FOR FINANCIAL ADVISERS ONLY TECHNICAL

GUIDE TO TRUSTS

INTRODUCTION All our trusts are ‘Pre-owned The taxation information set Assets Tax’ (POAT) friendly. They out in this guide is based on our This booklet is intended as a are all governed and construed understanding of the general practical guide for advisers who are according to the law of the Isle of application of Her Majesty’s considering the use of an offshore Man. Therefore, the courts of the Revenue and Customs (HMRC) plan in conjunction with a trust to Isle of Man shall have exclusive practice as at March 2021. assist the planning and arrangement jurisdiction to hear all disputes of their client’s investment affairs. concerning these Trusts. The contents of this booklet and In particular, it will be of use to any trust wording provided by us those wishing to enhance the Our trusts are offered free of charge should not be used as the basis of benefits offered through the range to our clients and ongoing support advice given to individual clients of products designed to meet the is provided by our Technical Team without independent legal advice needs of both UK domiciled and who will assist and provide support being sought. We cannot be held non-UK domiciled clients. in respect of any trust and tax responsible for any actions taken related queries. or refrained from being taken Significant and controversial by individuals as a result of the changes to the Inheritance Tax information provided in this guide. treatment of trusts were contained within Schedule 20 of the Finance Act 2006. Subsequently, since 22 March 2006, trusts may be broadly divided between those trusts which come under the mainstream Inheritance Tax regime for ‘Relevant Property’ trusts and those which do not. ‘Relevant Property’ trusts are taxed as ‘Discretionary Trusts’. The changes were made to ensure that the Inheritance Tax treatment of trusts were streamlined so that all trusts are treated in the same way, with some limited exceptions.

As a consequence of these changes, we offer the choice of establishing a trust on either a ‘Bare Trust’ basis or a ‘’ (flexible) basis, in order to accommodate the needs of a wider range of investors.

This guide will help advisers to understand not only the implications of choosing a particular trust but also to understand the reasons behind why an individual may need to create the trust on either a bare or discretionary trust basis.

1 WHAT IS A TRUST? the exception of the Discounted classes of discretionary and named Gift Trust, our trusts do not beneficiaries. Alternatively, if a Put simply, a trust is a legal automatically appoint the settlor client establishes a bare trust, arrangement where property/ as a . However, the settlor there will be no discretionary assets are held by someone, ‘the can appoint him or herself as a beneficiaries and instead the settlor ’, on behalf of someone trustee and additional trustees will appoint one or more absolute else, ‘the beneficiaries’, subject to could include family friends, family beneficiaries. The differences the terms of the trust. members, professional advisers or between these three types of a trust corporation. Beneficiaries are explained next. WHO ARE THE PARTIES TO A may also act as trustees although TRUST? care should be exercised to avoid Discretionary any potential conflicts of interest. ‘Discretionary beneficiaries’ is the Settlor name given to beneficiaries of a The settlor is the provider of the When accepting the role of trustee, discretionary trust. They may only funds for the trust. A settlor can it is important that the trustees fully benefit from the trust funds at also be a beneficiary of his or her appreciate the terms contained the trustees’ discretion and could own trust although this would within the trust deed and the legal also be excluded from benefiting represent a ‘gift with reservation’ principles which govern the trust. at a future date. The death of a and therefore would generally The Isle of Man Trustee Act 2001 discretionary beneficiary does make the trust ineffective from updated the statutory powers and not have any Inheritance Tax an inheritance tax perspective. duties of trustees contained in implications for the trust. Although some of our trusts allow the Isle of Man Trustee Act 1961. for joint settlors, this option should Although the full provisions and Named (where applicable) only be chosen where both parties implications of this Act are outside A named beneficiary has an are the providers of the funds, or the scope of this guide, under this entitlement to income but joint plan owners in the case of an Act trustees have a statutory duty not capital. In the event that existing plan. of care when carrying out their the trustees do not make an duties as well as a duty to act in the appointment of capital during the Trustees best interests of the beneficiaries. lifetime of the trust, the trust fund Trustees must be at least 18 years would default to those individuals of age, of sound mind and should Beneficiaries who are named in the trust deed be not bankrupt. Beyond that, as These are the beneficial owners of as named beneficiaries in the the name implies, trustees should property held within the trust. If a percentage shares stipulated in principally be people whom the client establishes a discretionary the trust deed. settlor feels can be trusted. With trust, the trust will appoint both Absolute An ‘absolute’ beneficiary is the name given to beneficiaries of a bare Trust. An absolute beneficiary will have an outright entitlement to capital from the trust and is able to demand payment of their share of the trust fund once they reach the age of majority.

