I have met with a client this morning who would like to vary her share of her mother’s estate into a trust so that she can have an income from this but also so that it is outside of her estate for IHT purposes (but call on the capital should she need it). She has spoken to her IFAs and they have advised that this can be done using an offshore bond and then calling on 5% of the bond. The main beneficiary is to be her son.
Am I missing something here as I would say that this would fall foul of the GRW rules and any income tax is payable by her (although she is a BR tax payer and I don’t think this will change even with the proposed additional income)
Sounds like she may have been advised to set up a discounted gift trust arrangement. But would be best to ask for a copy of any documentation she’s been given by the financial adviser. These can reduce the liability but still allow access to regular ‘income’ in the form of capital withdrawals. The 5% is to avoid chargeable events for income tax.
Provided that s.142 IHTA 1984 applies to the variation, neither GWR nor POAT will apply to the trust despite the client including herself as a beneficiary.
For the trust to be outside of her estate, it will need to be a relevant property trust – does she have a discretionary trust in mind?
It should be noted, though, that whilst the deceased will be deemed to be the settlor for IHT purposes, for both income tax and CGT, the client will be the settlor.
If the trust is likely to continue for over 20 years, I wonder if a bond is the most appropriate investment (whether on shore or offshore) as once the aggregated withdrawal exceeds 100%, each subsequent withdrawal is a chargeable event.
There would be no reservation of benefit if the variation complies with s142 IHTA.
Whilst it would be settlor-interested, it seems that the IFA is intending that the trust fund would be invested in an investment bond, as it does not typically trigger any tax liability provided that withdrawals are kept within the 5% allowances. When it comes to encashing segments of the bond (ie partial or, usually preferably, full encashment of a segment, beyond the 5% allowances), the segment can be assigned to a beneficiary before encashment, so that the beneficiary’s income tax rate can be utilised.
Assuming IHTA 1984 s.142 applies and the trust thereunder is discretionary, whether the settlor (ie the client for income tax and CGT, but the deceased for IHT ) falls within the class of beneficiaries or not any chargeable event gain arising within the trust on the bond (eg withdrawals in excess of the 5%) is the liability of the settlor (albeit with a right if reimbursement from the trustees) [ITTOIA 2005 s.465/538].
ITTOIA 2005 s.624 is inapplicable even where withdrawals exceed 5% as the excess is not income as in income arising under a settlement.