An adviser’s guide to the Discretionary Trust

Advisers – for use with customers Contents

Important notes 2

Reasons for putting a policy in trust 3

What is the Discretionary Trust? 4

Who is the Trust suitable for? 4

How the Trust works 5

The important features of the Discretionary Trust 5

Questions & Answers 6

Cautionary notes Back cover

Important Notes

This Guide gives basic information about the Friends Provident International Limited Discretionary Trust.

The Discretionary Trust is a trust which gives the full entitlement to the trust fund. In addition, the trust fund is held in a discretionary trust for the benefit of the ’ family. This allows for the beneficiaries to be changed if required.

As with all flexible lifetime trusts, the Discretionary Trust, will be treated as a “relevant property” settlement. The following is our understanding of the tax consequences of creating a relevant property settlement:

• The initial gift is a chargeable lifetime transfer (CLT) subject to at 20% to the extent that it, together with other CLTs made by the same Settlor in the seven years before creating the Trust, exceeds the current nil rate band. The gift will be the value of the policy that is gifted into trust.

• There is a potential liability on the trust to inheritance tax on every 10th anniversary. This is known as the “periodic charge”. At a maximum this will be 6% of the value of the trust fund but will frequently be much less than this.

• There is a potential liability to inheritance tax when capital leaves the trust (an “exit charge”) which will be linked to the rate of IHT paid at the last ten year anniversary or, if the capital leaves the trust in the first 10 years, when the trust was created.

• The trust fund will not form part of a beneficiaries’ estate.

It is our understanding that the amount treated as relevant property for the purposes of the lifetime charge will be the full value of the gift. A potential charge would only arise if this value, when added to chargeable transfers made by the Settlor in the seven years before he created the trust, exceeds the nil rate band at the time of any potential charge.

HM Revenue & Customs Reporting It is currently a legal requirement for any chargeable lifetime transfers that comprise of cash and cause the Settlor to exceed his/her nil rate band to be reported to HM Revenue & Customs (HMRC) on Revenue forms IHT 100, IHT100a and D34. These forms are available on the HMRC website at www.hmrc.gov.uk/cto/forms12.htm

The occasion of a periodic charge or exit charge also needs to be reported even if no IHT liability arises unless the cumulative total of the assumed transferor does not exceed 80% of the then nil rate band. The forms to use here, when relevant, are IHT 100c and d, and form D34.

Throughout this Guide, the term “spouse” also includes a civil partner for UK-domiciled individuals under the UK Civil Partnership Act 2004.

2 The Discretionary Trust

Reasons for putting a policy in trust

To make gifts and preserve wealth for future generations

A trust can be used to preserve wealth for future generations. By placing assets in trust, the creator of the trust (the Settlor) can provide a degree of financial security for the immediate family and beyond. A suitable trust can offer parents and grandparents peace of mind as regards the well-being of future generations.

A trust allows the Settlor to determine (through the trust deed) how the trust assets should be distributed in the future. This is especially useful where the beneficiaries are minors as it allows the to determine when and to whom the benefits will be paid.

To avoid delays If a policy is not written under trust, the value of the policy will form part of the policyholder’s estate should the policy come to an end as a result of the death of the policyholder. This means the proceeds from the policy will not be available until the will has been verified and a Grant of Probate issued. Where there is no will, the policy will be subject to the rules of and, again, delays may be experienced in distributing the proceeds of the policy while letters of administration are obtained.

A policy written in trust is legally owned by the trustees. It does not therefore form part of the original policyholder’s estate on death. Accordingly, because the policy does not belong to the deceased, proceeds from the policy will be available for distribution to the trustees without the need for a Grant of Probate (subject to Friends Provident International Limited ’s normal administration procedures). By transferring a policy into trust, the time, cost and inconvenience associated with obtaining probate is removed.

To assist with tax planning Transferring an asset (such as an offshore life policy) into trust will change the legal ownership of that asset. This invariably changes the taxation of the asset, which creates a number of important tax-planning opportunities for the adviser to consider.

One of the most effective uses of the trust/offshore policy combination is inheritance tax mitigation. Friends Provident International Limited offers a number of trust structures that have been designed to reduce the exposure to Inheritance tax. A number of these structures allow the creator of the trust to have access to all, or a proportion of, the trust capital.

3 What is the Discretionary Trust?

A discretionary trust is one where the Trustees have full discretion on who will benefit and when. However, the Settlor has full access to the trust fund during his or her lifetime. On the death of the Settlor, the trust fund is held under a discretionary trust for the benefit of the discretionary beneficiaries.

Who is the Trust suitable for?

The Friends Provident International Limited Discretionary Trust is suitable for investors looking for the following:

• To avoid the need for probate should the policy come to an end as a result of the death of the sole or last surviving life assured.

• To receive regular or one-off capital payments.

• To provide capital for a discretionary class of Beneficiaries on the death of the Settlor.

