guide to your Old Mutual International Loan Trust BARE VERSION
contents How a loan trust works 3 Benefits of your loan trust being invested in an Old Mutual International bond 8 How the trust works in practice 9 Your questions answered 12 Policyholder protection 14 Further information 14 2
how a loan trust works This guide is designed for you, the settlor, but may also be of interest to your trustees and legal personal representatives. Throughout this guide Old Mutual International refers to Old Mutual International Isle of Man Limited. summary This is a summary of how your Old Mutual International Loan Trust (bare version) works together with some of the benefits it provides. You have made an interest-free loan, repayable on demand, from your savings to your appointed trustees. The trustees have used the loan to invest in an Old Mutual International investment bond with the intention of achieving long-term capital growth. Old Mutual International have a selection of lump sum life assurance and redemption bonds which make suitable investment solutions for the Old Mutual International Loan Trust. The investment is not guaranteed and can go down as well as up in value, depending on market performance. Throughout this brochure, wherever we want to explain a particular term or draw your attention to a potential risk, we have highlighted them in boxes like this. Trustee The person who accepts the loan and applies for an investment bond and has responsibilities to administer the trust assets in accordance with the trust terms. Settlor The creator of the trust. 3
how a loan trust works (Continued) Inheritance tax Since you have made a loan rather than giving your money away, the value of the loan will remain an asset in your estate when calculating any potential inheritance tax (IHT) liability. However, any growth achieved on the loan will be outside your estate. Any repayment of the loan you request (whether in part or in whole) will reduce the value of your estate, should you spend the money. As the settlor (the creator of the trust) your sole entitlement is to have your loan repaid to you. You are specifically excluded from benefiting from any growth achieved by the investment. HM Revenue & Customs (HMRC) has confirmed that schemes set up on this basis do not create a gift with reservation (GWR) and are outside the scope of a pre-owned assets tax (POAT) charge. the bare trust One of the requirements for creating a bare trust is that you name your beneficiaries at outset. Your beneficiaries are the people who will benefit from the trust. These beneficiaries cannot be changed, regardless of any new circumstances, for example, the birth of a new grandchild where you have already named your existing grandchildren. If one of your named beneficiaries dies before you, their heirs will benefit from their share of the trust assets. Whilst the bare trust does not leave room to make any changes in the future, it does provide you with an element of certainty over who will eventually benefit from your trust. From a taxation point of view this type of trust is subject to the potentially exempt transfer (PET) regime. the Old Mutual International bond The trustees have invested the money you lent them into a single premium bond; either a life assurance or redemption version. The initial premium will have been used to purchase units in investment funds, and it is these units that provide the potential for capital growth. Any investment growth will be outside your estate for IHT purposes and held for the beneficiaries of the trust. 4
inheritance tax (IHT) The estate of an individual domiciled in the UK is liable to UK IHT if its value exceeds the nil-rate bands and it is not left to an exempt person, e.g. a spouse, civil partner* or charity. The excess is taxed at 40%. * As defined by the UK Civil Partnership Act 2004. nil-rate band (NRB) The first 325,000 in your estate is taxed at 0% for IHT purposes. This is known as the nil-rate band (NRB). Any assets above the NRB and not covered by the RNRB (see below) are liable to IHT at 40%. Residence Nil-Rate Band (RNRB) Introduced from 6 April 2017, an additional 100,000 is available on top of the NRB described above. This can be used to pass on a residence to direct descendants, for example children or grandchildren. The amount is due to increase to 175,000 by 2020/21 but is limited to the lower of the RNRB value or the property. domicile Domicile is a concept of general law and is distinct from nationality or residence. Whilst it is possible to be resident in more than one country, it is not possible to be domiciled in more than one country at any given time. Generally speaking, but not always, this means that a person will be domiciled in the country in which they have their permanent home. gift with reservation A gift with reservation of benefit is one that is not fully given away so that either: the person receiving the gift does so with conditions or restrictions attached, or the person making the gift withholds some benefit for themselves. Where this happens to gifts made on or after 18 March 1986, the value of the assets are included as part of your estate but there is no seven-year limit as there is for outright gifts. pre-owned assets tax (POAT) A yearly income tax charge, in circumstances where the taxpayers have successfully taken advantage of the IHT gifts with reservation rules, yet are still able to benefit from the assets transferred. potentially exempt transfer (PET) An outright gift into a bare trust is regarded as a potentially exempt transfer (PET). The value of the gift will remain in your estate for IHT purposes for seven years from the date of the gift. 5
