Zurich International Portfolio Bond Bare Discounted Gift Trust adviser guide For intermediary use only not for use with your clients.
Contents Introduction 3 1. The main benefits of the Bare Discounted Gift Trust (BDGT) investor suitability 4 2. Who is the BDGT not suitable for? 4 3. How does the BDGT work? 4 4. The Donor s Fund 5 5. The inheritance tax effects of the BDGT 7 6. The BDGT and tax avoidance rules 9 7. The Trustees and Beneficiaries 10 8. The investments of the BDGT 10 9. Joint investors and the BDGT 11 10. Other important questions 11 11. How do you set up a BDGT? 12 2
Introduction The growing scope of inheritance tax Inheritance tax (IHT) can significantly diminish the amount passing to a person s beneficiaries on death. On a person s death, IHT applies at a flat rate of 40% on the excess over the nil rate band. This is 325,000 for the 2012/13 tax year and will remain frozen until 6 April 2015. For some married couples (including civil partners) the introduction of the transferable nil rate band by the Finance Act 2008 has helped to reduce the potential IHT bill on their estates. This is because any percentage of the nil rate band not used on the death of the first of such a couple to die can be utilised on the survivor s subsequent death. Whilst this is a welcome relief, many married couples will find that the value of their combined estates may well still exceed the threshold above which IHT is payable. For example, based on a nil rate band of 325,000, on the death of a surviving spouse with a taxable estate of 1 million an IHT charge of 140,000 would still arise even though two full nil rate bands may be available. Using lifetime gifts to reduce IHT One very effective way to avoid IHT is to make lifetime gifts. Lifetime gifts that are potentially exempt transfers (PETs) give rise to no IHT when made. However, following the new rules introduced by the Finance Act 2006, the scope for making PETs has been severely restricted so that only outright gifts to other individuals or gifts to bare (or absolute) trusts and trusts for the disabled qualify as PETs. For a gift to be effective for IHT, the donor cannot retain any access to the property gifted or the income from it as otherwise the gift with reservation (GWR) rules will apply. These rules, which apply when a donor makes a gift and continues to enjoy a benefit from the asset gifted without paying for that benefit, mean the value of the gifted asset continues to form part of the donor s taxable estate for IHT purposes and so no IHT saving results. For many would-be donors, access to funds to be given will be a requirement. It is in these circumstances that a Discounted Gift Trust, such as the BDGT, can help. The BDGT is a lump sum investment plan combined with a suitable trust that helps an investor to mitigate IHT whilst providing them with a regular stream of capital payments. As well as the GWR rules, the changes to the taxation of trusts introduced in 2006 also need to be considered. Under provisions in the Finance Act 2006 all trusts created during a settlor s (donor s) lifetime (other than bare trusts and trusts for the disabled) are now treated in the same way as discretionary trusts for IHT purposes. This means: gifts (discounted as appropriate) that cause a person to exceed their available nil rate band (taking into account chargeable lifetime transfers (CLTs) made in the previous seven years) will give rise to an immediate 20% IHT charge on the excess over the nil rate band; there can be a periodic charge every ten years, generally equal to a maximum of 6% of the excess of the value of the trust fund over the available nil rate band at that time; and capital leaving the trust could be subject to an IHT charge of up to 6%. In addition, IHT calculations will need to be carried out and tax returns may need to be made to HM Revenue & Customs (HMRC). The impact of the above IHT provisions on the use of Discounted Gift Trusts The post-2006 IHT treatment of trusts may deter some individuals from transferring funds into a discretionary trust based Discounted Gift Trust if such a transfer causes them to exceed their available nil rate band, because an immediate IHT liability could arise. A bare trust, such as the BDGT, is not a settlement for IHT purposes. Therefore, provided a donor is prepared to forego all flexibility over who eventually benefits from the trust fund on their death, PET treatment of the initial gift and avoidance of the periodic and exit charges to IHT is still possible. In this guide the term spouse includes registered civil partner. Tax rules apply to registered civil partners in the same way as they apply to married couples. 3
