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

Transcription

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

2 Contents Background 3 What is the Absolute Gift Trust? 4 Who is the Trust suitable for? 4 How the Trust works 5 Questions and answers 6 Why Friends Provident International? 9 What to do next 9 Important notes 10 Important notes Friends Provident International Limited 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. Friends Provident International Limited does 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 Friends Provident International Limited s 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 Gift 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 and only one nil rate band is available) 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 very effective way of IHT planning is to make lifetime gifts. As these gifts are usually potentially exempt transfers (PETs), there will be no IHT on the gift when made and it can be ignored completely if the donor survives the gift by seven years. The solution To answer the needs of these people, we have introduced the Absolute Gift Trust an inheritance tax plan which is designed to provide both immediate and long-term benefits. The purpose of the Trust is to enable your client to make a lump sum investment which will allow the investor (the Donor) to pass capital to his nominated beneficiaries. Regular savings plans can also be placed into trust. No IHT will be due on the Trust fund on the Donor s death if he lives for seven years after the creation of the Trust. 3

4 What is the Absolute Gift 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. The Donor cannot benefit from the Trust. 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 10-year periodic and exit charges. Who is the Trust suitable for? The Absolute Gift Trust is suitable for your clients who are aiming: To reduce their IHT liability without incurring tax charges under the relevant property regime which was extended to all lifetime settlements by the UK Finance Act For all investment growth to be outside the estate. To provide capital for nominated beneficiaries on the death of the Donor, potentially free of IHT. To have the ability to gift new or existing policies to the nominated beneficiaries. To benefit from a wide range of investment funds that offer greater potential for capital growth over the medium to long term. The ability to use the Trust for both single and regular premium policies (provided they do not offer terminal illness benefit). The inclusion within the Trust of optional benefits such as additional life cover. 4

5 How the Trust works New policy applications The Donor completes an Application for a policy and the Trust Deed. The Trust Deed is left undated. We date the Trust the day after the Policy starts and the Policy is assigned into the Absolute Gift Trust. Existing policies The Donor completes the Trust Deed. The Trust Deed should be dated and forwarded to us. We then assign the Policy into the Absolute Gift Trust and issue endorsements to confirm ownership by the Trustees. The benefits of the Absolute Gift Trust The Trust enables the Donor: To potentially reduce IHT as all growth is outside of the estate. To further reduce the potential IHT liability after seven years. To accumulate a cash sum for the investor s nominated beneficiaries, potentially free of IHT. 5

6 Questions and answers The following questions and answers should help to address your queries regarding the Absolute Gift Trust. Who is the Absolute Gift Trust suitable for? What are the main benefits of the Absolute Gift Trust? How is the Trust set up? Can an existing policy be assigned to the Trust? Who is the Donor? Can spouses set up their own individual Trust? The Trust is suitable for individuals on whose death a potential IHT liability will arise and who have cash with which they are prepared to make a lifetime gift. The Trust is not suitable for clients who may require full, immediate or unrestricted access to the capital invested. It enables a person to: Make a substantial gift. Provide long-term benefits to that person s beneficiaries, potentially free from IHT. The gift will be free from IHT after seven years, and all other benefits (including investment growth) will be free from IHT from the creation of the Trust. The Donor applies for a Friends Provident International Limited investment product. The Policy is then assigned into trust. Yes, both single and regular premium policies can be assigned into the Absolute Gift Trust. The person who applies for the Policy, who is investing the money or who is the existing Policyholder. Yes, it is possible as long as the beneficiary of each Trust is not the other partner. Can spouses set up the Trust jointly? Can spouses set up a Trust for the benefit of each other? When and whom should the Donor appoint as Trustees? What is the role of the Trustees? Can Beneficiaries be appointed Trustees? Can new Trustees be appointed? Who should be the Beneficiaries? Yes, this is possible as long as payment is made by both parties, either from a joint bank account or two cheques drawn on individual accounts. Where there are joint Donors, neither should be a beneficiary under the Trust as otherwise a gift with reservation could arise. For regular premium policies, both parties should be existing Policyholders. 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 Donor must name the 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 Donor these are normally trusted family members or a corporate trustee. It is essential that at least two Trustees are appointed, with a maximum of four. The Trustees are responsible for administering the Trust fund in accordance with the terms of the Trust. The Donor may or may not be 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 Donor 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. The Donor names the person(s) he wishes to benefit from the Trust. 6

7 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? What is the inheritance tax position for regular premium policies? Can the Trustees pay the Policy proceeds to the Beneficiaries before the Donor dies? Can monies be lent to the Beneficiaries? Who is taxed? Why is there no gift with reservation for inheritance tax? What if the Donor wishes to cancel the Policy under his cancellation rights? Can the arrangement be wound up? 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, the greater the number of nominated Beneficiaries who are lives assured the greater the flexibility. Neither the Donor nor the Donor s spouse can be a nominated Beneficiary. We will permit up to ten, depending on product, lives assured on a last-survivor basis which will normally enable all the nominated Beneficiaries to be included. The deceased Beneficiary s interest in the Beneficiaries Fund 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. Yes, this is possible as long as the gift is recorded and the Beneficiaries are the same. This will be treated as a further gift and will be outside the estate after seven years. The Trust enables an investor to make an investment in trust that, if he survives, will be free of IHT after seven years. It also means that if the Donor dies within seven years, IHT taper relief should be available. Any premiums should be covered by either the annual exemption (currently 3,000 per annum) or be treated as gifts out of normal expenditure. In the unusual event that any premium amount is not covered by the exemptions, the premium could be treated as a potentially exempt transfer. Yes, this is possible when the Beneficiaries reach (or are over) 18, as the Donor cannot benefit and the Trustees can use their discretion. If payment is made via surrender/withdrawals, this could have tax consequences. Yes, this is possible. However, if the Trust asset consists of an investment bond only, taking capital from the bond could have tax consequences. If the Beneficiaries are over 18 and resident in the UK, they will be liable to 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 100. For there to be a gift with reservation, there needs to be a disposal of property by way of gift from which the Donor enjoys a benefit. Section 102 Finance Act 1986 states that if a donor enjoys a benefit from property he has gifted, it will be a gift with reservation. However, the gift with reservation rules will not apply where the donor makes a gift of identifiable property from which he cannot benefit. We will surrender the Policy and pay the proceeds back to the Donor. The Trust will be treated as void as it has no assets. The Trust is irrevocable and so cannot simply be wound up by the Donor with him recovering all the Trust assets. 7

8 Can the Policy be surrendered while the Donor is still alive? Yes, this is possible but the Trust will still continue. What happens on the death of the Donor? What if there are joint Donors and death occurs? If death occurs after seven years, no value will be included in the Donor s estate. If death occurs within seven years, the value included in the estate will be the gift less any IHT taper relief. The deceased Donor s part of the gift (50%) will form part of their estate if death occurs within seven years of the gift. If death occurs after seven years, this will fall outside the estate. 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 The political stability of assets held in the Isle of Man. In summary The Absolute Gift Trust allows your clients to reduce the impact of inheritance tax immediately and in the long term. Your client benefits from: All capital growth immediately outside the estate Capital goes to the intended Beneficiaries, on death The valuable tax benefits of a policy from an international life assurance company. 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 Gift Trust Deed contains all the documentation necessary to put the scheme into operation. 9

10 Important notes 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. 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 or interrupted. 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. 10

11 Friends Provident International Limited Registered and 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/AGT/ADGUIDE (38751)