We are dealing with the administration of an estate, where, under the terms of the Will, the residue flows onto a discretionary trust.
Now that we are passed the two year period from the date of death the trustees wish to provide for the principal beneficiary by way of a revocable life interest.
Before the changes to the taxation of dividends we would have considered passing the funds to a broker to invest to produce dividends on which the trustees (following the appointment of the life interest) would have no further liability to tax. We would then have approached HMRC for dispensation from completing the yearly tax returns.
However, with the new rules on the taxation of dividends, this no longer seems appropriate as the trustees wish to keep the annual compliance to the absolute minimum. It has been suggested that a single premium investment bond could be used to provide regular amounts to the life tenant within the 5% limit. We are of course aware that the withdrawals from the single premium bond will be returns of capital but the trustees do have the power to pay capital under the terms of the Will. As the beneficiary will receive capital they will not need to consider it for their own tax purposes.
The payments will be exits for the purpose of inheritance tax but we do not consider any returns will be required under the excepted settlements regulations of 2008. Further, as there is no natural income arising to the trustees nor will there be any capital gains we do not consider that the trustees will need to file annual self-assessment returns or even, notify HMRC of the existence of the trust for income tax and capital gains tax purposes until an event arises whereby the trustees become liable to tax.
This seems a rather neat solution to the problem of the increased compliance following the recent changes to dividend taxation. Have other forum members considered this or have any experience of doing this?
Nigel Scase
Greene & Greene
I am not sure this is necessary, as hmrc still anticipate income including dividends can be mandated. Provided this is treated as dividend income in the hands of the beneficiary there should be no problem.
If you go down the investment bond route, you should revoke the life interest, as otherwise the trustees will be acting in breach of trust.
Simon Northcott
Is there any need to appoint a life interest if the trustees will be exercising their discretionary powers of capital in any event and if there is no intention for there to be much/any income?
As Simon Northcott points out, there might technically be a breach of trust if the trustees invest in a way that actually produces no income. The breach might be mitigated by an agreement that the trustees will make compensatory capital distributions, but this does not seem ideal and could lead to other complications.
Paul Davidoff
Bircham Dyson Bell LLP
There is nothing particularly neat about this solution. It implicitly raises issues of equity.
If the advisor invested the fund would he be able to achieve an income yield of 5%? If not, you are benefitting the life tenant. Maybe you want to do this, but I think a positive decision has to be made.
If you do this the 5% is capital and after 20 years that capital will be exhausted and the whole amount surrendered from then on will be a chargeable gain. A healthy life tenant has a good chance of having a 90th birthday party.
What happens when the bond is eventually surrendered? If it is surrendered in the trust, the trustees will be taxed at the trust rate on the gain based on the initial cost less the capital distributions already made. If it is passed to the remaindermen they will be taxed on the same gain subject to top slicing relief? You are therefore, potentially at least, passing a tax liability which you might consider to properly belong to the life tenant from the life tenant to the remaindermen.
These are actually quite major decisions, and while it may simplify several tax issues now, one can see that you are maybe creating future complications.
This course of action makes several decisions implicitly, which I feel ought to be made only after due consideration.
Ian McKeever
Ian McKeever & Co Consulting Actuaries