1. The main benefits of the Bare Discounted Gift Trust (BDGT) investor suitability The BDGT enables an investor to: make a tax-efficient investment into an Investment Bond held in trust for the benefit of a named Beneficiary or named Beneficiaries (as appropriate) which gives rise to a lifetime gift (a discounted gift) that has a lower value for IHT than the amount of the investment; make a lifetime gift which is a PET, i.e. without an immediate IHT liability arising regardless of the size of the gift; avoid any risk of periodic or exit charges in connection with the Trust; avoid any IHT implications on survival of the gift by seven years; ensure that investment growth accrues outside of their estate during their life and (where appropriate) the life of their spouse from outset; enjoy a tax-efficient cash supplement to income for the rest of their life; and where relevant, make a joint investment with a spouse and enjoy a cash supplement to income throughout their joint lives. 2. Who is the BDGT not suitable for? Broadly speaking, where the benefits summarised above are not required or valued by the investor, the BDGT will not be suitable. More particularly, the BDGT is not suitable for persons who are not prepared to forego the flexibility over who eventually benefits from the Trust Fund after their death. It also may not be suitable for persons whose income needs are likely to vary significantly in the future and especially not for one who may need periodic access to capital over and above the regular payments normally made under the BDGT. 3. How does the BDGT work? The BDGT is comprised of two components a Zurich International Portfolio Bond (the Plan) effected with Zurich Life Assurance plc (Zurich) and a Trust into which the Plan is transferred. These two components are described in more detail below. (i) The Plan The underlying investment of the BDGT is a Zurich International Portfolio Bond that, depending on the version chosen, will be a whole of life insurance policy or a capital redemption policy. An investment in a nonincome producing asset, such as a life insurance policy or capital redemption policy, means that trust administration is minimised and the investor is substantially sheltered from any personal income tax during the Plan s existence. Under the BDGT the Donor first effects the Plan (using the application form specific to this Trust) and specifies the required level and frequency of withdrawals. The maximum is 5% per annum of the amount invested. These will be paid directly to the Donor. If the life insurance version is chosen, the Plan should be effected on the lives of the Beneficiary(ies) and, if more than one, on a joint lives last survivor basis. Because the Plan will encash on the death of the last surviving life insured, it is preferable that there is more than one life insured because this gives more control over encashment of the Plan from both an investment and tax standpoint. The Plan must not be effected on the lives of the Donor or Donor s spouse in order to ensure that the arrangement cannot be caught by the IHT anti-avoidance rule in para 7 Schedule 20 Finance Act 1986 see section 6 of this guide for more details. No lives insured are needed if the capital redemption version is chosen. 4
(ii) The Trust The investor (who is known as the Donor ) and additional Trustees appointed by the Donor execute a Deed of Trust which sets out the terms of the gift. The Donor transfers the Plan, subject to their carved-out rights to the regular withdrawals from the Plan, to the Trustees. Legal ownership of the Plan then vests in the Trustees. The Trust operates as follows: The Trust Fund will be notionally split into two parts: the Donor s Fund and the Beneficiaries Fund. Under the Donor s Fund, the Donor retains an absolute right to the regular withdrawals under the Plan. Should the regular withdrawals from the Plan cease, because the only or last life insured has died, the BDGT provides that the Donor will continue to be entitled to equivalent amounts payable from the Trust Fund. The residual fund is known as the Beneficiaries Fund and this is held for the benefit of the Beneficiary(ies) named in the Trust. After the Donor s death, the Trustees can distribute it to the Beneficiary(ies). The Beneficiaries Fund is held on bare trust for the named Beneficiary(ies). This means that neither the Beneficiary(ies) nor their share(s) can be changed. 4. The Donor s Fund Under the Trust, the Donor is entitled to the Donor s Fund. This means that when the Donor survives to the relevant date when a withdrawal is due, they will become entitled to a capital sum at that time. These capital sums can be used as income. The following important points should be noted in relation to the Donor s entitlement to regular capital payments: At outset, the Donor must choose the initial level of withdrawals from the Plan as a percentage of the Plan investment. The Plan is endorsed to this effect and cannot be surrendered by the Trustees as long as the Donor is alive. The withdrawals cannot later be changed (although it may be possible to give them up see later). The BDGT can allow more than one Donor. For example, for married investors, by making a joint investment, capital payments will continue to the surviving spouse after the first death. Frequently asked questions: (i) Can the Donor change the amount of capital payments they are entitled to? Once the Trust is established, the Donor cannot directly change the amount of the income entitlement. If there is a wish to reduce or give up some of the capital payments, this can be done by the Donor executing a suitable Deed of Release. Such action will have important tax and legal consequences and any deed should be drafted by a solicitor and only after the Donor has taken professional advice. Zurich cannot advise on such dealings as this is not the intention of the BDGT and the Donor should seek their own professional advice if circumstances change. In no circumstances can the level of capital payments increase. (ii) Can the Donor defer entitlement to capital payments? Under the BDGT, the Donor has the following options: 1. monthly in arrears, 2. monthly deferred for one year or 3. yearly in arrears. So the latest the payments must start is one year after the Plan start date. (iii) Can the Donor s spouse receive capital payments? This is only possible if both spouses are making the gift as joint Donors. 5
