My firm offer those individuals who wish to protect some of their cash/savings/investments from inheritance tax, creditors, claims made by a divorcing spouse, an ex-spouse, possible care home fee claims and claims made whereby there has been no insurance in place or there is a possibility of under insurance, by use of a Discounted Gift Trust and to eliminate HMRC viewing the trust as being still for some settlor benefit we invariably recommend that the trust is set up on an absolute ( bare ) basis. To keep the cost down and for better confidentiality we recommend the services of a New Zealand firm of chartered accountants who provide a professional trustee service. That firm accept cash transfers and/or “in specie” transfers of suitable existing investment accounts and they then place the money/investments into an offshore protected cell Life Assurance Company plan. Our correspondence with HMRC suggests that they will not view this type of recommendation needing us to become involved with the DOTAS arrangements as it would appear that our scheme meets the HMRC rules as regards what they have referred us to on their web site under the heading of IHT. Furthermore as the Life Co. plan does not generate income it also appears that the Trust does not need to be registered with the TRS. It will be interesting to hear what the Forum members feel about all of this ?
DGTs are not of a uniform structure. I therefore assume that the plan is for a UK resident to transfer cash/other assets to a non-resident trustee to fund a single premium on an insurance policy (written on a life or lives assured or for a fixed term) with the counterparty being a non-resident insurance company.
There is a single composite trust governed by a foreign law divided into 2 distinct funds: one is a bare trust for the settlor allowing him to be paid an amount equal to the single premium over his lifetime at the cumulative rate of 5% a year; the other fund is the policy net of partial surrenders or total surrenders of any of a cluster of policies to fund actual settlor payments in his or her lifetime held on trust for persons other than the settlor, either discretionary trusts or interest in possession trusts with a power of appointment for the trustees.
The UK IHT treatment is that the settlor makes a CLT but its value transferred is reduced by the NPV of his right under the bare trust. HMRC accept in principle that there is no GROB because the settlor’s right is part of a “shearing” exercise.
The policy will be an offshore policy for the chargeable policy gains legislation and such gains will arise on maturity of the policy or prior surrenders in excess of the 5% a year disregard. The insurer will not be a close company equivalent so the settlor trustees and the beneficiaries will not be taxable on the insurance company’s own income and gains
even though, given the protected cell, the underlying assets and their investment returns fund and fund only the policy value.
The settlor must do his or her due diligence on the investment and counterparty risks and any applicable regulation safety net.
The question is about TRS but anti-avoidance Transfer of Assets Abroad legislation needs to be addressed.
The trust will be a non-UK express trust with no UK resident trustee not owning UK land. Not registrable on the TRS. If at any time a policy gain is chargeable to income tax the trustee will not be taxable where the chargeable person is the settlor. If the settlor is dead, and the PRs are not chargeable on the gain as estate income, the gain will be treated as income arising to the NR trustees under the TAA legislation with a resultant liability on a distribution of it or benefit provided out of it to a beneficiary. But the as trustees are not themselves chargeable the trust is still not registrable on TRS.
HMRC accept that the equitable interests of the beneficiaries are not in themselves a “benefit”: INTM601580(Note). What is not clear, to me at least, is whether lifetime withdrawals by the settlor are “capital sums” for TAA. Arguably not as the settlor has a right to them by way of an incipient reservation, which he never gave away, but the definition is as awkward fit: INTM601060. In practice this will not matter as there will be no TAA income because the policy gains are only deemed to be such income in circumstances where they are not directly charged on the settlor. It would be unwise for anyone to rely on the escape clause Condition A (no chance under B) now that Fisher has decided that taxation includes betting duty: INTM602980 and 60300.
Jack Harper
DGTs are not of a uniform structure. I therefore assume that the plan is for a UK resident to transfer cash/other assets to a non-resident trustee to fund a single premium on an insurance policy (written on a life or lives assured or for a fixed term) with the counterparty being a non-resident insurance company.
There is a single composite trust governed by a foreign law divided into 2 distinct funds: one is a bare trust for the settlor allowing him to be paid an amount equal to the single premium over his lifetime at the cumulative rate of 5% a year; the other fund is the policy net of partial surrenders or total surrenders of any of a cluster of policies to fund actual settlor payments in his or her lifetime held on trust for persons other than the settlor, either discretionary trusts or interest in possession trusts with a power of appointment for the trustees.
The UK IHT treatment is that the settlor makes a CLT but its value transferred is reduced by the NPV of his right under the bare trust. HMRC accept in principle that there is no GROB because the settlor’s right is part of a “shearing” exercise.