If an absolute beneficiary dies, the portion of the trust fund belonging to him or her forms part of their estate for Inheritance Tax purposes.

Therefore, after the beneficiary’s death, his or her share must be passed to his or her estate to be distributed in accordance with the terms of the will or via the laws of in their particular jurisdiction. If a client establishes a bare Trust it is not possible to change the absolute beneficiaries.

2 WHY USE A TRUST IN As long as there is a surviving settlor’s estate for Inheritance Tax CONJUNCTION WITH AN trustee, proceeds of the plan purposes depending upon the type OFFSHORE PLAN? can therefore be paid to the of trust chosen. beneficiaries without delay. There are various reasons why As you will see later in this guide, an individual might wish to To control family assets we offer a range of trusts which place their plan into a trust Trusts have an advantage over can be used to mitigate UK or invest through a trust into an outright gift as the donor inheritance tax. a plan. The most common can exercise a degree of control reasons are listed below: and can still have access to Inheritance Tax planning for non- capital in some limited cases. UK domiciled individuals To avoid Isle of Man Many investors wish to set aside An individual who has been a Any plans issued in the Isle of Man assets for the future benefit of long term resident of the UK for are classed as Isle of Man assets members of their family whilst income tax purposes but is not and Isle of Man Probate will be restricting beneficiaries’ access UK domiciled or deemed UK required on the death of the last until it is thought appropriate domiciled may wish to consider plan owner before either proceeds that those assets should be the establishment of an Excluded can be paid out or the plan is distributed. If the plan is written Property Trust in which to hold re-registered into the name of in a discretionary trust, the their offshore plan. the new owner. Grant of Probate/ trustees can be instructed to hold Letters of Administration refers to the plan until the beneficiaries This is because non-UK domiciled the situation where, on a person’s reach a certain age or for future individuals who are likely to remain death, the court must confirm that children or grandchildren. in the UK in the medium to long the executors are entitled to deal term can avoid future liability to with the deceased’s estate before Inheritance Tax planning for UK Inheritance Tax on non-UK assets any assets can be distributed. domiciled individuals if those assets are placed in trust For individuals who are domiciled prior to becoming resident in the If a plan is placed into trust, legal or deemed domiciled in the UK for 15 out of the last 20 tax ownership lies with the trustees UK, Inheritance Tax applies to years (i.e. whilst the individual is and Isle of Man Probate will not their worldwide property and still non UK domiciled). be required on the Settlor’s death. would therefore include offshore Therefore, this can help to provide investments. By arranging for the The trust assets will remain privacy, as unlike trusts, Grant of offshore plan to be held under trust, excluded property for as long Probate/Letters of administration all or part of the proceeds from as they remain in trust and are records are available to the public. the plan may be removed from the situated outside the UK (e.g. an offshore plan.

If an individual wishes to establish an Excluded Property Trust then please refer to our Excluded Property Trust Guide.

INTRODUCTION TO INHERITANCE TAX

Where an individual is UK domiciled or deemed UK domiciled for Inheritance Tax (IHT) purposes, their worldwide assets are potentially subject to IHT at a rate of 40%. Generally speaking, IHT is the tax payable on an individual’s estate when they die if the value of their estate exceeds the inheritance tax threshold which is known as the nil rate band (currently frozen at £325,000 until April 2026).

An additional allowance may also be available which is called the Residence Nil Rate Band (RNRB).

3 This is available for deaths on or after 6 April 2017, where the deceased owned a home, or a share of a home which was lived in by the deceased and is inherited by their direct descendants.

The home or share of a home does not need to have been their main residence at the time they pass away.

The RNRB allowance for individuals is £175,000 and will be frozen at this level until April 2026.

If the value of the home is less than the RNRB allowance, the amount that the estate can claim is limited to the value of the home.