(iv) Does the Donor have to take capital payments from the BDGT? Yes, on survival to the appropriate date, as the Donor then satisfies the contingency and becomes entitled to the payment. If having survived to the appropriate date the Donor does not need the capital payment, a gift of the cash received can be made. This would (depending on the circumstances) normally be a PET. Alternatively, if it is known in advance that a forthcoming capital payment is not needed, the right to the capital payment or payments could be given up in advance, as explained in question (v). (v) What if the Donor no longer needs the capital payments? The Donor could either: (1) separately gift cash to the Beneficiaries (or anybody else) out of the capital payments they receive from the Plan; or (2) waive the right to all or some of the capital payments from the Plan. In order to waive all or a part of the entitlement, the Donor would need to provide the Trustees with a Deed of Release drafted by their legal advisers. They should also take appropriate advice on the implications of this. The Trustees would then need to send a copy to Zurich so that no automatic payment is made to the Donor. The Donor could give up one capital payment or a series of such payments. If one payment only is given up this will be a gift by the Donor equal to the amount of the capital payment given up. This may well be covered by the Donor s annual exemption. If a series of capital entitlements is being given up, this will require an actuarial valuation based on the Donor s age and state of health to determine the value given up. As such actions are not contemplated under the BDGT, Zurich will not be able to assist with the valuation on such an occasion. Professional advice should be sought at the time. This is a complex area and Zurich can take no responsibility for this. Advice should be sought from your client s legal advisers. It is strongly recommended that the Donor should first consult professional advisers over how the right to capital payments could be given up and what the tax implications would be. As already explained, external professional advice will have to be supplied and any documentation drafted by the Donor s solicitor. (vi) How are the capital payments taxed? The Donor is entitled to a stream of capital payments from the Plan at specified frequencies. These are known as reversionary interests. These payments are capital and therefore not subject to income tax. In the case of Stevenson -v- Wishart (1987) 1 WLR 1204, the Court of Appeal decided that if capital payments are made out of a trust to a beneficiary entitled to that capital, those payments would be treated as capital unless paid as a result of a specific direction in the trust to supplement trust income with capital. The capital payments are funded by the withdrawals from the Plan as requested by the Donor at the time of the application for the Plan. The Trustees are entitled to withdraw up to 5% of the initial investment each year, for 20 years, with no income tax at that time. As withdrawals under the BDGT cannot exceed these 5% allowances, there will be no income tax to pay for 20 years if 5% annual withdrawals are taken or, for example, 25 years if, say, 4% annual withdrawals are taken. The usual rules which apply to the taxation of chargeable event gains apply see section 8 of this guide and the Plan brochure for full details. If the Plan terminates on the death of the last life insured (where the life insurance version has been chosen), the proceeds will be paid to the Trustees who will be obliged to make continuing equivalent capital payments to the Donor. Normally, the Trustees would reinvest the proceeds of the Plan into another Plan and so the consequences of any further withdrawals will be as explained above. If the Trustees decide to invest in other investments, they should seek advice as to the tax implications at that time. 6
(vii) How do the Trustees make the capital payments to the Donor? The Donor sets up a regular withdrawal facility under the Plan with the payments made directly to the Donor s bank so there is no need for the Trustees to be involved. 5. The inheritance tax effects of the BDGT (i) Establishing the Trust The creation of the Trust will give rise to a transfer of value by the Donor for IHT purposes based on the value of the discounted gift. If there are joint Donors each will be treated as making 50% of the total investment for the purposes of calculating the discounted gift. The value of this transfer (measured by the loss to the estate) will, of course, take into account the value of the Donor s right to withdrawals. As the Trust is one that vests an absolute entitlement in the Beneficiary(ies), this transfer will be a PET except to the extent that it is exempt (e.g. where the value transferred falls within the available annual exemption which is currently 3,000). It is also possible to use any unused annual exemption carried forward from the previous year so that a maximum of 6,000 per Donor could be exempt if no gifts were made in the previous tax year. This means that there will be no IHT charge when the transfer is made and the possibility of a charge will only