This trust was designed by a tax solicitor and combines the company’s dimension preference account with a bespoke discounted gift trust. It allows investors to mitigate inheritance tax while retaining an income from the investment.
Income is taken through regular withdrawals of at least £50 on a monthly, quarterly, half-yearly or yearly basis but the frequency cannot be altered once selected.
The plan enables investments of at least £50,000 to be invested across a wide range of internally and externally managed funds. Minimum investments for the external funds may be lower than investing directly into those funds, and the running costs may also be lower through rebates that Canada Life International has negotiated. Investors can switch between funds without incurring a capital gains tax liability and the income they receive is taxable only when it is accessed.
The plan can be established as a discretionary or bare trust. If a discretionary trust is chosen, IHT may be payable if the investment exceeds the IHT nil rate band of £312,000 and annual exemption of £3,000. Further IHT may be payable if the investor – known as the settlor – dies within seven years, but the discounted gift scheme can reduce this liability. The settlor will receive a fixed income – known as reversions – from the plan and if they die within seven years, IHT is payable on the value of the estate less a figure which represents the value of the right to receive future reversions. This discount is calculated actuarially, taking into account the level of reversions, interest rate assumptions and the life expectancy of the settlor. An IHT charge of up to 6 per cent will be payable every 10 years and also if the trustees pay any benefit to the beneficiaries.
Where as bare trust is chosen, the plan’s beneficiaries must be chosen at the outset and the proportion of assets they are to receive upon the settlor’s death cannot be changed.
The initial investment is not liable to IHT, unlike the discretionary arrangement, as it is deemed a potentially exempt transfer. However, if the settlor dies within seven years, it becomes a chargeable transfer. IHT may be payable but will be reduced by taper relief if the settlor dies more than three years after gifting the assets into trust.
This plan may have sufficient flexibility in terms of charging and commission and the structure of the trust, but discounted gift schemes do have an element of inflexibility. Investors will have a fixed income that may not always meet their needs and beneficiaries will not have emergency access to money during the investor’s lifetime.