The RNRB tapers away by £1 for every £2 where the estate A PET is where a lifetime transfer the gift was made at its value at exceeds £2 million (i.e. will not is made outright to another that time. be available for the 2021/22 tax individual or where the gift is year where the estate exceeds being made to a bare Trust (also Taper relief provides that if a donor a total value of £2.35 Million). known as an ‘absolute Trust’) or a survives for at least three years trust created for a disabled person after making a PET or CLT only If there is any RNRB allowance that (as defined under section 89(4) a reduced percentage of the full hasn’t been fully used when the IHTA 1984). If a donor survives death rates will be used as follows: first person in a marriage or civil the potentially exempt transfer by partnership dies, the unused part seven years, it will be outside of Complete years Percentage of can be transferred to the estate their estate for IHT purposes. between gift full charge at of the surviving husband, wife and death death rates or civil partner when they die. A CLT is where an individual 3-4 80% establishes a discretionary trust This still applies, even where for the benefit of a wide range 4-5 60% the first spouse or civil partner of beneficiaries. A CLT is not 5-6 40% died before 6 April 2017. immediately chargeable to IHT providing there is an available Nil 6-7 20% However, where the deceased has Rate Band against which it can moved to a less valuable home, be offset. Any amount of the CLT Although the taper relief reduces or ceased to own a home after 8 which exceeds the available nil rate the amount of tax payable, it does July 2015, a downsizing addition band is chargeable immediately. not reduce the value of the gift. can be claimed if the former home would have qualified for On the death of an individual, the It is important to remember the RNRB if it had been kept. seven year period prior to death is that all transfers between UK reviewed to see what gifts have been domiciled spouses are completely Lifetime gifts can generally be made. If during that period a CLT has exempt, unless the donor is classed into three main categories been made, it is then necessary to domiciled in the UK but the – exempt transfer, potentially review the seven years prior to the donee is not, in which case the exempt transfer (PET) or a CLT in order to ascertain whether exemption is limited to £325,000. chargeable lifetime transfer (CLT). or not there was an available nil rate This is in addition to the £325,000 band available at the time of the CLT. IHT NRB available to the estate of An exempt transfer is free from This is why, potentially, there is a 14 the UK domiciled spouse, so up-to inheritance tax. An example year period under review when an £650,000 could be left to the non of an exempt transfer would individual dies. UK domiciled spouse. be a gift made from one UK domiciled spouse to another PETs and CLTs take their Despite the changes announced UK domiciled spouse. chronological position for in the Finance Act 2006, many cumulative purposes at the time lifetime gifts made from small to

4 medium sized estates will generally inheritance tax unless there was an If the trustees pay the tax, this is still fall within the nil rate band. available nil rate band with which to payable at a rate of 20%, however, if In many cases therefore, lifetime offset against the value of the gift. this is instead paid by the Settlor(s), inheritance tax planning using the rate payable is grossed up to trusts can still be carried out Any growth on the value of 25%, under the loss to the estate without an immediate inheritance the gift is immediately outside principle (i.e. by paying the tax, tax charge arising. Provided the of the settlor’s estate for HMRC have lost out on inheritance donor survives for seven years and inheritance tax purposes. tax due from the estate). undertakes no further IHT planning during this period which would The value of the trust fund Where the nil rate band was impact on the availability of his or will form part of the named exceeded on the creation of the her nil rate band, the full nil rate beneficiary’s estate for IHT trust, there would be further IHT band will be available again. purposes. to pay if the settlor died within the seven year period. One potential strategy which could THE INHERITANCE TAX be utilised, is for individuals to make TREATMENT OF DISCRETIONARY If a Settlor survives for seven years, lifetime gifts up to the value of the (FLEXIBLE) TRUSTS the Chargeable Transfer drops out nil rate band every seven years. of their cumulation period. Any gifts made in between those The creation of the trust is a years could be to utilise exemptions chargeable lifetime transfer (CLT). As a result, the value of the gift such as the annual exemption for will then be outside the settlor’s gifts or the normal expenditure It is possible to utilise the current estate for IHT purposes. All out of income exemption. It is of year’s annual exemption of £3,000 investment growth (if applicable) course also possible to establish a and the previous year’s annual is immediately outside the bare trust where no nil rate band is exemption where they are still Settlor’s estate. available at that time. available, in order to reduce the value of the gift. The trust will be assessed for IHT THE INHERITANCE TAX at every tenth anniversary at a TREATMENT OF BARE TRUSTS If the amount of the gift is within maximum rate of 6% on the excess the settlor’s available nil rate of the value of the trust fund over The creation of the trust band, there is no immediate and above the nil rate band at that constitutes a potentially exempt charge to IHT. time. transfer (PET). A CLT is immediately subject to Distributions from the trust may If the settlor survives seven inheritance tax, if the cumulative trigger an IHT exit charge. years from the date of the value of gifts to discretionary PET then the gift becomes trusts in the last 7 years exceeds There will be reporting exempt from Inheritance Tax. the individual’s available nil rate requirements to HMRC. band at the time. This applies If the settlor dies within this period, to the excess of the cumulative CHARGEABLE LIFETIME the value of the initial gift would value of gifts over and above the TRANSFER REPORTING TO HER become potentially chargeable to available nil rate band. MAJESTY’S REVENUE AND CUSTOMS