• Access to a wide range of investment funds that offer greater potential for capital growth over the medium to long term.

4 How the Trust works

Getting started Your client creates a Discretionary Trust, appointing Trustees. The Settlor provides the capital for the Trust, but sends this direct to Friends Provident International Limited. The Trustees invest this capital into a Friends Provident International Limited policy. The Discretionary Trust Deed is available separately.

Tax-efficiency of policies held in a Discretionary Trust The Trustees are able to take 5% withdrawals from the policy each year, free from an immediate charge to income tax. If more than 5% per year is withdrawn, the excess will be subject to income tax and may reduce any age-related personal allowances or tax credits if your client is resident in the UK.

• Investment switches within a Friends Provident International Limited policy create no liability to Capital Gains Tax, either for the Settlor or the Trustees.

• Life policies are deemed to be ‘non-income producing’ assets and therefore considerably reduce the administrative duties of the Trustees.

• The combination of these tax benefits make policies such as those available from Friends Provident International Limited the ideal investment choice for a Discretionary Trust.

The important features of the Discretionary Trust

• Avoids the need for probate should the policy come to an end as a result of the death of the only (or last surviving) life assured.

• Access to capital from the policy in the form of regular cash withdrawals • Cash withdrawals up to 5% of the initial investment each year tax deferred (UK resident policyholders only)

• The trust provides for a wide class of discretionary Beneficiaries • Access to Friends Provident International Limited’s policies, all of which accrue in value without the impact of UK tax (apart from any withholding tax) thus enabling the Trustees to maximise their prospects for investment growth

• The policy can be effected as a number of segments – a further valuable option for further financial planning.

5 Questions & Answers

The following address many typical questions you may have in relation to the Discretionary Trust. The Policyholder is referred to as “the Settlor” (i.e. the person who creates the Trust).

Who is the Discretionary Trust suitable for? The Trust is suitable for individuals who may require full and unrestricted access to the capital invested, if required, otherwise for the benefit of a large class of discretionary Beneficiaries.

What are the main benefits of the Discretionary Trust? It enables the Settlor to:

• avoid the need for probate

• receive a tax-efficient flow of capital payments (in the form of regular withdrawals)

• provide long-term benefits to a wide class of discretionary Beneficiaries.

How is the Trust set up? The Settlor sets up the Trust and the Trustees apply for a Friends Provident International Limited policy. The Settlor pays the premium for the policy direct to Friends Provident International Limited.

Can an existing policy be assigned to the Trust? Yes. The Trust is suitable for new and existing policies.

Who is the Settlor? The person who establishes the Trust, and assigns the policy into Trust.

Can spouses set up the Trust jointly? Yes, there can be joint Settlors.

When and whom should the Settlor appoint as Trustees? The Settlor must name the Trustees when he executes the Trust document. The appointed persons must be aged 18 or over, of sound mind and not bankrupt, and must have the confidence of the Settlor – these are normally trusted family members or a corporate . It is essential that at least two Trustees are appointed, with a maximum of four.

What is the role of the Trustees? The Trustees are responsible for administering the Trust fund in accordance with the terms of the Trust. The Settlor is automatically a Trustee.

Can Beneficiaries be appointed Trustees? Yes, as long as they are aged 18 or over, of sound mind and not bankrupt. However, care should be exercised in advance, as the would then have a say in how the Trust is administered.

Can new Trustees be appointed? The Settlor has the power to appoint and retire Trustees, provided at least two remain. Any additional Trustee(s) (up to maximum of four) will assume joint responsibility.

Who should be the Beneficiaries? The Trust contains a wide class of discretionary Beneficiaries from which the Trustees can choose.

Can Beneficiaries be changed? The Trust is a discretionary trust, which means the Trustees have full discretion on who they appoint as Beneficiaries.

6 On whose lives is the policy written? We recommend the policy is written on the lives of potential Beneficiaries from the wide class of potential Beneficiaries. This has the advantage of enabling the policy to remain in force for as long as possible. Subject to the limit explained in What is the maximum number of lives assured permitted under the policy? below, clearly the greater the number of potential Beneficiaries who are lives assured the greater the flexibility. As an alternative, it is possible under the Friends Provident International Reserve to select a Capital Redemption policy – see How does a Capital Redemption policy differ from a life assurance policy? below.

What is the maximum number of lives assured permitted under the policy? Friends Provident International Limited will permit up to four lives assured on a last-survivor basis.

How does a Capital Redemption policy differ from a life assurance policy? A Capital Redemption policy does not have lives assured and has a term of 99 years with a guaranteed maturity value. In terms of taxation, a Capital Redemption policy in trust is treated in the same way as a life assurance policy. This option is only available under Reserve.

Are further lump sum top ups permitted? Yes.

Can the Trustees pay the policy proceeds to the Beneficiaries before the Settlor dies? Yes, but the Trustees have a duty to pay the Settlor (who is the main beneficiary), and must take this into account.