how a loan trust works (Continued) settlor the loan and loan repayments You can request regular withdrawals from the trust to supplement your income, or occasional withdrawals for a specific purpose. Repayments can be requested at any time and at any level, provided the amount requested is not over the outstanding loan amount. In total, you are only entitled to the repayment of the loan amount shown in the Old Mutual International Loan Trust deed you have completed. Once the loan is repaid, any amount in the trust fund will be held on trust for the beneficiaries. It would therefore be prudent for your trustees to keep a record of the outstanding loan and any loan repayments made to you. Regular repayments If you would like the loan repaid in regular instalments, you can ask the trustees to start repayments immediately or at a later date. These repayments could be set up monthly, quarterly, half-yearly or yearly. Occasional repayments You can request a partial loan repayment from the trustees whenever you need the money. Full repayment You can request a full repayment of the outstanding loan at any time. 6
trustees the loan and loan repayments The trustees must act on any request from you, the settlor, to repay the loan in part or in full. As mentioned earlier, you can request repayments at any time. Regular repayments If you request regular repayments of the loan, these can be set up as automatic withdrawals from the bond which will be done by partially cashing in enough of the underlying investments across all the policies within the bond. These repayments will start immediately if this was requested by the trustees on the bond application form. If you request that the regular repayments start at some point in the future, the trustees can ask Old Mutual International to set this up by completing the appropriate form and sending it to Old Mutual International. It is advisable that the trustees keep ongoing records of the outstanding loan. Occasional repayments The trustees would pay any occasional requests for repayment of the loan by cashing in part, or all of one or more of the individual policies within the bond. To do this they need to complete the Request for withdrawal, Surrender or Maturity form and send it to Old Mutual International. If there are no instructions about how the withdrawal from the bond should be made, Old Mutual International will partially cash in all policies within the bond to achieve the amount requested. However, depending on the size of the repayment, for tax reasons a full encashment of individual policies may be more appropriate. Your trustees should discuss the different options with their financial adviser before taking any action. Full repayment You can request that the trustees fully repay the loan at any time. To do this the trustees may have to fully cash in all policies within the bond. You need to be careful if you make this request soon after the bond is started as this could result in an early withdrawal charge which will reduce the value of the bond. Investment performance may go down as well as up. If the value of the trust fund goes down, there may be inadequate funds to meet your demands for repayment of the loan. The trustees may have to meet any shortfall in relation to the outstanding loan from their personal resources. This also applies where the value is reduced by charges. RISK WARNING Throughout this document we refer to various methods of repayment. We strongly recommend that you seek financial advice before requesting any repayments as there may be an income tax consequence associated with this transaction. If the value of the bond is less than the value of the outstanding loan when you request full repayment, the trustees are liable to pay any shortfall from their own personal resources. 7