It is sometimes necessary for a CLT to be reported to HMRC. The relevant statutory instruments are the Inheritance Tax (Delivery of Accounts) (Excepted Transfers and Excepted Terminations) Regulations 2008 and the Inheritance Tax (Delivery of Accounts) (Excepted Settlements) Regulations 2008.

It is also necessary to submit an account to HMRC every ten years and also where monies leave the trust fund. The rules can be found in full on the HMRC website.

5 WHICH TRUSTS ARE AVAILABLE FOR SINGLE PAYMENT PLANS?

Is the client either UK domiciled or deemed UK domiciled?

Yes No

International Flexible Trust2/ Does the client wish to reduce Excluded Property Trust2/ their Inheritance Tax liability? Beneficiary Trust3

Yes No

Does the client require access to Isle of Man Probate Trust their capital?

Yes No

Does the client require FULL Would the client rather establish the trust under the access to their capital? Potentially Exempt Transfer (PET) or Chargeable Lifetime Transfer (CLT) regime?

PET CLT

Gift Trust Yes No Gift Trust (Bare) (Discretionary)

Would the client rather establish the trust Does the client wish to retain flexibility under the Potentially Exempt Transfer (PET) or as regards to the choice of beneficiaries? Chargeable Lifetime Transfer (CLT) regime?

Yes No PET CLT

Would the client like to Would the client like to Loan Trust Loan Trust (Bare)1 create a rainy day fund create a rainy day fund (Discretionary)1 alongside their PET? alongside their CLT?

Yes No Yes No

Discounted Gift Trust Discounted Gift Trust Discounted Gift Trust Discounted Gift Trust established on a Bare established on a established on a established on a Trust basis (choosing Bare Trust basis (not Discretionary Trust basis Discretionary Trust basis the option of the Access choosing the option of (choosing the option of (not choosing the option Fund) the Access Fund) the Access Fund) of the Access Fund)

1 Please note that the Loan Trust cannot be used for existing plans.

2  Trust to be created during the settlor(s) lifetime.

3 Trust to be created upon the death of the last surviving plan owner.

6 WHICH TRUSTS ARE AVAILABLE FOR REGULAR PAYMENT PLANS?

Is the client either UK domiciled or deemed UK domiciled?

Yes No

Is the intention to mitigate UK Inheritance Tax (IHT)?

Yes No

Are the beneficiaries to be Isle of Man Probate Trust fixed or discretionary?

Fixed Discretionary

Is the trust to be created during Gift Trust Gift Trust (Bare)* lifetime or upon death of the (Discretionary)* last surviving plan owner?

* The settlor is excluded from benefit. Lifetime Death

International Flexible The Beneficiary Trust Trust

THE ISLE OF MAN Key points to note • The trust should not be used as PROBATE TRUST • The creation of the trust is neither an excluded property trust for a Potentially Exempt Transfer or a non-UK domiciled individuals. This is a simple bare trust which Chargeable Lifetime Transfer. allows the settlor access to their The Isle of Man Probate Trust would • The beneficial owner is the sole investment during their lifetime. be suitable for individuals who: beneficiary. The sole purpose of the trust is to • want to retain access to their avoid Isle of Man Probate. • If the offshore plan is written on investment. a sole life assured basis, it allows • wish to avoid Isle of Man General features of the trust the plan proceeds to be paid Probate and ensure plan • The trust can have up to two to the beneficial owner’s estate proceeds can be paid without Settlors. without the need for Isle of Man further cost and delay. Probate. Alternatively, if the • The trust can be used for plan was written on more than • do not wish to create a existing plans. one life assured, or as a capital Chargeable Transfer or a • The trust can accept increments redemption plan, the ownership Potentially Exempt Transfer. to the Trust fund. can be transferred into the name of a chosen beneficiary (named in • Since the Settlor is the sole the beneficial owner’s will or via beneficiary, the establishment of the laws of intestacy) without the the trust is a ‘gift with reservation’ need for Isle of Man Probate on and therefore the value of the the death of the beneficial owner. trust fund will remain within the settlor’s estate for IHT purposes. • The trust will come to an end upon the death of the beneficial • The trust avoids Isle of Man owner. Probate.

