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's 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's 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's death
without creating a taxable event. The bond, effectively a wrapper, met the
client's 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's 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's estate.
After an appropriate time period, the trustees will execute a deed
appointing the client's children as beneficiaries. If the client's 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's 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's 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.