arise should the Donor die within seven years of making the gift see below. (ii) What is a discounted gift? Because the Donor retains a right to regular withdrawals from the Plan (known as the Donor s Fund), this right will have a value for IHT purposes which stays inside the Donor s estate. For the purposes of calculating the gift at outset, the value of the initial investment can therefore be reduced (or discounted ) for the purposes of IHT by this retained value. This discounted value remains relevant for IHT calculation purposes should the Donor die within seven years of the gift. (iii) Why is there no value attached to the Donor s Fund on death? Although the right to future capital payments has a value during the Donor s lifetime, no value will be included in the Donor s estate on death in respect of the Donor s Fund. This is because the Donor s right to the stream of future capital payments ceases on death and therefore immediately before the Donor s death this right is worthless, meaning no value needs to be included in the Donor s taxable estate at that time. (iv) How is the size of the discounted gift determined? The value of the Donor s right to future regular capital payments (i.e. the Donor s Fund) is calculated taking into account the Donor s (or both Donors if appropriate) age, state of health and the amount and frequency of the capital payments they are entitled to. For new Plans, the difference between the value of the Donor s Fund and the amount of the initial investment will be treated as a transfer of value for IHT purposes and will be a PET. (v) Underwriting the gift to calculate the discount Zurich will underwrite the Donor to establish the amount of the discounted gift. Subject to the Donor being satisfied with this discounted gift valuation, the investment can then proceed. To enable the underwriting to be carried out, Zurich require that the Donor completes a health questionnaire at outset and, if appropriate, they then obtain medical evidence from the Donor s GP. The only time a General Practitioner s Report (GPR) won t be collected is where the Donor s application has to be declined because of information included in the Donor s health questionnaire. 7
(vi) Does HMRC need to be informed about the BDGT? As the gift is a PET, there is no need to inform HMRC about it when the BDGT is established. (vii) What are the IHT implications of the Donor dying within seven years of establishing the BDGT? If the Donor does not survive the gift by seven years, the PET will become chargeable. Even then a liability would only arise on the gift if, taking account of the Donor s right to withdrawals, the Donor s nil rate band was exceeded. Any tax liability that does arise on the gift would benefit from taper relief if more than three years had elapsed from the date of transfer. Broadly speaking, where a PET becomes chargeable, this relief reduces the IHT due by 20% for each full year after three years, until after seven years there is no tax liability. It is important to note that, regardless of this relief, the full value of any PET (at the time it was made) that becomes chargeable, by virtue of the Donor s death within seven years of making the PET, will have to be taken into account when assessing the IHT liability on the estate of the Donor. (viii) What are the IHT implications for the Trust itself? As this is a bare trust, the special IHT charging rules that apply to other types of trust do not apply here. The value of the Plan, less the value of the Donor s retained rights, is treated as part of the estate of the Beneficiary(ies) and so the only IHT implications to arise do so if the Beneficiary were to die. (ix) How is the amount of the discounted gift arrived at when there are joint Donors who are spouses or civil partners? Where spouses or civil partners invest as joint Donors, the cheque establishing the arrangement must be drawn on a joint bank account (or two individual cheques each for half of the total investment). Each Donor will then be treated as making an investment equal to 50% of the total investment. However, the discounted gift made by each will vary because of the different mortality factors that will apply due to age and state of health. Example Let s assume that Paul and Sue (who are both UK domiciled) invest 100,000 as joint Donors into a BDGT under which they are entitled to withdrawals from the Plan of 5,000 each year throughout their joint lives and the life of the survivor. Each is treated as making an investment of 50,000 which will provide each of them with a withdrawal of 2,500 each year throughout each lifetime. Sue is younger than Paul. The joint discounted gift is calculated as 46,300 on the 100,000 joint investment and it will be apportioned according to Paul and Sue s income rights on their individual investments of 50,000 each. Because of differing mortality factors, the discounted gift elements will differ. For example, Paul s discounted gift might be 26,400 and Sue s 19,900. This will reflect the likelihood of Sue living longer than Paul (because she s younger), which means her Donor s Fund will have a greater value. However, the amount retained by each of them will also include an allowance for the income right that person may receive as survivor if he/she outlives the first to die. HMRC has issued guidance notes on how this calculation should be made. In broad terms, the joint discount will be apportioned between Paul and Sue according to the respective value of their income rights. If there are joint Donors who have contributed equally, the Trust is effectively treated as two separate Trusts, each created by one Donor, for all IHT purposes. Where the Trust is to be created by a husband and wife and one (or both) are non-uk domiciled, separate professional advice should be taken. 8