Who is taxed? It is our understanding that if a chargeable event occurs, the tax will fall on the Settlor if UK-resident, or if the chargeable event occurs in the same tax year as the death of the Settlor. If the Settlor is non-UK resident, or has died in a previous tax year, then the tax will fall on the Trustees if any of the Trustees is UK-resident. If none of the Trustees is UK-resident, the tax will fall on any UK-resident Beneficiaries.

Is the Settlor immediately taxed on any cash withdrawals? If payment has been made via withdrawals, this is deemed a return of capital by HM Revenue & Customs. This means that if 5% of the premium per annum is paid to the Settlor this can be done up to a maximum of 20 years.

What is the tax position when the policy ends? • Chargeable event gains will be calculated by deducting the premiums paid from the surrender value of the policy. Any previous withdrawals will be added to the surrender value.

• Assuming the surrender occurs after the death of the Settlor and in the following tax year, based on our understanding of UK tax law, the income tax charge will fall on the Trustees if any of the Trustees are UK-resident; if not, on any UK-resident Beneficiaries.

Is the Trust caught by Pre-owned Assets Tax? No, it is not thought so as HM Revenue & Customs have confirmed in writing to the Association of British Insurers that Preowned assets tax will not apply to discretionary trusts. Friends Provident International Limited have also taken legal advice to confirm this.

Can the arrangement be wound up? Yes. The Settlor can take the benefits or request the Trustees to assign the policy ownership to him.

What happens on the death of the Settlor? The Settlor’s entitlement to the Trust Fund will cease. The Trust Fund will then be held for the benefit of the Beneficiaries.

7 Cautionary notes

The information given in this document is based on Friends Provident International Limited’s understanding of UK and Isle of Man tax law and HM Revenue & Customs practice as at September 2011, which may change in the future. Individuals are advised to seek professional independent advice and no liability can be accepted for the personal tax consequences of this Trust or for the effect of future tax and legislative changes.

It is important to appreciate that although Friends Provident International Limited has sought the views of leading Tax Counsel on the tax implications of the Trust and he has confirmed that the arrangement does not, in his view, constitute a gift with reservation of benefit within the meaning of the Finance Act 1986, nor does it fall within the definition of a settlement in s43 of IHTA 1984, no guarantee can be given that (albeit unlikely) HM Revenue & Customs will not take a contrary view or that tax legislation will not change in the future. As the value of units can go down as well as up, due regard must be given to the level of possible future growth in the policy when selecting the level of capital repayments required. A high capital repayment may not be thought advisable, at least in the early years following the commencement of the arrangement.

Investment involves risk and each class of investment will involve its own individual level of risk. We recommend that you discuss specific risks associated with individual investments with your clients before making any investment decisions.

Fund prices may go up and down depending upon the underlying investment performance or, where investments held within a fund are not denominated in the currency of that fund, simply because of movements in currency exchange rates.

All fund performance is quoted net of annual charges. However, fund performance should not be viewed as an indication of future performance – the value of the investment cannot be guaranteed and your clients may get back less than they paid in.

Each policy is governed by and shall be construed in accordance with the law of the Isle of Man. If your client effects a policy whilst resident in the United Arab Emirates, all disputes regarding the policy shall be subject to the non-exclusive jurisdiction of the courts of the United Arab Emirates.

Some telephone communications with the Company are recorded and may be randomly monitored or intruded into.

All policyholders will receive the protection of the Life Assurance (Compensation of Policyholders) Regulations 1991of the Isle of Man, wherever their place of residence.

Investors should be aware that specific investor protection and compensation schemes that may exist in relation to collective investments and deposits accounts are unlikely to apply in the event of failure of such an investment held within insurance .

Complaints we cannot settle can be referred to the Financial Services Ombudsman Scheme for the Isle of Man.

A written statement of the policy terms and conditions of the products may be obtained from Friends Provident International Limited on request.

Copyright © 2011 Friends Provident International Limited. All rights reserved.

Friends Provident International Limited Registered & Head Office: Royal Court, Castletown, Isle of Man, British Isles, IM9 1RA Telephone: +44(0) 1624 821212 Fax: +44(0) 1624 824405 Website: www.fpinternational.com Incorporated company limited by shares Registered in the Isle of Man No. 11494 Authorised by the Isle of Man Insurance & Pensions Authority Provider of life assurance and investment products Authorised by the Office of the Commissioner of Insurance to conduct long-term insurance business in Hong Kong Registered in the United Arab Emirates as an insurance company (Registration No.76) and as a foreign company (Registration No. 2013) Authorised by the United Arab Emirates Insurance Authority to conduct life insurance and savings business Registered in Singapore No. F06835G Authorised by the Monetary Authority of Singapore to conduct life insurance business in Singapore

XIM/DT/ADGUIDE 09.11