7 THE GIFT TRUST The Gift Trust is suitable for Option 1 individuals who: Inheritance Tax arising on the Potentially The Gift Trust represents the • are UK domiciled or deemed UK Exempt Transfer on the creation of the simplest form of Inheritance Tax domiciled for IHT purposes. Gift Trust: planning in that the Settlor passes • can afford to gift away capital Amount of initial investment £500,000 property by way of a gift to the into trust with no requirement for future trustees for the benefit of chosen access. Less current year’s IHT annual £3,000 beneficiaries. exemption

Establishing the trust as a Bare Less last year’s IHT annual £3,000 Some individuals will have an exemption Trust would be suitable for aversion to making substantial individuals who: Less Inheritance Tax nil rate £325,000 gifts directly to their children. band of £325,0001 • wish to create a potentially For example, they may want the Chargeable to IHT £169,000 exempt transfer for IHT purposes. children to inherit the money at a later age when they are more • wish to avoid reporting Taper relief of 60% available as James died between years 5 and 6. So 40% of financially mature or they may requirements to HMRC. the death rate of 40% = 16%. want to gift away money without • have specific beneficiaries in 16% of £169,000 £27,040 it affecting the spouse’s access to mind. the funds. This trust will allow an Tax on remainder of estate at death: individual to make a gift without Establishing the trust as a Value of estate £600,000 relinquishing full control over the Discretionary (Flexible) Trust would Less inheritance tax nil rate £0 monies. band (already used) be suitable for individuals who: • wish to create a chargeable Less Residence Nil Rate Band £175,000 General features of the trust (RNRB)2 lifetime transfer for • The trust can be established with IHT purposes. Chargeable to Inheritance Tax £425,000 single or joint settlors. Tax at 40% £170,000 • wish to retain flexibility • The settlor is not automatically regarding their future choice Total tax due on estate & trust £197,040 included as a trustee. £170,000 + £27,040 = of beneficiary. • The settlor is not a beneficiary. Example • The trust can be used for existing Option 2 James is a UK resident property or new RL360 plans. Inheritance Tax on estate at death where owner and wishes to invest the plan was not written under trust. • The trust can accept increments £500,000 in an offshore plan. He to the Trust fund. has no intention of using this capital Plan value £638,141 in the future and requires no income • The trust avoids Isle of Man Balance of estate £600,000 from the investment. He ultimately Probate. £1,238,141 wishes the investment to pass to his two sons or their respective estates Less IHT NRB1 of £325,000 £500,000 & RNRB of £175,0002 should they have pre-deceased him at the time of his death. James has Chargeable to Inheritance Tax £738,141 two options. He can either: Tax at 40% £295,256

1. place the plan into a Gift Trust Total tax due on estate £295,256 established as a bare trust and - no trust used nominate his two sons as the beneficiaries; Placing the plan under the trust or would save the estate a total of 2. decide against the use of a trust £98,216 in Inheritance Tax. and leave the plan to his sons in his will instead. 1 The IHT nil rate band has been frozen at £325,000 until April What would be the difference in 2026. Inheritance Tax, should James die just over 5 years later? For 2 The Residence Nil Rate Band this example we assume that the (RNRB) has been frozen at plan has grown in value at 5% per £175,000 until April 2026. year, so is now valued at £638,141, with the remainder of his estate (including the property), being £600,000.

8 THE LOAN TRUST

The Loan Trust enables the Settlor to make a gift of the growth of their initial investment and still retain control over it.

General features of the trust • The trust cannot be used for existing plans.

• The trust allows for single or joint settlor. However, as you cannot loan money to yourself, there needs to be an additional trustee that is not a settlor.