benefits of your loan trust being invested in an Old Mutual International bond An Old Mutual International Bond gives your trustees choice, flexibility and tax efficiency. tax efficiency for you As settlor, you are liable to pay any income tax on withdrawals from the bond while you are alive and a UK taxpayer. The trustees have the ability to take regular or occasional withdrawals from the bond to make any repayment of the loan you require, whether in full or in part. Provided partial repayments do not exceed 5% each policy year of the original premium (or the cumulative total of these allowances), you will not be liable to income tax on the amount received at the time the payment is made to you that liability will be deferred until the bond is fully cashed in. If your repayments exceed 5% a year, the whole of the excess will potentially be subject to UK income tax. Partial repayment of the loan can be for a specific amount or for an unspecified amount by fully cashing in a certain number of policies which comprise the bond. The tax calculation for these options is different and your trustees should speak to their financial adviser about the most appropriate method of withdrawal for your circumstances. All growth will be free from UK IHT from the start. tax efficiency for the FUNDS LINKED TO THE POLICY The funds linked to the policy are free from capital gains and income tax, although withholding tax, which cannot be reclaimed, may apply on some investments. choice Access to a wide range of Old Mutual International investment funds, managed by world-leading fund managers. The Old Mutual International contracts also provide access to an extensive choice of internal and external collective investment funds. This allows the trustees to pick funds which appropriately maximise the potential for longterm capital growth for your beneficiaries while balancing this with the need to repay any outstanding loan to you. Most of the investments available are not guaranteed and can go down as well as up in value depending on market performance. flexibility Access to capital whenever they need it by cashing in part, or all, of the policy/ies. The investment will automatically have been split into 12 separate policies (unless the trustees requested a different number of policies on the application form). They can then partially or completely cash in policies, without cancelling the entire bond, when receiving occasional requests from you to repay the loan. Taking money from the bond may also result in withdrawal and other charges applying to the product, as detailed in the Policy Terms and Charges Schedule (belonging to the trustees and not you, the settlor). The ability to change the funds within their bond, as often as they require, taking advantage of market movements and maximising capital growth. An administration charge may apply depending on your charging structure and will be detailed in the Policy Terms and Charges Schedule. To help them monitor the changing values of the bond, Old Mutual International send the trustees regular valuations. Currently, valuations can also be requested more frequently, or on an occasional basis, without incurring an extra charge. 8
how the trust works in practice The following FICTIONAL example shows how the Loan Trust works. Mr Brown is aged 50 and has substantial assets including a house worth over 550,000. He wishes to reduce his potential UK IHT liability and is prepared to use 150,000 to do so. However, ideally he would like to retain access to the capital, to supplement his income in the future. His financial adviser recommends that he sets up an Old Mutual International Loan Trust (bare version). This arrangement allows him to set up a trust where he names his beneficiaries, as he knows who he would like to benefit. It also allows him to choose his trustees and lend them a capital sum while still retaining full access to the capital through repayments of the loan. The trustees are then able to use the loan to invest in a single premium, whole life or redemption, bond. To ensure this investment can continue for as long as possible, they invest the loan in an Old Mutual International redemption bond. Since the length of time a redemption bond can remain in force is 99 years, the trustees have more control over the timing of any encashment. The bond can be cashed in on request at any time during the 99 year term. Any growth on the loan would be outside Mr Brown s estate for UK IHT. Mr Brown does not need access to the capital immediately, so waits to request a repayment of the loan until ten years later. He then asks the trustees to repay him 7,500 a year, payable monthly, which is within his 5% tax-deferred yearly allowance. The trustees do this by setting up a regular monthly withdrawal from the Old Mutual International Portfolio Bond redemption version payable to Mr Brown. Unfortunately, Mr Brown dies eight years after he asked the trustees to start the regular loan repayments. The part of the loan which hasn t been repaid falls into Mr Brown s estate for IHT purposes. The beneficiaries of Mr Brown s estate will therefore be liable to IHT on any amount in Mr Brown s estate in excess of the then NRB and RNRB, including the amount of the outstanding loan. However, any growth on the outstanding loan is not part of Mr Brown s estate and therefore is not liable to IHT on his death. 9
