I have a client who is a widow. He has a life insurance policy and wishes to benefit his two adult children. One of his children lives overseas.
He is looking to limit IHT. My immediate thought is to put it into trust but he has been advised by an accountant that he should assign the policy.
The assignment would be a lifetime transfer for IHT purposes . The transfer will be a PET . Obviously the children would own the policy . Placing it is trust would be the same for the purpose of IHT.
Just wondering if there are any mayor advantages of placing the policy in trust trust over the assignment or any thoughts you may have.
Broadly, the IHT outcome is the same either by assignment by deed or assignment to trust. As you suggest a PET, the value being the surrender value of the policy or the premiums paid / depending on type.
DOA are typically absolute (the providers deeds are), the trust route would provide more flexibility to change beneficiaries.
I’d suggest there is no right/wrong way, the main issue would fall on the client requiring flexibility or content with absolute assignment. The implications of a predecease usually needs some thought.
It may depend upon the current value of the policy.
An absolute gift to the children will be a PET, but a transfer into trust will be an immediately chargeable transfer.
If the current value of the policy is within the client’s available nil rate band, both will have a similar effect for IHT (provided the client makes no further immediately chargeable transfers), falling out of account 7 years after the gift was made. However, a trust offers greater flexibility as a decision can be made at a later date perhaps to benefit grandchildren rather than just the client’s children.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
Just because a child lives overseas it does not follow that their UK tax status is more favourable and they may be exposed to the tax regime of another jurisdiction. But if it is more favourable overall it may be better for that child to have an assignment of the asset and carry out their own planning in relation to it rather than have the parent put the asset in a UK-based arrangement with long-term UK consequences. A simple point: the chargeable event income tax effects are quite different as between the policy being owned by a UK resident trust and a non-resident individual. As ever the data is too sparse to say more.
It is unclear whether the policy is a qualifying (term, whole life or endowment) or non-qualifying (eg single premium bond) policy for UK tax purposes. If qualifying, presumably there is one life assured namely the person who is currently the beneficial owner. There is no indication of the various ages of the parties.
It seems that the policy was taken out for the childrens’ benefits, although not settled for their benefit, and not as part of a provision for cash to settle any IHT arising on death.
Assuming qualifying, if the main objective is simply provision of monies for the children an outright assignment would probably be the better option. If this is not the case, and it is unclear as to the future, the trust option may offer extra flexibility. Under either scenario, the policy proceeds fall outside the assured’s estate on death for IHT.
If the policy is non-qualifying the UK tax issues are more complicated.
For any assignment of the equitable interest a decision needs to be taken as to whether whether the beneficial interests of the children are to be held as joint beneficial tenants or beneficial tenants in common.
Overseas tax implications need also to be considered for the non-resident child as will the legal implications of any assignment.
If a minor dies owning a valuable asset it must pass under English Law on his intestacy as he or she cannot make a valid Will unless the active service exception applies. If the minor has no child the asset will pass to the minor’s parents in preference to any siblings. This may not be what the donor had in mind at all.
A trust can provide greater flexibility for a minor donee than an outright gift.
A gift in trust can be made contingent on surviving to a specified age, whether 18 or higher. If the minor dies before that age there can be a gift over to siblings, cousins or indeed anyone; or an overriding power of appointment can be employed for even more flexibility with the minor having a vested life interest and being an eligible object of the power. That power can be used by the trustees to regulate the flow of capital to the minor and the income too if s31 TA 1925 is excluded; in this way the minor can be protected from him or herself and from the influence of “unsuitables”, if need be, even after majority, and capital can be diverted and passed down one or more generations.
Tax considerations loom large but available flexibility over who receives income can minimise income tax. A lifetime trust must now be a relevant property trust for IHT requiring management of that tax on distributions and 10 year anniversaries, in the light of any available nil rate band; an absolute appointment under the power will be within that regime whether it goes to the main beneficiary or another one. So if a life tenant is thereby deprived of capital it will not be a personal chargeable transfer. In fact a full discretionary trust operates to like effect for IHT (and for income tax too if s31 is excluded in a life interest trust).
It may be if the donor can inject a full or near full nil rate band into the trust that the future IHT exposure will be nil or modest and provided the trust property is not completely illiquid able to fund any IHT charges. This will depend on the donor’s personal IHT cumulation before the date of the gift into trust and the then value of the asset and whether that value increases over time.
The gift into trust cannot be a PET but a “chargeable” transfer will not attract an IHT charge if covered by annual exemptions and nil rate band. Both types of gift cease to cumulate after 7 years have passed.
Insurance companies’ own trust wordings may well suffice to document a reasonably basic trust which will keep down the set up costs but it will have to be registered with HMRC under TRS. And the trustees may need a soupcon of advice and assistance initially and from time to time which is not yet obtainable on the NHS despite popular misconceptions to the contrary.
If the value of the gifted asset is really modest a trust may just be more trouble than it is worth.