• The settlor is not a beneficiary but is entitled to repayment of their loan.

• The creation of the trust is neither a potentially exempt transfer nor a chargeable lifetime transfer.

• Any growth on the value of the initial investment is immediately outside of the settlor’s estate for inheritance tax purposes.

• Any outstanding loan on the settlor’s death will form part of their estate for inheritance tax purposes.

• Assuming the level of loan repayments does not exceed the cumulative 5% per plan year, there is no immediate liability to full amount of the loan will remain monitor the position closely Income Tax. as an asset of the settlor’s estate. and ensure all repayments are recorded to avoid any breach of • If the settlor has taken loan • The trustees are responsible trust occurring through excess repayments then, to the extent for repaying the loan to the payment. that they have spent the money Settlor. It is likely therefore that on disposable items, their suitable trustees would include • The trust avoids Isle of Man taxable estate will be further the settlor’s spouse/partner Probate. reduced. Spending or gifting and or other family members Discretionary Trust – key points the loan repayments is therefore rather than professional trustees. to note absolutely critical to the success In practical terms it will often • Although the trust will normally of the planning to avoid them make sense to appoint the same include the settlor’s spouse as a increasing the value of the person who has been named as discretionary beneficiary, care settlor’s estate. executor(s) of the settlor’s will. should be taken if any payments • The settlor can make an express • Although there is nothing to are made to them during the life bequest of the outstanding loan stop the trustees making a of the settlor. If the payment can balance in their will or in a . distribution to a beneficiary be seen in any way to benefit the If the bequest is in favour of the during the lifetime of the settlor, settlor, it could be deemed to be settlor’s UK domiciled spouse the trustees should never a gift with reservation. it will fall within the spouse lose sight of the fact they are • For the purposes of the ten exemption for Inheritance Tax and responsible for repayment of the yearly calculations in respect of will enable the spouse to continue loan and the trust fund provides potential inheritance tax charges, to receive loan repayments. their only means of doing this. the value of the trust fund will be • Although deferring income is • Since the settlor’s entitlement reduced by the amount of any possible and will enhance the is only in respect of the loan, it outstanding loan. growth potential of the plan the is important that the trustees

9 The Loan Trust would be suitable for individuals who: • are UK or deemed UK domiciled for Inheritance Tax purposes.

• can afford to gift away future growth on their capital.

• require full access to initial capital.

• require flexibility as regards to frequency and amount of capital repayments.

• do not wish to create either a Potentially Exempt Transfer or a Chargeable Lifetime Transfer.

Creating the trust as Bare Trust would be suitable for individuals who: • have specific beneficiaries in mind.

• wish to avoid ten yearly charges or charges when distributions are made from the trust.

• wish to avoid future reporting requirements to HMRC.

Establishing the trust as a Discretionary Trust would be suitable for individuals who: • Require flexibility as regards future beneficiaries.

Example Gerald, who does not own any property, wishes to invest £100,000 in an offshore plan. He calculates that he will require an annual income of £5,000 from the investment and wishes only his What would be the difference in Option 2 current grandchildren to benefit Inheritance Tax should Gerald die Tax position when the plan is not written from the investment on his death. 10 years later? For this example we under trust assume that the value of the plan Gerald has two options, he can is £100,000 with the remainder of Value of plan at Gerald’s death £100,000 either: his estate being £508,000. Balance of estate £508,000

1. establish a Loan Trust on a Option 1 Total estate for IHT £1,238,141

bare trust basis and name Tax position when the plan is written Less nil rate band* £325,000 his grandchildren as the under a Loan Trust beneficiaries. He lends the trust Chargeable to Inheritance Tax £283,000 Loan remaining in Gerald’s estate £50,000 £100,000 which is invested in Tax due at 40% £113,200 an offshore plan. The trustees Balance of estate £508,000 withdraw £5,000 per annum If Gerald had written his plan under Total estate or IHT purposes £558,000 and pass this to Gerald as a trust he would have saved IHT repayment of his loan; Less nil rate band* £325,000 of £20,000 because the growth in or Chargeable to Inheritance Tax £233,000 the plan of £50,000 would have been outside of his estate 2. decide against the use of a Tax due at 40% £93,200 for IHT purposes. trust and withdraw £5,000 from the plan each year. * Frozen at £325,000 until April The investment is left to his 2026. grandchildren in his will.