6. The BDGT and tax avoidance rules Two potential pieces of tax avoidance legislation could apply to the BDGT the IHT gift with reservation rules and the income tax pre-owned assets tax rules. (i) The gift with reservation (GWR) rules These rules apply in cases where a donor makes a gift of assets and continues to enjoy a free benefit from those assets be it the enjoyment of income or access to capital under a trust. On the face of it, as under the BDGT an individual makes an investment in a trust and enjoys a regular flow of capital payments from it, the GWR rules would appear to be capable of application. In fact they do not apply, but to understand why these provisions do not apply, it is necessary to first consider the precise nature of the Donor s entitlements under the Trust. These are known as reversionary interests which means that the Donor is only entitled to the payments on survival to the appropriate payment date. In principle, the GWR rules could apply by virtue of one of two provisions: a) Section 102 Finance Act 1986 Under this provision, if a donor enjoys a benefit from property they have gifted, it will be a GWR. However, as was established in the House of Lords decision in the Ingram case, the GWR rules will not apply where the donor makes a gift of identifiable property from which they cannot benefit and keeps back separate identifiable property from which they can benefit and which remains in their estate. In the case of the BDGT, the property retained is the Donor s Fund (the right to the regular withdrawals or their equivalent) and the property gifted is the Beneficiaries Fund. As the Donor cannot benefit from the Beneficiaries Fund, section 102 will not apply. b) Para 7 Schedule 20 Finance Act 1986 This provision means that where a person makes a gift of a life insurance policy effected on his life or the life of his spouse (which would include a registered civil partner) and the rights under that policy vary between the donor and the donee of the gift, then the gift of that policy will be a GWR. With the BDGT, para 7 Schedule 20 will not apply because the Plan will not be effected on the life of either the Donor or their spouse. Furthermore, any variation of rights occurs under the Trust and not the policy. This is only relevant if the life insurance version is chosen, as there are no lives insured under the capital redemption version of the Plan. (ii) The pre-owned assets tax rules Schedule 15 Finance Act 2004 introduced the pre-owned assets tax (POAT) rules. These rules apply where the donor of an asset continues to enjoy a free benefit from the asset they have gifted and that gift is not caught by the IHT GWR rules. In those circumstances if, using special valuation rules, the value of the benefit together with other POAT benefits of the same donor exceeds 5,000 in a tax year, the whole of that benefit is charged to income tax on the donor. For the POAT rules to apply on a gift of investments, two conditions need to be satisfied: a) The property must be held on a settlement. b) The donor must be able to benefit from the property in the settlement. (The test for this is whether section 624 ITTOIA 2005 would apply to the settlement.) For these purposes, property held on a bare trust is not held on a settlement. Moreover, under the legislation if a trust consists of a number of separate sub-trusts, each of those sub-trusts must be tested separately. This means that when different property in a settlement is subject to different trusts only the particular property which is caught is subject to the charge imposed by Schedule 15, and not (where 9
greater) the whole property of the settlement. Where such sub-trusts exist, it is therefore necessary to test each of those sub-trusts independently to see if the POAT rules apply. Under the BDGT certain interests are held for the benefit of the Donor (the Donor s Fund) and some for the Beneficiaries (the Beneficiaries Fund). This means that the Trust Fund is comprised of two sub-funds, one is the Donor s Fund and the other the Beneficiaries Fund. Both funds therefore need to be tested against the two conditions to see if they are subject to the POAT rules. In this respect, the Donor s Fund is held on bare trust for the Donor and so this part of the Trust is not held subject to a settlement a precondition for the POAT rules to apply. The Beneficiaries Fund is also held on a bare trust and the Donor cannot benefit from this part and so, again, the POAT rules do not apply. HMRC has also confirmed in their Guidance Notes on the POAT issued in May 2007 that the more commonly understood forms of Discounted Gift Trust are not subject to the POAT legislation. 