View more on these topics

Graeme Robb: A flexible solution to IHT planning


Isabel is a 60-year-old widow with two children and four grandchildren. When her husband died several years ago he left his entire estate to her. Currently, her estate is valued at just over £1m for inheritance tax purposes, with £450,000 represented by the family home.

Isabel meets her adviser to discuss investing £250,000 sitting in a deposit account in an IHT efficient manner. She has made no previous gifts. The account is paying a low rate of interest and to compound matters she is a higher rate taxpayer suffering 40 per cent tax on the interest. She will, however, be a basic rate taxpayer in retirement.

Isabel requires ad hoc access to her investment. Her adviser therefore rules out both a gift trust and a discounted gift trust from an insurance company.

The IHT position

When Isabel dies, her personal representatives will be able to claim a transferable nil-rate band from her late husband. Eligibility is straightforward: transfer is available to survivors of a marriage who die on or after 9 October 2007, regardless of when the first spouse died.

In this case, 100 per cent of her late husband’s NRB was “wasted” (he left his entire estate to Isabel) meaning the NRB on her death can be increased by 100 per cent to £650,000, based on current figures.

Consideration should also be given to current Government proposals, which, if implemented, will effectively increase the IHT threshold for married couples and civil partners to £1m under a new transferable main residence allowance of £175,000 per person.

In short, upon Isabel’s death, there is likely to be an IHT liability, albeit the potential liability may be relatively modest.

The solution

After a meeting with her adviser, Isabel decides on a solution comprising an onshore bond “inside” a discretionary loan trust. This proceeds on the basis of three steps:

  • Isabel sets up the trust and appoints her two children as additional trustees
  • Isabel makes an interest free loan to the trustees
  • The trustees purchase an insurance bond with two trustees as lives assured

There is no gift for IHT purposes subject to the seven-year rule. Instead, the outstanding loan balance remains inside Isabel’s estate, with the growth arising inside the discretionary trust where her children and grandchildren are potential beneficiaries.

Regarding the loan, Isabel has options. The trustees could repay the loan to her by taking 5 per cent tax deferred withdrawals from outset. Alternatively, given 5 per cent withdrawals are cumulative, the bond could be left intact with larger withdrawals taken in future policy years (for example, 25 per cent of original investment in the fifth year). Alternatively, the trustees could consider encashing segments to raise funds to repay the loan.

If Isabel decided she no longer needed access to the full outstanding loan balance, she could enquire whether her insurance company provides a deed to waive amounts of the loan. This would provide her with IHT planning without disinvesting from the bond. For example, a waiver of £3,000 could be made to utilise Isabel’s annual IHT exemption. Larger waivers would be subject to the seven-year rule.

The likelihood of a discretionary trust charge is remote. In this case, the trustees will have a full NRB meaning there will only be a tenth anniversary charge if the trust fund exceeds that figure. The trust fund is the bond value less the outstanding loan.

As well as considering the IHT impact, income tax must not be overlooked. Firstly, it should be noted Isabel will no longer be in receipt of bank interest subject to higher rate tax. Instead, the trustees own a non-income producing bond meaning an income tax liability may only arise if a chargeable event occurs and a gain is calculated on it. In that event, the liability would fall back on Isabel while she is alive.

If Isabel dies while the arrangement is in place, the bond will continue if there are any surviving lives assured. Note that it is possible for Isabel to instruct that any outstanding loan balance be cancelled on her death. This would avoid the need for the trustees to encash and repay the loan to her estate. The bond would then be dealt with at the discretion of the trustees who would have the following options after her death:

  • Keep the bond running
  • Encash in the tax year of death with the gain crystallising on Isabel
  • Encash in a subsequent tax year, but beware of trustee tax liabilities
  • Assign segments to adult beneficiaries, in which case any subsequent encashment gain would fall on the beneficiary

The discretionary loan trust provides Isabel with a flexible solution offering income tax and IHT efficiency with access to original capital on demand.

Graeme Robb is technical manager at Prudential


Pensions-savings-retirement-piggy bank

Child dependants excluded from pension death tax reforms

Rules that mean child dependants must spend pensions before the age of 23 should be scrapped to avoid potentially huge tax bills, AJ Bell says. A dependant’s pension usually stops when the child reaches 23, while if the beneficiary was 24 when the payments began they are treated as a nominee. Nominees and adult dependants […]

Martin Wheatley Pose 480

FCA and PRA unveil banker accountability rules

The FCA and the PRA have published final rules designed to ramp-up management accountability in the banking sector. The rules cover banks, building societies and PRA-designated investment firms, and come after a clampdown on bonuses announced last month. The new rules encompass the senior managers regime, the new conduct rules and the certification regime, which […]


Richard Leeson: The FCA’s flawed approach to charges disclosure

Just over a year ago, the FCA published its thematic review on clarity of fund charges (TR14/7). It received less publicity at the time compared to other reviews since the implementation of RDR. This lack of publicity may have been because the usual warning of follow-up reviews was absent. Instead, the FCA indicated that, with […]

Global income: preparing for a rate rise…

In the five years since we launched the Artemis Global Income Fund, its manager Jacob de Tusch-Lec has built a distinctive portfolio that is first among its peers. Here he explains why his “quality, cyclical and value yield” stocks, and flexible approach, leave the fund better placed to benefit from uncertainty than funds that depend […]


News and expert analysis straight to your inbox

Sign up


There are 2 comments at the moment, we would love to hear your opinion too.

  1. Mark Williams 8th July 2015 at 3:27 pm

    It’s perhaps an overstatement to describe the loan trust as an IHT ‘solution’ when the key point, as Robb acknowledges, is that ‘the outstanding loan balance sits inside Isabel’s estate’.

  2. What would be wrong with a DGT.It could immediately reduce IHT to nil and give her 5% pa which she could spend or save .I know it does not have the same flexibility but could ensure Mr Obsorne gets nowt

Leave a comment


Why register with Money Marketing ?

Providing trusted insight for professional advisers. Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and thought leadership.

News & analysis delivered directly to your inbox
Register today to receive our range of news alerts including daily and weekly briefings

Money Marketing Events
Be the first to hear about our industry leading conferences, awards, roundtables and more.

Research and insight
Take part in and see the results of Money Marketing's flagship investigations into industry trends.

Have your say
Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

Register now

Having problems?

Contact us on +44 (0)20 7292 3712

Lines are open Monday to Friday 9:00am -5.00pm