The policy will be an offshore policy for the chargeable policy gains legislation and such gains will arise on maturity of the policy or prior surrenders in excess of the 5% a year disregard. The insurer will not be a close company equivalent so the settlor trustees and the beneficiaries will not be taxable on the insurance company’s own income and gains
even though, given the protected cell, the underlying assets and their investment returns fund and fund only the policy value.
The settlor must do his or her due diligence on the investment and counterparty risks and any applicable regulation safety net.
The question is about TRS but anti-avoidance Transfer of Assets Abroad legislation needs to be addressed.
The trust will be a non-UK express trust with no UK resident trustee not owning UK land. Not registrable on the TRS. If at any time a policy gain is chargeable to income tax the trustee will not be taxable where the chargeable person is the settlor. If the settlor is dead, and the PRs are not chargeable on the gain as estate income, the gain will be treated as income arising to the NR trustees under the TAA legislation with a resultant liability on a distribution of it or benefit provided out of it to a beneficiary. But the as trustees are not themselves chargeable the trust is still not registrable on TRS.
HMRC accept that the equitable interests of the beneficiaries are not in themselves a “benefit”: INTM601580(Note). What is not clear, to me at least, is whether lifetime withdrawals by the settlor are “capital sums” for TAA. Arguably not as the settlor has a right to them by way of an incipient reservation, which he never gave away, but the definition is as awkward fit: INTM601060. In practice this will not matter as there will be no TAA income because the policy gains are only deemed to be such income in circumstances where they are not directly charged on the settlor. It would be unwise for anyone to rely on the escape clause Condition A (no chance under B) now that Fisher has decided that taxation includes betting duty: INTM602980 and 60300.
Jack Harper
To add a couple of comments:
- the income rights of the settlor are not limited by the initial premium. They retain a right to income for life (or as long as the trust fund can maintain income payments, if shorter). For example, if they live for 40 years drawing an income of 5% of their initial premium, they will receive 2X initial capital throughout their life.
- It is commonplace to set up DGT’s on a discretionary basis, with the difference at outset being that the gifted element will be a PET for an absolute trust and a CLT if using a discretionary trust. (note in the response above it mentions CLT - as you are using a bare trust, the gifted element will be a PET).
- The discount is retained as a right to future income, so is not considered a PET / CLT. An actuary will value this discount at outset.
- If you are trying to keep costs down, it odd to involve the New Zealand professional trustees, unless they are operating for free?
- DGT’s are express trusts and do not fall under an exemption for TRS registration (regardless of underlying tax wrapper)
If the Settlor’s drawings exceed the initial premium the trustees will no longer be able to fund them by tax-free 5% withdrawals, which will mean the settlor, by definition still alive, will be taxed on a chargeable event gain.
If the settlor fails to draw, arguably he is making a s3(3) IHTA omission for IHT: “…he shall be treated for the purposes of this section as having made a disposition at the time (or latest time) when he could have exercised the right, unless it is shown that the omission was not deliberate”. The counter-arguments are that it was not deliberate 0r that it does not increase the estate of any other person or settled property without a QIIP. Astonishingly this point is not addressed at all in IHTM20650-6 or in their DGT Technical Note at https://webarchive.nationalarchives.gov.uk/ukgwa/20140109143644/http://www.hmrc.gov.uk/cto/dgs-tech-note.pdf
These manual contents do discuss the crucial factor in valuing the settlor’s retained rights: his life expectancy at the date of settlement.
Compare the HMRC approach to pension drawdown rights at IHTM17105 and the ABI guidance note. The approach is slightly different, certainly as to valuation of the TOV, because the consequences of an omission are also different to a DGT. But it is clear that in principle HMRC view an omission occurring at the “instant” before death and focus on the “deliberate” issue by looking at the pattern of historic withdrawals and the advice given about the facility to the fund member. Significantly they say “We acknowledge that income withdrawal will usually be elected for commercial and retirement planning rather than donative reasons”.
There is no doubt that at the instant before death the undrawn rights of the settlor increase the value of the policy held on trust and s3(3) is engaged if it is an RPT but apparently not if QIIPs are in force, as often would be the interests of default beneficiaries with pre-22 March 2006 IIPs. Bare trust beneficiaries whenever they became beneficiaries are caught but the policy is rarely settled on initial bare trusts as opposed to absolute default interests in a settlement. HMRC will be sure to take the view wrt “commercial and retirement planning rather than donative reasons” that a significant omission to draw on retained rights by the instant before death is deliberate. A settlor is probably well-advised to draw in full or substantially and to spend or give away the monies. Although chargeable event gains do not count as income under the s21 exemption they may make it affordable to make regular gifts out of other income which does.
