View more on these topics

Where there’s a will, there are several ways

Key to will planning is the interaction between advisers and the level of access to funds for the investor

Loan trusts and discounted gift schemes continue to remain popular vehicles for use in connection with inheritance tax planning. But both types of scheme provide less than complete access to funds for the investor and while many consider this to be a price worth paying, there are a significant number of would-be investors who, while wanting to minimise IHT, also need to retain access to all of their funds, all of the time.

For these investors, avoiding the pre-owned assets tax (Poat) charge and the gift with reservation (GWR) provisions will not be possible on a lifetime gift but, of course, neither tax applies on death and everyone can leave up to 275,000 (after taking into account any transfers made within the seven years immediately preceding death) to persons other than a surviving spouse free of IHT.

With will planning, if no lifetime gifts have been made, up to 275,000 could be left subject to a discretionary trust, whereby access for the surviving spouse to both capital and income can be secured by ensuring that a wide power of appointment is vested in the trustees, and by including the widow(er) within the class of beneficiaries who could benefit under the trust.

The other main way an investor could make use of his nil rate band on death is to execute a stand-alone trust that takes effect immediately.

During the investor’s lifetime, he or she has an interest in possession (a right to the income arising from the trust fund), with the trustees having the power to appoint capital to him or her should they regard this as being an appropriate course.

Following the death of the investor, the trustees have three options. First, to distribute the trust fund immediately to the chosen beneficiaries; second, to continue to hold the trust fund subject to the existing trust; and finally, to create a further trust up to an amount equal to the nil rate band of IHT, with the balance of the trust fund being held for the absolute benefit of the surviving spouse – provided that this does not conflict with provisions under the investor’s will.

With regards to the tax consequences of this trust, since the investor has an interest in possession and has retained the right to benefit from part or all of the capital of the trust fund, there will be no transfer of value on the creation of the trust, although the trust fund will be treated as being comprised in the investor’s estate for IHT purposes on his/her death.

The trust can only be established by a sole investor, although married couples can establish mirror nil rate band probate trusts.

As the investor will have an interest in possession in the trust fund there will be no charge to Poat and, with regards income tax, on the assumption that the under-lying investment of the trust is either a life insurance policy or a capital redemption policy, the chargeable events legislation will apply.

Provided that the trust fund is only invested in a life insurance policy or a capital redemption policy, there should be no liability to capital gains tax.

The discretionary will trust is probably the most well known option. Its major benefit is that the investment remains completely within the legal and beneficial ownership of the investor during their lifetime. The will can, of course, be changed at any time up until death.

The key factors of the nil rate band probate trust are that it is self contained in that it is in place immediately and there is no need to obtain probate in respect of the investment (it is already in trust so the legal ownership is not with the investor). The nil rate band is used as the investor’s interest in possession terminates on death and the new post-death trust terms take effect.

As ever, there is no right or wrong solution. For many financial advisers, the key determinants between a discretionary will trust and the nil rate band probate trust (given that the IHT outcome is substantially the same in either case) are likely to be the extent to which interaction with other professional advisers is possible (or desired) and the extent to which unfettered access to funds is required by the investor.


Are friends Electra?

The VCT season has started relatively slowly following the change in the listing rules in July. Since the start of September, about 25m has been raised. I expect this figure to pick up dramatically in the coming months as more VCTs are launched and more column inches are devoted to the subject. This is the […]

Down on the farm

I read that the Aifa and ABI are telling their member firms to dissuade claimants from being represented by so-called claim farmers in respect of endowments but balk at defining anyone not regulated by the FSA as such. Instead, they define them as being “not members of a professional regulatory body”, which is obviously intended […]

Leitch confirms multi-tie project

Former Zurich and Allied Dunbar chief executive Lord Sandy Leitch has confirmed he is setting up a multi-tie financial services distribution business, called Intrinsic, with well-known industry colleagues. Former Zurich Advice Network marketing director Kevin Donaldson will head up the firm as CEO.A spokesman for the venture says the move, first reported in Money Marketing, […]

FSA is flawed over customer controlled functions, says CII

The Chartered Insurance Institute is criticising the FSA for its proposals in CP 05/10 to remove customer controlled functions from the regulatory regime. The CII is stressing the importance of direct regulation of all individuals dealing with customers, rather than just senior personnel. The FSA is calling for the abolition of customer controlled functions when […]

Guide front cover - thumbnail

Guide: how to… audit your auto-enrolment scheme compliance

As the Pensions Regulator starts to bare its teeth and the changes mentioned in the Budget and Queen’s Speech start to come into force, it is essential that you understand your scheme and the processes you need to undertake to ensure it remains compliant. Our second re-enrolment guide looks at how to audit the key areas of your auto-enrolment scheme.


News and expert analysis straight to your inbox

Sign up


    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 advice.

    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