Type: IHT mitigation plan
Aim: Reducing IHT liabilities by investing into portfolio style collective funds through a trust
Minimum investment: Lump sum £5,000
Investment choice: Way cautious portfolio, Way global blue, Way global red, Way total return
Charges: Fund charges – initial 5%, annual 1.45-2% depending on fund, 0.65% additional for bond wrapper
Commission: Initial 3%, renewal 0.75%
Tel: 01202 890895
The Way Group has designed an inheritance tax planning product aimed at people who have a high net income.
Considering this IHT plan’s suitability to the market Origen Financial Services technical director Bob Perkins says: “It probably will not be right for everyone but there is likely to be a good deal of interest for clients who are high earners and who do not wish to exacerbate their IHT problem by accumulating surplus income.”
Perkins notes that the marketing of this plan arrives on the back of significant changes to the IHT treatment of some trusts at a time when advisers are focussing on this market sector.
Discussing how the plan works Perkins says: “The plan makes use of a flexible power of appointment trust which gives named beneficiaries an “interest in possession”, a concept that advisers are familiar with. The difference is that it is worded to clearly evidence the settlor’s intention to make regular gifts out of income.
The trust carves out two distinct interests in that on specified anniversary dates the settlor could receive back a proportion of the trust capital, but that at all other times the assets are held for the beneficiaries under the trust. The settlor is specifically excluded in this respect.”
Perkins observes that the trust is carefully constructed so that the settlor does not have an absolute right to any of the trust assets because the trustees not only have the power to diminish the available capital, by making appointments of interest and advancements of capital within their powers under the trust, but also the ability to postpone the event. “
It is the trustees that in effect control the timing of the reversion and not the settlor, so there is no question of the latter wilfully omitting to take action or postponing a right.
According to Perkins, the literature is attractive and the trust document is well presented. “Having said that, it is naturally quite lengthy and it may require some careful study and explanation,” he says.
He points out that investment management is provided by IMS, which is a well- known multi-manager with an experienced and high profile team.
Perkins feels the main downside is that that this is quite a sophisticated means of making transfers that are completely exempt but holding out the potential for investors to have access to the capital in the future. “There is a danger that investors might not appreciate that they have no guarantee that their capital will be there and that control is in the hands of the trustees.”
Perkins draws attention to the fact that the trustees must not only be prepared to take on the trustee responsibilities but also understand that they could at some stage come into conflict with the objectives of the settlor. “Any failure to act appropriately might call the operation of the trust into question and undo any IHT benefit that might be achieved,” says Perkins.
He believes it is also important to realise that if the settlor does receive the capital back, then unless they subsequently spend or use it, the whole amount plus capital growth will be back in their taxable estate for IHT purposes.
Though many advisers may have looked to the “gifts out of normal expenditure” exemption to help to reduce the rate at which an individual’s surplus income adds to their taxable estate, Perkins feels there are not many products that are being marketed purely for that purpose.
“I do not see that there is any direct competition at the present time as I am not aware of any other packaged product that is focussed on the same objective. There are alternatives such as life assurance maximum investment plans, but this plan offers a new and interesting means by which high earners can make use of a much under-used IHT exemption.
Summing up, Perkins finds this an innovative approach to coping with IHT. He feels the fact that the IFA can choose to make use of portfolio style collectives or an offshore bond wrapper, increases the flexibility beyond that which is available from traditional providers.
“Though the concept is fairly straightforward, using the carve out principle in a similar manner to that which applies to trusts for discounted gift schemes, advisers should take great care in how they advise and explain this to their clients. Trustees must be seen to be actively involved in the trust, particularly in the approach to the two dates at which capital can revert to the Settlor.”
Perkins adds that the trustees must act in a positive way in relation to the potential interests of the beneficiaries and not ignore them. “I would suggest that regular meetings should be held and recorded so that, if challenged, it can be clearly shown that the trustees were aware of their responsibilities and had acted accordingly.”
Suitability to market: Good
Investment choice: Average
Adviser remuneration: Good