10 THE DISCOUNTED GIFT can be used to top‑up income. After speaking to his financial TRUST (DGT) Furthermore, these further adviser, he sets up a RL360 gifts can also be discounted Discounted Gift Trust using liquid Our DGT is a trust where the subject to a satisfactory assets of £250,000. individual gifts one of our offshore underwriting outcome. plans into a trust for the ultimate Mr Young’s combined index linked • The trust allows the settlor benefit of the trust’s nominated pension and investment income is the option of creating beneficiaries. currently £20,000 per year and he an Access Fund. has decided that he would like to The trust allows for both a • The trust avoids Isle of Man take his maximum 5% withdrawals Gifted and an Access Fund to Probate. from the plan, as this is the amount be created. The settlor carves he can withdraw each year without out a right to capital sums which The DGT would be suitable for creating an immediate income tax are payable to the settlor for individuals who: liability. Based on £250,000, Mr. as long as the settlor survives • are UK domiciled or Young will be able to withdraw or the trust fund is exhausted, deemed UK domiciled for £12,500 per annum from his plan if that should happen earlier. Inheritance Tax purposes. in order to supplement his existing pension and investment income. • are looking to reduce the Once the trust has been created value of their estate for it is not possible to amend the Whilst Mr. Young is prepared to Inheritance Tax purposes and amounts of these capital sums invest all of his liquid capital, he are prepared to make a gift so payable to the settlor. does want to retain the possibility long as their standard of living of access to £100,000 of this can be maintained. The creation of the Access Fund money as he would like to be is optional and is essentially a • can afford to gift away any able to cover any unexpected ‘rainy day’ fund which provides the potential growth on their future spending requirements. settlor with access to capital should existing capital. He therefore decides to place unforeseen circumstances arise. If £150,000 in the Gifted Fund and • are in good health. in the future, the settlor decides £100,000 in the Access Fund. they no longer require access to • require an immediate reduction Proportionate withdrawals from this fund, it can be gifted to the in Inheritance Tax. both funds will provide him with trust to be held for the benefit of annual payments of £12,500 for the • require access to pre-determined their nominated beneficiaries. remainder of his life or until such capital payments from the trust. time as the trust fund is exhausted. The value of the amount gifted • are not confident about gifting initially into the Gifted Fund away all of their disposable capital Mr Young currently has three is reduced for Inheritance Tax and would like the ability to children and one grandchild but purposes should the settlor die retain access to some of it should he would like a trust which caters within seven years of creating the unforeseen circumstances occur. for the possibility of having further trust. This is because in the case grandchildren in the future and of a gift made subject to retained Establishing the trust as a Bare decides therefore to create the rights, the amount of the transfer Trust would be suitable for trust on a flexible basis. Because equals the gift less the value of individuals who: the amount being invested in the those retained rights. • wish to create a discounted plan is below his available nil rate potentially exempt transfer for band there will be no immediate As this arrangement is trust based inheritance tax purposes. inheritance tax charge. as opposed to product based, this • wish to avoid reporting provides flexibility if the trustees Following underwriting, Mr. Young requirements to HMRC. should decide to change the is found to be in good health and underlying assets. • have specific beneficiaries in mind. we calculate the discounted value of the transfer to the Gifted Fund General features of the trust Establishing the trust as a as being £52,979. Therefore, if Mr. • It can be established with single Discretionary Trust would be Young should die within the next or joint settlors and be used for suitable for individuals who: seven years, this reduces the gift new applications and can also be • require flexibility regarding their for inheritance tax by £97,021, used with existing plans. choice of beneficiaries and would resulting in a saving of £38,808 in like to cater for as yet unborn inheritance tax. • The settlor is automatically family members. included as a trustee. In addition, if Mr. Young survives • The trust can accept increments Example seven years, then the full value of to the trust fund whilst the Mr Young is aged 65 and is a UK the trust fund will be outside his settlor is still alive and these resident and domiciled individual. estate for inheritance tax.

