Has anyone come across a Canada Life Wealth Preservation Trust before? Investment into offshore life assurance bonds, under an agreement containing both bare and discretionary trusts, where the settlor is able to withdraw 100% of the funds on staggered annual maturity dates - and yet it’s purported to be a gift from day one. I’m curious to understand how it works.
The IHT theory, backed up by careful drafting, is that there is a gift into trust but no reservation. The settlor is only ever entitled to a fixed sum which is invested by the trustees in a bond (or several bonds) held on trust for beneficiaries excluding the settlor but subject to the trustees repaying the fixed sum (if and when the settlor can call for that under the terms of the arrangement).
Those repayments are generally funded by part-surrenders of the bond, or full surrenders of one of many individual bonds, originally purchased with the gifted fixed sum. An aspect of that strategy is that up to 5% per annum of the sum can be withdrawn over a maximum 20 year period and used to repay the fixed sum to the settlor without a chargeable event for income tax.
The settlor’s payment of the fixed sum will be a TOV and the value transferred will be calculated by reference to the (discounted) Net Present Value of the right to repayment. This will depend on the precise terms of such right. There would be no TOV if the sum was repayable on demand but this would require the trustees to liquidate the bond(s) on demand—which is not really the plan. That is for the bond to grow in value and for the investment growth to be held for the beneficiaries. Repayments will diminish the return. I have seen bonds return 200% on the fixed sum over a long period.
The Settlor is usually planning to call for no repayment for some future period, if ever, but it represents access to liquid funds within the agreed limits, if any. On the “loss to donor” basis the fixed sum amount less the NPV of the right to repayment, less any AE, is a CLT and the plan will usually be for the TOV to fall within the available NRB of the settlor. He can also make a lifetime gift of the right or leave it by Will, depending on his anticipated need for further access.
HMRC, without prejudice to whether it is only through gritted teeth, accept that no GROB arises. See IHTM20424 onwards. This is so even though, as the Aussies say, “it sticks out like a dead crow in a bucket of milk” that the investment of the fixed sum generates a wholly gratuitous fair dinkum reward for the beneficiaries. In effect he or she gives away the investment growth but not (necessarily) the fixed sum but without a GROB. The sum still unpaid at death can also automatically revert to the beneficiaries without a further IHT disposition as part of the original trust limitations.
The bond may be held on a DT or, to avoid RPT charges, for a number of individuals who are preferably young and healthy, usually as beneficiaries with absolute but defeasible interests, subject to the exercise of a trustee power of appointment among a wider class. Because the trust fund is not totally illiquid this second type of trust is not as problematic as one holding a qualifying life policy. It can be a capital redemption fixed period bond so no lives assured required at all.
The bond can be offshore or onshore which have different income tax exposures on future chargeable events. The offshore will benefit from the provider’s own low or zero tax profile but it is just one facet of investment selection and expected overall performance. The onshore bond comes with a basic rate credit on a chargeable event but this is not repayable. It is a pukka financial investment and the settlor cannot control granular investment selection strategy because of falling foul of the personal portfolio bond rules. Tax wise these are what one of my law tutors (the redoubtable J G Collier of PIL fame) used to describe as a “cock-up de luxe” without renvoi or forum non conveniens.
Jack Harper
There is a bit of a warning on Canadian policies/ trusts in IHTM26011
Should have googled it before replying. If you do so you will find that is a DGT with bells on. I would want chapter and verse from the provider about whether it has been stress-tested with HMRC as regard the bells.
The WPA is a flexible reversionary trust, which HMRC are perfectly comfortable with.
IHTM20561 - Flexible Reversionary Trusts: Introduction - HMRC internal manual - GOV.UK
It is akin to a flexible DGT whereby, instead of fixed payments, the settlor/trustees can decide on whether to take the annual maturities, or defer them to take another year.
If taken, the maturing segments will be a chargeable event and any tax liability on the settlor needs to be considered,
I wonder why it is that such trusts and DGTs involving insurance products have attracted such uncharacteristic tolerance from HMRC whereas carve-outs to do with land have been historically pursued with venom, not least by s102A FA 1986. There is a bit of sinister bet hedging in IHTM20563.
Jack Harper
Remember that clients get old and if you do a reversionary trust, you will need a plan for when they lose capacity (ie. appointment of new trustee to confirm the reversions every year). This can be a particular problem where the client doesn’t accept that they are losing capacity.
There has to be a minimum of two capable trustees. So the other trustee can use Section 36(1) Trustee Act, which gives them the power to arrange a replacement for the incapacitated trustee. They will then decide if maturities are needed to sustain his lifestyle, or to defer them to be used for the beneficiaries of the trust.
I have come across the Canada Life version and I’m looking forward to seeing the Transact alternative which is being stress tested as we speak.