I’m a financial adviser and have been approached by a family who are currently receiving advice from an adviser linked to Quilter. He has taken over from their previous adviser and they are finding him unresponsive hence looking for someone new.
In the course of doing my fact find, I’ve discovered that when she moved house last year, Quilter cashed in an Investment Bond and paid the funds out to her to fund the purchase of her new home prior to the sale of her previous one. The snag is that the investment was held inside a Discounted Gift Trust she set up in May 2018.
At this stage she has been unable to locate a copy of the Trust Deed or initial paperwork and recommendation so I can’t check who the trustees and beneficiaries are, or what the discount was. I would be staggered if the Deed did not exclude her as a potential beneficiary, however. I’m not sure in what capacity Quilter have paid the funds out to her - whether it’s because she’s a named trustee (likely, I think) or whether it’s a mistake on their part (possible). The original investment was for £350k so presumably the discount took the chargeable lifetime transfer below £325k meaning no lifetime IHT charge.
Her Quilter advisers (current and previous) have both told her it’s fine - all she’s done is cancelled her previous investment and so long as she takes out a new one there’s no problem. I’ve told her that’s not how a discounted gift trust works and advised her to take legal advice, but she’s refusing because she doesn’t want to upset her Quilter adviser and so far I’ve failed to impress on her how serious this situation could potentially be.
Her new Quilter adviser has made a recommendation for a new DGT. The funds are already invested in a new bond and they are waiting for underwriting on the new discount to be complete.
Please can forum members help me by clarifying my thinking on worst case scenarios here?
So far, I’ve got the following:
The new DGT takes her cumulative CLT value over £325k within the last 7 years creating an immediate 20% IHT charge on the excess
I believe the most likely trust structure is that she and her two daughters are trustees, and her daughters and grandchildren are potential beneficiaries. The trustees have created a breach of trust by using capital she is not entitled to to purchase her current property, which is in her sole name. While her daughters are unlikely to sue, her grandchildren may not be so amenable as they get older.
What else could arise out of this car crash of a situation?
I am currently helping a friend manage and dismantle a DGT that has served its purpose. It is typical of the genre so I will assume your client’s is too.
I doubt the new DGT would involve a CLT as she would be the sole beneficiary of the settlor’s fund so her estate would not diminish.
That assumes that her settled funds belonged to her and as you surmise they might not because they were paid out to her as a trustee in the first instance. She might have been beneficially entitled to at least part of the money being the undrawn part of her settlor’s fund. But as you fear doubts may arise over who owns what assets the money has been used to buy.
You are self-evidently acting professionally by encouraging her to ascertain exactly what has happened and why it may come back to bite the family if she does not authorise that. Clients are often their own worst enemy and sometimes, like one’s own children they just have to make their own mistakes
That’s helpful, thanks Jack. As you say, you can lead a horse to water…. I’m being asked to take the family on as their financial adviser but I’m not sure I want to insert myself into this situation.
In my friend’s case the issue has been ignored for too long. The investment performance over three decades has been excellent. The settlor has been dead for 10 years. The settlor’s children all have pre-March 22 2006 IIPs and are in their 70s. PETS can be utilised but ideally it would have been done 10 years ago.
On the basis that the trust arrangement for the original DGT was a discretionary trust rather than a bare trust DGT, the transfer of funds to the DGT would be a CLT. Any further transfer of funds to a lifetime trust will be a DGT. So the lifetime charge is a consideration.
Ultimately the trustees would be responsible for the trust and the payment of funds out.
Working in financial services and having seen a fair few hundred of this type of trust the settlor is universally excluded from benefit other than their carved out right to the regular ‘income’ payment.
The providers will transact based on paperwork supplied, as in my experience they consider that the trustee is responsible for submitting the correct paperwork and their role is not to audit the operation of the trust.
The beneficiaries that have potentially lost out could take action against the trustees.
I would recommend legal advice on whether it is possible to rectify the original trust arrangement rather than create a new trust.
Thank you Gill. You have echoed my thoughts almost exactly. She has received an email from the existing adviser yesterday stating that because the previous trust has no trust assets, it no longer exists. That may well be the case, but it doesn’t negate the CLT which took place in 2018 and is still within the 7 year cumulative total. Or the fact that the trustees have made a payment to someone who was not entitled to receive it, although the fact that the trustees and the potential beneficiaries are probably one and the same reduces the likelihood of legal action against the trustees (although not to zero if one of the grandchildren took umbrage once they are of age and if they become aware of what has happened in time to do something about it).
I don’t follow this. If the settlor made a CLT originally it would have been a very strange kind of DGT, even one incompetently designed or drafted. The entire basis for such a trust was to ensure that the settlor did not make a transfer of value and, just as importantly, that they did not make a GROB. HMRC perhaps surprisingly accepted that the two separate funds, properly drafted, did not involve a reservation, though the settlor was the settlor of both funds. There was no original TOV because the settlor’s fund was held on a bare trust for the settlor. The settlement anti-avoidance legislation was not engaged because the investment growth in the beneficiaries’ fund was not income but quasi-income taxed under the chargeable events code. The plan encouraged settlors to settle more than they were otherwise prepared to give away.
It allowed the bond, a life policy with a single premium, or more usually a number of such policies, to be surrendered utilising the 5% pa facility, tax-free because treated as a return of capital i.e. the premium.
The beneficiaries’ trust was usually before March 22 2006 a qualifying IIP trust. That might not always be clear and either mistakes in the drafting could be made or its consequences misunderstood or unintended Qualifying IIP or not?. It could have been a bare trust or a deliberate DT but that was not usual. After that date any new beneficiaries’ trust had to be a RPT unless it was a bare trust. Existing QIIP trusts were not automatically converted to RPTs. That put new settlors off unless they aimed to game the RPT rules e.g. 0% rate in first 10 years where the settlor had no prior cumulation and 0% even later depending on investment performance.
Please note the contents of this article for the operation of a post 22 March 2006 Provider IHT planning product discounted gift trust. The value of the discounted gift settled on the discretionary trust will fall within the CLT regime and the trust will fall within the RPR. So care needs to be taken on the initial discount and subsequent discount at the 10 year charge points. The only right of the settlor is to the carved out right and the the underlying bond value.