Jack Harper
If the gift at outset is valued as a retained right to income for life, then payments continue for life. Yes, there will be tax consequences under the chargeable events regime.
If DGT payments to the settlor stop during their lifetime, then at that time there is a gift (PET / CLT) of the value of future income being given away (loss of value to the estate), which would need valuing under the same principles as at outset.
Of course, a set term (for example 20 years) could be determined at outset - this would reduce the value of the discount if there is any chance of the settlor living past 20 years.
Going a bit off subject with the s21 gifting rules, but I would be careful in assuming that a settlor living off DGT income can use other income i for regular gifting… If the donor has to resort to capital (which DGT income is treated as) then other income is not surplus.
Sorry the comment on s21 is simply bad law. The source of a s21 gift is irrelevent. There is no tracing back to the source. If the criteria are satisfied and the income caculation shows a surplus the source of the regular gifts does not matter.
Jack Harper
I read the question in a different way to the others. As I know little about discounted gift trusts, I won’t comment on how the OP’s ideas might be taxed (sorry Jack, I know you don’t like answers like this).
The first thing that struck me was the use of a New Zealand firm for “better confidentiality”. I don’t see how the fact that a New Zealand firm is involved changes confidentiality compared with any other trustee (assuming the trustees don’t wear two hats - e.g. are not family or friends). Seeing a focus on “better confidentiality” makes my spidey senses tingle and makes me wonder what I am not being told.
Like any trust with non-resident trustees, the OP will have an obligation to notify HMRC within three months of the making of the settlement.
In relation to DOTAS, the position has changed over time. Looking at regulation 4, it might be said that Condition 1 is likely to be satisfied (I am not saying it is as I have no idea what the facts are) and Condition 2 would seem likely to have been satisified (again, I am not saying it is).
So the get out is that there is no need to tell HMRC (under DOTAS) if the arrangements are substantially the same as “related arrangements”, with these being arrangements that were entered into before April 2018 and which accorded with established practice of which HMRC had indicated there acceptance: The Inheritance Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2017
I have no idea whether what the OP might advise on is substantially the same as established practice (that HMRC has indicated its acceptance to) as it will depend on the actual facts. What I would be looking at is what, for example, HMRC’s pre-2018 and current manuals (and, of course, D27 of the GAAR guidance) and comparing the OP’s proposal to that. If the tax magic that the OP has in mind falls squarely within them then all well and good. Make a file note and move on. But simply saying “it would appear that our scheme meets the HMRC rules as regards what they have referred us to on their web site under the heading of IHT” isn’t sufficient if there are differences in the tax magic and there is a ventillation-related incident.
I’ll leave the comments about claims from divorcing spouse and care home fees to someone who knows about that sort of thing (e.g. Matrimonial Causes Act 1973).
I am glad to compliment Tigger on raising the DOTAS point. This wonderful legislation inhabits the realm of Metaphysics and it is not known whether HMRC adhere to the school of the Enlightenment or Postmodernism. Hopefully not the Medieval school. Victims are directed to form an opinion about what might be in the mind of a promoter or informed observer i.e. another person. I can’t accurately do that in relation to my spouse of 55 years.
There is no doubt that the DGT arrangement has a tax avoidance motive as it aims to make a gift without a reservation. It requires consideration of the confidentiality and premium fee hallmarks as well as the special IHT hallmark with its 2 conditions which must both be satisfied to make the arrangement notifiable. From this hallmark there are exceptions for established practice accepted by HMRC. Plain vanilla DGTs fit in well here.
I can thoroughly recommend the guidance notes, a tour de force of 234 pages.Disclosure of tax avoidance schemes: guidance - GOV.UK. Section 8 deals with IHT with some cross-references to other areas, notably the general hallmarks above. Accountants will love the 17 Examples of non-notifiable arrangements in 8.4 though surprise may register that some could ever be captured in principle. DGTs are covered well and should be safe as long as they are not egregiously “tweaked”.
Users must bear in mind that when the promoter is offshore and has no UK place of business they have the duty to notify and so must know the law or be advised on it and time limits are short.
Generously the Finanzpolizei undertake to advise anybody who is “concerned” who cares to write to them in Newcastle:see 1.5 of the Notes. Owain Glyndwr claimed to be able to summon up dragons but Hotspur asked: would they come when they were called? So do not blame me if there is no satisfactory reply or a refusal.
Jack Harper