The legal personal representatives of Mr Brown s estate have three options available to them once probate is granted or letters of administration have been obtained, in respect of the outstanding loan: 1. they can demand repayment of the outstanding loan in full then the cash can be distributed to Mr Brown s heirs in accordance with his Will. example 2. with the agreement of the heirs of Mr Brown s estate, they can waive the rights to the outstanding loan in favour of the beneficiaries of the Old Mutual International Loan Trust. This would be classed as a transfer of value and treated as a PET for IHT from the heirs of Mr Brown s estate. This amount would form part of those heirs estates for the next seven years. A draft deed is available from Old Mutual International. 3. assign the right to repayment of the outstanding loan to one or more of the heirs of Mr Brown s estate. This would be achieved by deed. The legal personal representatives need to obtain a deed and should seek legal advice before proceeding with this option. Mr Brown, age 50, lends 150,000 and appoints trustees to an Old Mutual International Loan Trust (bare version). The trustees invest the loan in an Old Mutual International International Portfolio Bond redemption version. Any growth in the bond will be immediately outside Mr Brown s estate for IHT purposes. 10 years after the Loan Trust was created Mr Brown asks the trustees for repayment of the loan of 7,500 a year, payable monthly. 18 years after the Loan Trust was created, Mr Brown dies. The amount of the loan which has not been repaid is 90,000, which means this will now fall into Mr Brown s estate for IHT purposes. PROBATE When someone dies, the executors or administrators of the deceased (collectively known as the legal personal representatives) apply to the Court for authority to deal with the deceased s estate. This authority is called probate for executors and letters of administration for administrators. 10
We have illustrated Mr Brown s example in the graph opposite. It assumes an investment of 150,000 (the loan) and monthly regular repayments of 5% a year starting 10 years after the bond commenced. It also assumes investment growth at 5% a year and includes current bond and management charges. However, you should note that this is not guaranteed as fund values can fall, which could result in the outstanding loan exceeding the fund value. 200,000 150,000 100,000 50,000 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Years Value of outstanding loan Fund value The value of the loan which has not been repaid at the time of Mr Brown s death in year 18 will be in his estate for IHT purposes. However, by setting up the Loan Trust, he has reduced his IHT liability (assuming all of the value of the outstanding loan is above the NRB and RNRB at the time of his death) by 24,000. IHT liability on the amount of the loan at outset: 150,000 x 40% = 60,000. IHT liability on the amount of the outstanding loan at the time of death: 90,000 x 40% = 36,000. The investment growth in this illustration amounts to 105,000 at the time of Mr Brown s death. This will all be outside his estate for IHT purposes and will benefit his chosen beneficiaries. RISK WARNING If you do not spend your loan repayments, these will continue to be part of your estate for IHT purposes. 11
your questions answered Am I, the settlor, automatically appointed as a trustee? No. However, if you wish to be a trustee and you were not named as a trustee in the trust deed, then you need to be specifically appointed as a trustee by deed. This can be achieved either at outset or at a later date. A draft deed is available from Old Mutual International. Can I, the settlor, be the sole trustee? Yes, but this is not recommended for two reasons: firstly because if you are the sole trustee, there will be no one immediately available to administer the trust on your death and secondly because although it is perfectly possible to declare oneself as sole trustee, HMRC may question whether you can make a loan to yourself. Can additional trustees be appointed in the future? Yes, additional trustees can be appointed at a later date. Who can benefit from the trust? The parties you named as beneficiaries at outset. Can the beneficiaries be changed? No, this is not possible under the bare trust. Can my spouse/civil partner* benefit from the trust? Only if named in the trust deed. * as defined by the Civil Partnership Act 2004. How often can I request that the trustees repay the loan? You can demand repayment of the loan at any time, in full or in part up to the amount of the original loan. Can the trustees set up regular withdrawals to repay the loan? Yes, please see page 7 for more details. What happens if the value of the bond is less than the value of the outstanding loan if I, the settlor, demand full repayment of the loan? The trustees will have to fund the shortfall from their personal assets unless you agree to waive repayment of this amount. If you waive the shortfall then this will be regarded as a gift and classed as a PET in your estate for IHT. Can I still receive money from the trust once the trustees have repaid the loan? No, as you are specifically excluded from benefiting from the trust. Can the trustees pay money to the beneficiaries even though the loan has not been repaid? Yes, but the trustees are liable to you, as the settlor, for the outstanding value of the loan. 12
