed trust interests) caught by these provisions? No. HMRC has confirmed that the Discounted Gift & Income Trust is unaffected by the pre-owned assets legislation. However, where a person who may benefit under the trust has previously transferred funds or assets to the settlor, advice on the possible implications in relation to the pre-owned assets legislation should be obtained before proceeding. Please speak to your financial adviser for further information. 11

14 IMPORTANT NOTES Important. Please read carefully. If there is anything you do not understand or if you would like more information about any aspect, please contact us. This brochure gives an overview of the Discounted Gift & Income Trust (creating fixed trust interests) and its inheritance tax and other effects. Scottish Widows recommends that before proceeding you should consult your legal and financial advisers. Special consideration may be needed where you are either resident or domiciled outside the UK. The information given in this brochure is based on our understanding of UK law and HMRC practice at the time of printing. We accept no liability for the accuracy of the information provided. Legislation regarding taxation and HMRC practice may be subject to change, which cannot be foreseen. References to civil partners are references to individuals who have registered their civil partnership under the Civil Partnership Act

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16 Scottish Widows Limited. Registered in England and Wales No Registered office in the United Kingdom at 25 Gresham Street, London EC2V 7HN. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Financial Services Register number /17