I am trying to ascertain the IHT treatment of a trust based pre-paid funeral plan. I understand that they are common place with the large funeral providers, so this is not unique.
The basic model would appear to be a standard discretionary trust. This would suggest that contributions would be regarded as chargeable lifetime transfers and the trustees would be subject to 10 year anniversary and exit charges. However, given the number of investors and the fact that trust based pre-paid funeral plan is heavily influenced by actuarial valuation there could be special rules/exemptions.
I have unable to find any guidance on the subject and HMRCās technical department were reluctant to comment.
Surely there is no transfer of value? The payment is for a future service. IHTA s10 applies
Within the trust-based plan there could, in theory, be exit and 10-yearly charges, but every single contributor would be a separate settlor (IHTA s44(2)). One would have to be planning a very grand funeral for the value of oneās contributions to be above Ā£325,000, although, technically there could be an issue if the contributor had actually used his whole nil-rate band in gifts to family trusts in the preceding seven years.
If the plan is set up appropriately, I agree with Anthony, as it is a
commercial arrangement, and there is no bounty.
However, some schemes (hopefully now only historic) created
inappropriate rights for the plan subscribers, resulting in potential
for IHT charges to arise, and for the income in the plan to be
attributable to the plan holders.
If in doubt about any particular plan, I suggest the plan provider be
specifically asked to confirm the tax status of the scheme in respect of
IHT, income tax, and CGT. Hopefully they will provide reassurance,
rather than duck the question.
I have been involved in drafting a couple of these sorts of trust arrangements over the years. It is more in the nature of an escrow arrangement than a trust and anyone who just drafts a simple discretionary settlement with a few extra terms tagged on is probably not doing justice to their instructions. The trust must comply with the relevant provisions in The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (which I suspect were not drafted by someone with any real knowledge of trusts). The order stipulates inter alia that the provider must undertake to secure that sums paid by the customer under the contract will be held on trust for the purpose of providing the (contracted for) funeral. Of course, purpose trusts donāt exist in English law so you canāt take that part of the legislation too literally; but equally it doesnāt sound to me as though the trustees are supposed to have a lot of discretion about what they do with the money paid over to them.
The IHT consequences are worth pondering but for the reasons given above they donāt seem to cause anyone a loss of sleep. The position was different pre-2006 when, if the trust was viewed as an IIP trust, and if a close company (the funeral provider) were the beneficiary of the income, the payment of funds out of the trust could give rise to a chargeable transfer by the shareholders (under the IHT rules applicable to close companies).
The other very salient question to consider is the income tax consequence of this sort of arrangement. Working out who the income belongs to is not easy - it may depend on a future contingency. For example, usually, the settlor is entitled to have his money back with interest if he cancels his contract. So perhaps the income belongs to him? But it would be an administrative nightmare for the operator of the plan to send an R185 to every customer once per year (who could then claim the tax from the trust - after having obtained a certificate as to the amount from HMRC!). Obviously that result is best avoided, but doing so requires a fair degree of thought concerning the terms of the trust and the wider arrangement which it supports.
Interestingly, similar trusts can be created to hold deposits paid to travel operators so as to provide assurance that the deposit will be used for the purpose for which it was paid (i.e. as an alternative to ABTA bonding). As you might expect, the relevant rules in the Package Travel Regulations do not mirror the rules for funeral plan trusts so unfortunately you canāt simply top and tail one trust document so as to create the other.
Surely the clients (those ābuyingā a funeral plan) have no intention themselves of settling money in trust. They are relying on the Funeral Provider to do as advertised; that is, to ring-fence the funds required to meet its contractual obligation. The funds still belong to the Funeral Provider, and any income or gains derived therefrom must surely belong to the Funeral Provider in reality and for tax purposes.
Iām not sure any income or gains on the funds would be taxed in the hands of the Funeral Provider, given that there should be a true separation between provider and trust to ensure regulation isnāt required.
As Paul Davies suggests, the situations with regard to the funeral plans are not dissimilar to the arrangements used as an alternative to ABTA bonding, or even the CAA bonding. In each case the terms of the arrangement between providers may be subtly different and, certainly, the earlier ones appear to reflect little recognition of any taxation consequences (having been drafted by commercial lawyers with little apparent trust knowledge).
It is not unusual for the plans to be structured to keep the future liability off the providerās balance sheet, as this might otherwise require the liability for each funeral to be re-assessed on a regular basis ā an onerous task.
In many schemes the income accretion is intended to help fund any increased costs of providing the funeral and may, or may not, be transferred to the funeral provider on an annual basis. I believe that more often they remain within the ātrust fundā with the funeral provider taking out only the costs of the funerals that have happened, and any refund where a client has withdrawn from the plan. In such cases, the documentation may provide the income accrues to the funeral provider, not the plan member.
In general, the plan memberās rights are contractual between them and the funeral provider, and they are not party to the trust arrangement, even though in some trust deeds they are clearly the settlor as the funeral provider is acting merely as a bare trustee when setting up the arrangement (which likely conflicts with the underlying contractual arrangement between the client and the funeral provider).
Few, if any, clients would even suspect there to be any tax consequences upon them of entering into a funeral plan.
Anyone looking at the consequences of the trust created should look at those terms together with the terms and conditions of the contractual arrangement between client and funeral provider. They may find that the underlying client only has an entitlement to anything if the funeral provider goes into liquidation. Until then, the monies are held upon the instructions of the funeral provider. I appreciate this does not address the taxation aspects, but they will merely follow on from identification of the beneficial interests. As identified above, unfortunately, every scheme might have a subtly different outcome.