Can a beneficiary demand their share of the trust fund whilst the loan is outstanding? No, the trustees have an obligation to the creditor (ie you, the settlor) and until this obligation is fulfilled then the beneficiary is not able to demand their rights. Can the trustees cash in the bond? Yes, and they can apply for a new or a different investment vehicle. This does not affect your right to repayment of the outstanding loan but may give rise to an income tax charge/liability. What is the IHT position if a beneficiary dies before me, the settlor? The value of the trust fund minus the outstanding loan proportionate to that beneficiary s share will form part of the beneficiary s estate for IHT purposes. The deceased beneficiary s share of the trust fund will pass to an heir of their estate in accordance with their Will. Do the trustees have to repay the loan on my death? No, but the value of the loan is an asset of your estate. There are a number of options available to your legal personal representatives, see page 10 for details of these options. Can the trustees pay tax from the trust fund? Yes, but chargeable event gains where you are still alive and a UK taxpayer (and therefore personally liable to pay the income tax) cannot be met by the trust fund. Can I waive all or part of the loan in the future? Yes, you can do this by deed. This would be classed as a transfer of value and be treated as a PET. Draft deeds are available from Old Mutual International, please contact your financial adviser. Can the trust continue after my death? Yes, but the outstanding loan forms an asset of your estate. 13
policyholder protection The Isle of Man has a statutory compensation scheme for all life assurance companies based on the Isle of Man. The scheme operates globally, which means investors will benefit from this protection wherever they reside. The Isle of Man scheme provides compensation of up to 90% of the policy benefit, in the unlikely event Old Mutual International becomes unable to meet its liabilities. For the purposes of the scheme this is calculated as the policy value less any contractual charges associated with the policy. Please note that the scheme relates to the solvency of Old Mutual International, it does not extend to protecting the value of assets held within your policy. further information Details of the range of contracts that are suitable for the Old Mutual International Loan Trust can be found in our brochures, Key Features documents and Policy Terms. These are available from any Old Mutual International regional office. Investors should be aware that the value of unit-linked contracts cannot be guaranteed as the price of units may fall as well as rise. Please remember that funds which hold investments in non-uk based currencies may rise and fall purely because of fluctuations in the exchange rate. Certain investment income is subject to a non-reclaimable tax deduction at source in its country of origin. The information in this document is based on Old Mutual International s interpretation of UK law and HM Revenue & Customs practice as at March 2018. While we believe this interpretation is correct, we cannot guarantee it. Tax relief and the tax treatment of investment funds may change. The value of any tax relief will depend on the investor s financial circumstances. We cannot accept responsibility for any losses arising from actions taken as a result of the information contained in this document. 14
15
Old Mutual International King Edward Bay House King Edward Road Onchan Isle of Man IM99 1NU British Isles T +44 (0) 1624 655 555 F +44 (0) 1624 611 715 www.oldmutualinternational.com Calls may be monitored and recorded for training purposes and to avoid misunderstandings. Old Mutual International Isle of Man Limited is registered in the Isle of Man under number 24916C. Registered and Head Office: King Edward Bay House, King Edward Road, Onchan, Isle of Man, IM99 1NU, British Isles. Phone: +44 (0)1624 655 555 Fax: +44 (0)1624 611 715. All promotional material is approved by Old Mutual Wealth Limited. Old Mutual Wealth Limited is authorised and regulated by the Financial Conduct Authority. Financial Services register number 165359. The rules made under the Financial Services and Markets Act 2000 (as amended) for the protection of retail clients in the UK do not apply. Licensed by the Isle of Man Financial Services Authority. Old Mutual International Isle of Man Limited is a member of the Association of International Life Offices. Old Mutual International is registered in the Isle of Man as a business name of Old Mutual International Isle of Man Limited. When printed by Old Mutual this item is produced on a mixed grade material, which uses a combination of recycled wood or paper fibre from controlled sources and virgin fibre sourced from well-managed, sustainable forests. PDF5906/INT18-0166/March 2018