Mr and Mrs T were both retired, Mr T being in his mid-70s and Mrs T a sprightly 66-year-old. They had £230,000 from the sale proceeds of a second property and wished to increase their potential income, particularly for Mrs T in the event of Mr T's death, while considering the effects of her age allowance. They were cautious regarding investments in general, especially in the light of the currently volatile stockmarkets, and already had a self-invested Isa through a stockbroker.
They wished to reduce their inheritance tax liability and, although some income was available from other investments, were concerned about the implications of future long-term care costs. They wished to be able to provide for both themselves and their children, should the need arise, both before and after death, so access to capital was important. In short, they appeared to want to have their cake and eat it. What should they have done?
The first step was to set up discretionary will trusts for both partners so that they could each use their nil-rate band for inheritance tax purposes. This allowed each spouse to retain full ownership and control of their assets during their lifetime as no gift is made until death.
The nil-rate band of the first spouse to die is fully used, while the surviving spouse is financially secure as he or she is a beneficiary under the trust and entitled to receive payments from it at the discretion of the trustees. Although the surviving spouse would have access to the funds transferred into the discretionary trust, they are not treated as his or her assets for IHT purposes.
Importantly, if circumstances change in the future, any wording can simply be amended or discarded before the death of either spouse.
Offshore investment bonds are commonly used in conjunction with discretionary will trusts as they are viewed as a tax-efficient and flexible investment vehicle. The bonds are drawn up separately for each spouse but on a joint-life basis to ensure that, on the first death, the bond remains in force. Two bonds were recommended for Mr and Mrs T.
The sum of £89,000 was invested in the Royal Skandia collective investment bond. Skandia was Europe's first life insurance group to develop the multi-fund management concept and this portfolio-style bond provides scope to invest in nearly all the world's major investment houses. Within the bond is a portfolio of four lowto medium-risk funds.
A similar £89,000 was invested in the Prudential offshore with-profits fund via the Prudential International Prudence bond. This fund is based on Prudential's long-running onshore with-profits fund. While bonus rates have fallen markedly across the board, this fund was favoured as it has an above-average exposure to fixed-interest securities such as corporate bonds and business property. Prudential's overall financial strength was also taken into account.
Although equity release might have been considered to provide for long-term care costs, the clients did not want to borrow on their property, so £52,000 was invested into the Axa lifetime care asset protection bond. This is essentially a hybrid plan, combining a unit-linked investment bond and a lump-sum long-term care insurance policy. The investment bond element, in this case Axa Sun Life's distribution fund, had extra life cover added for the whole £52,000, including the LTC insurance cost. The investment bond was written under trust to ensure that proceeds are paid outside the estate, thereby further reducing inheritance tax.
The long-term care element, once underwritten, guaranteed index-linked benefits of £10,000 a year for Mr T and £8,000 a year for Mrs T. Combined with income from the clients' other investments, this would give each of them around £28,000 a year, enough to provide for future care costs.
It was obviously important to underline to the clients that these recommendations were longer-term investments and were based on their having other savings for short-term contingencies.
In summary, this strategy of combining discretionary will trust planning with offshore investment bonds and long-term care insurance provided Mr and Mrs T with:
A substantial reduction in their IHT liability while still maintaining control and access to the investments during their lifetimes.
Extra provision of long-term care benefits, guaranteed and protected against inflation.
In the event of death, payment of the full cost of the LTC insurance outside the estate to reduce IHT liabilities further still.
The potential for additional flexible income if and when required by taking advantage of the 5 per cent withdrawal concession from investment bonds.
The clients were thus able to meet their apparently conflicting objectives and they were delighted to accept all the recommendations.