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Gift Wrapping

Mr X has recently taken early retirement/redundancy at the age of 52. He

needs investment advice as he has reasonably large sums on deposit from

savings, his pension lump sum and redundancy payment. He also has other

assets including Pep, Isa and Enterprise Investment Scheme investments and

a sizeable holding of shares in his former employer. How should he proceed?

Mr X has a good level of pension income and is a higher-rate taxpayer. He

also intends to accept one or two non-executive director positions that

have been offered to him.

This will provide a sufficient level of income. The company pension

provides for a two-thirds widow&#39s pension, which both the client and his

wife feel will be sufficient for her needs in the event of his death. The

client and his wife have rec-ently arranged wills with a local solicitor

and have incorporated a will trust to utilise their nil-rate bands. Mr X

intends to make gifts to his children and is aware of the implications that

making the gifts would have on his estate.

He has a significant potential IHT liability, which concerns him. However,

other than the gifts to his children, he does not wish to lose control of

or access to his funds.

Mr X wishes to retain his shares and other assets and has allocated around

£200,000 for investment. This is to be invested as tax-efficiently as

possible. As an experienced investor, he feels it is important to have the

flexibility to access different fund management groups in order to manage

the investment actively without incurring excessive charges and ensuring

any potential tax liability is deferred.

We therefore explored the option of using an offshore product, allowing

for gross roll-up of the investment, deferring the tax liability and

allowing access to all UK-listed unit and investment trusts and Oeics.

The client&#39s requirements were achieved by taking the following steps:

He applied for an offshore bond on a single-ownership, joint-life basis,

his wife being the second life assured. Issuing the bond on a joint-life

basis ensures that the investment continues after the client&#39s death

without creating a taxable event. The bond, effectively a wrapper, met the

client&#39s requirements for investment diversification.

A flexible power of appointment trust, which includes the settlor, was

established and an offshore trust company was appointed as the trustee. The

client&#39s wife was nominated as the default beneficiary. The client, his wife and other relatives were nominated as potential beneficiaries. This transfe

rs the investment from his estate to that of his spouse.

The client was appointed protector of the trust.

In simple terms, this effectively means the client has given the

investment to his wife. There are no IHT implications as the transfer of

the asset is between husband and wife. However, it removes the investment

from the client&#39s estate.

After an appropriate time period, the trustees will execute a deed

appointing the client&#39s children as beneficiaries. If the client&#39s wife

survives seven years from this deed of appointment by the trustees, the

investment will not form part of her estate for IHT purposes.

What exactly has been achieved? The client gave the investment to his wife

and then the trustees will give it to the children. Seven years after the

trustees appoint the children as beneficiaries, the investment will no

longer form part of the wife&#39s estate, giving an inheritance tax saving of


Although the client made the original gift, he can still benefit from the

investment as a potential beneficiary. This would usually be classed as a

gift with reservation. However, there is an exemption to this rule under

section 102, part 5 of the Finance Act 1986, which states that, if the

transfer is between husband and wife, then the gift with reservation rule

does not apply.

As a beneficiary, the client&#39s wife can still benefit from the investment

by receiving payments as interest-free loans that may be repaid by her

estate on death, which could reduce IHT further. This gives the client and

his wife access to the investment if they require it. This access is at the

discretion of the trustees.

As protector of the trust, Mr X has certain – although limited – rights of

veto over the actions of the trustees, giving him a degree of control over

who receives benefits from the investment and when they receive them.

In summary, the client has achieved his aim of investment flexibility,

access and control over his investment while potentially mitigating

£80,000 of IHT.


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