7. The Trustees and Beneficiaries (i) Who can be Trustees of the BDGT? The Donor will automatically be a Trustee. Additional Trustees must be appointed and this is contemplated in the Trust Deed at outset. Anyone over 18 years old and of sound mind may be appointed. It may be appropriate to appoint a professional adviser, such as a solicitor or accountant, as a Trustee, although such a person is likely to charge a fee for acting as Trustee. (ii) Who are the Beneficiaries under the Trust? The Donor is entitled to a stream of cash payments specified at outset each time they survive to a payment date. This is known as the Donor s Fund. The balance of the benefits is held as the Beneficiaries Fund. The Beneficiaries Fund is held on bare trust for the named Beneficiaries. As the Trust is bare, the Beneficiaries cannot be changed nor their entitlement. 8. The investments of the BDGT (i) What investments can be held in the BDGT? The Donor must first invest in the Zurich International Portfolio Bond (the Plan). This can be based on a life insurance or capital redemption version. The BDGT is not available with any other investment. Further details are available in the Plan brochure. (ii) What are the income tax implications of the BDGT? An income tax chargeable event gain can arise in the event of the Plan being encashed or a part surrender of more than the cumulative 5% tax deferred annual allowances being taken. As the withdrawals under a BDGT are limited to 5% annually of the invested amount, there will be no chargeable event for at least 20 years (or, for example, 25 years if the withdrawals are limited to, say, 4% per annum) unless the Donor dies sooner and the Trustees encash the Plan. After that period, any chargeable event gains will be taxed on the Donor if alive and UK resident in the tax year in which they arise. Based on the current tax rules, the liability to tax will be at the Donor s marginal rate(s). For the purposes of the liability to higher rate or additional rate tax only, top-slicing relief will apply so, in general, the gain will be divided by the number of whole years the Plan has been in force. As the Plan is an offshore investment plan, there is no UK tax deemed to have been paid on any gain, with the result that the full amount of the gain is subject to UK income tax. This is different from the income tax treatment of gains within a UK-based plan, where basic rate tax is deemed to have been paid within the plan, and gains are only taxed when they take the taxpayer into the higher rate or additional rate of tax. Whether any tax is payable and, if so, how much, will depend on the circumstances. After the death of the Donor, any gains are taxed on the Beneficiaries. Since April 2007, this is regardless of the age of the Beneficiary (until then the assessment would be on the Trustees if the Beneficiary was under 18 years of age). The above rules apply regardless of whether the Plan is based on the life insurance or capital redemption version. 10
9. Joint investors and the BDGT (i) Should spouses each set up their own individual BDGT? There is no objection to this, as neither spouse would be a Beneficiary of the other s Trust. However, they could also effect one Plan (jointly) subject to a joint Donor Trust. You will need to advise your client(s) on the most appropriate choice based on their circumstances. (ii) Can income be paid to the Donor s spouse after the Donor s death? Only if both spouses are making the gift as joint Donors. They will then enjoy income throughout both of their lives. (iii) What happens on the death of the Donor(s)? The Donor s entitlement to regular capital payments will then cease (unless there is a surviving joint Donor). No value will be included in the Donor s estate in respect of the right to future capital payments as that entitlement relies on the Donor then being alive. Similarly, in joint Donor cases where the right to capital payments continues to the Donor s surviving spouse, no value will be included in the estate of the first Donor to die in respect of the interest passing to the surviving spouse as it is not property in their estate that they can give away. Any value of this right passing to the surviving spouse is taken into account in calculating the discounted gift at outset. Following the Donor s death (or the death of the surviving Donor) the Trustees can then either retain the Plan as a long-term tax-efficient investment for the Beneficiaries or encash the Plan and distribute the proceeds. 10. Other important questions (i) What are the capital gains tax implications of the BDGT? A life insurance or capital redemption bond, such as the Zurich International Portfolio Bond, does not produce gains that are subject to capital gains tax. (ii) Is stamp duty payable? With effect from 1 December 2003, stamp duty on documents was abolished which means that a declaration of trust no longer needs stamping. (iii) Can the Plan be added to at a future date? Further investments in the Plan are not permitted. If the Donor wishes to make further gifts they should make a fresh investment into a new Plan subject to a new Trust. (iv) Can the Trustees take withdrawals which exceed the Donor s capital entitlement? The Trustees cannot pay the Donor more than his entitlement under the Plan and, in any event, the Trust does not allow the Trustees to encash the Plan during the Donor s lifetime. (v) Can the Trustees encash segments of the Plan and pay the proceeds to the Beneficiaries? Because the Donor is entitled to the withdrawals from the Plan, and this right is endorsed on the Plan, the Trustees could not take this action whilst the Donor is alive as this would prejudice the Donor s rights. After the Donor s death, there would be no reason why the Trustees could not encash segments and pay the proceeds to the Beneficiaries. Alternatively, the Trustees could assign segments to the adult Beneficiary(ies) in satisfaction of their interest under the Trust. (vi) What if the Plan loses value so the Donor cannot be paid their capital entitlements? The Donor s entitlement is under the Plan and so subject to the value of the Plan being sufficient to meet that entitlement. The Trustees have no personal liability to the Donor in cases where the investment reduces in value. (vii) Can an investor get their money back after making the investment? Yes, they can. When we issue the Plan documents, we ll send your client details of how to cancel their Plan. They will have 30 days from receiving these documents to do this. 11
If they decide to cancel, we ll give them their money back. However, what they get back may not be the amount they invested they may get back less. The amount they will get back will be the lower of the amount they invested and the value of their transaction account after we have sold the assets that they have already invested in. They can also cancel before they receive their Plan documents by calling us, or you notifying us on their behalf. If they invest in assets that are not priced daily, there may be a delay in paying the cancellation value until all trades have been completed. Please refer to the Plan s Terms and Conditions for full details. (viii) Is there any income tax on final encashment of the Plan? Chargeable event gains arising on full encashment of the Plan can be taxable. The full implications were described in the answer to the above question What are the income tax implications of the BDGT? in section 8(ii). (ix) What are the charges associated with an investment in the BDGT? You should look at Zurich s literature on the International Portfolio Bond in order to determine the charges made on such an investment. 11. How do you set up a BDGT? Your client will have had a full discussion with you (and other professional advisers where appropriate) about the operation of the BDGT and its suitability for them given their objectives and tax position see all the issues covered in this guide. Having decided that the BDGT is suitable in principle, the potential investor will receive a personal Discount Illustration from you (available online, allowing you to quote our basic and healthy discount rates) and a Zurich International Portfolio Bond illustration showing estimated future values for the Plan. After this, completing the following steps will lead to implementation. Step 1 A health questionnaire must be completed by your client(s) and, at this stage, only this form must be submitted to Zurich. Step 2 Zurich will underwrite your client(s) and if they are accepted, we will issue a Discount Certificate to confirm the discount (whether it s basic or healthy ). If your client(s) fails the underwriting process, a decline letter will be sent. Step 3 If your client(s) then wishes to proceed, they must complete the appropriate application form for the Plan and the BDGT Deed. The clearly labelled Plan application form is subtitled Application form for use with a Bare Discounted Gift Trust. No other application form can be used as the wording is not appropriate. The BDGT Deed must not be dated, Zurich will do this using the Plan issue date. The forms (completed Plan application form and Trust Deed), along with your client s cheque (or telegraphic transfer) for the full amount to be invested and the anti-money laundering information should be sent to Zurich. Step 4 The Plan documents will be sent out soon after issue. 12
Important notes Creating a trust is an important matter and has lasting legal and tax consequences. This guide is for your general information only and cannot cover every situation. If you are in any doubt about the purpose or effect of this Trust, you should consult your own legal advisers. The Trust, once created, is irrevocable and the Plan and its benefits must be held according to the terms of the Trust. The Trustees will be in control of the operation of the Trust, which means that they may need to set up a Trustee bank account. Any benefits arising because of the exercise of options available under the Plan will also be held subject to the Trust. Taxation law is subject to change. Such changes cannot be foreseen. The information in this guide is based on our understanding of current law and HMRC practice (November 2012). Although every care has been taken in the preparation of this guide and the draft Trust Deed, neither Zurich Life Assurance plc nor any of its officers, employees or agents accept responsibility for the operation of the Trust. Your attention is drawn to the Important information for the Donor section of the Trust Deed. 13
For use by professional financial advisers only. No other person should rely on or act on any information in this advertisement when making an investment decision. This advertisement has not been approved for use with clients. The Zurich International Portfolio Bond is provided by Zurich Life Assurance plc. NP129564A50 (05/13) RRD Zurich Life Assurance plc is authorised and regulated by the Central Bank of Ireland and subject to limited regulation by the Financial Conduct Authority for the conduct of insurance business in the UK. Registered office: Zurich House, Frascati Road, Blackrock, Co Dublin, Ireland. Registered in Ireland under company number 58098. We may record or monitor calls to improve our service.