11 INTERNATIONAL Key points to note • For non-UK domiciled persons FLEXIBLE TRUST • The trust should only be used already resident in the UK, by individuals who are non-UK this is only effective where the This is a simple trust which domiciled for IHT purposes. This person is not yet deemed UK allows a settlor to nominate a is because, for individuals who domiciled for UK IHT purposes, person(s) who in the event of the are UK domiciled, the creation of i.e. worldwide assets are then last plan owner’s death should the trust would be a chargeable subject to UK IHT. (See our be paid the proceeds of the transfer as well as a gift with Excluded Property Trust Guide death claim without the need for reservation. for further details). obtaining Isle of Man Probate. • The settlor is a beneficiary of The International Flexible Trust the trust. General features of the trust might be suitable for non-UK • The trust can have up to two • For a non-UK domiciled settlor, domiciled individuals who: settlors. who may move to the UK at a • wish to retain access to their later date, the trust can be used investments. • The trust can be used for existing as an Excluded Property Trust. plans. • wish to ensure that their However, we do also have an plan passes to a nominated • The trust can accept top-ups. Excluded Property Trust which is beneficiary upon death. specifically designed for Non-UK • The trust avoids Isle of Man domiciled individuals moving to Probate. or already resident in the UK.

12 EXCLUDED PROPERTY The Excluded Property Trust TRUST might be suitable for non-UK domiciled individuals who: A discretionary trust which • wish to retain access to their enables Non-UK domiciled investments. individuals to protect their Non- • wish to protect their investment UK assets (e.g. a single payment from UK inheritance tax. offshore plan with ourselves) from UK inheritance tax (IHT). • wish to ensure that their plan passes to a nominated General Features of the Trust beneficiary upon death. • The trust can have up to two settlors.

• The trust can be used for new applications and for existing plans.

• As long as the individual is still deemed non-UK domiciled for inheritance tax purposes, then the trust can accept top-ups.

• The trust avoids Isle of Man Probate.

Key Points to Note • Just like the International Flexible Trust, the trust should only be used by individuals who are non-UK domiciled for IHT purposes. This is because, for individuals who are UK domiciled, the creation of the trust would be a chargeable transfer as well as a gift with reservation.

• The settlor is a beneficiary of the trust.

• Please see our Excluded Property Trust Guide for further details.

13 THE BENEFICIARY TRUST

This trust has been designed for plan owners who are non-UK domiciled and who want the plan’s benefits to go to one or more beneficiaries in the event of death. Whilst there is nothing to prevent UK domiciled plan owners from also using the trust, it is important to understand that there would be no IHT planning advantages in doing so.

The Beneficiary Trust comes into being on the death of the ‘Relevant Person’. The ‘Relevant Person’ is the person on whose death the benefits of the plan become payable. Where there are joint plan owners, the plan will not pass into trust until both owners are deceased. It is important to note however that where the plan is written on a joint life first death basis, the trust will not work because, on the death of the first life assured, the plan would simply If the beneficiaries are under IMPORTANT NOTES pay out to the surviving plan owner. the age of 18, because the trust has powers of reinvestment, the For financial advisers only. Not to The trust will be of particular proceeds of the plan could be be distributed to, nor relied on by, interest to those individuals who reinvested under the terms of retail clients. want the plan to remain in their the trust until such time as the own name during their lifetime but beneficiaries reach the age of 18. Please note that every care has would like the plan to pass into been taken to ensure that the trust after their death. This will Where the sole or last surviving information provided is correct mean that, assuming at least one of plan owner dies and there is still a and in accordance with our current the nominated trustees is still alive life assured in existence, the plan understanding of the law and Her on the death of the last surviving automatically passes into trust Majesty’s Revenue and Customs plan owner the costs and delays and is held by the trustees until (HMRC) practice as at March 2021. associated with obtaining Probate such time as the trustees wish to You should note however, that we would be avoided. distribute the trust fund either by cannot take upon ourselves the role surrendering or assigning the plan of an individual taxation adviser How does it work? out of the trust to a beneficiary. and independent confirmation When the sole or last surviving plan should be obtained before acting owner dies and this simultaneously The trust can be revoked at any or refraining from acting upon brings the plan to an end by virtue time leading up to the death of the the information given. The law of them also being the sole or last plan owner by the plan owner(s) and HMRC practice are subject to last remaining life assured, then simply writing to us and informing change. Legislation varies from the proceeds of the plan may be us that they no longer wish to use country to country and the plan paid to the trustees. Alternatively, the trust or by completing a new owner’s country of residence may assuming the beneficiaries are 18 Beneficiary Trust which would impact on any of the above. or over and our requirements have simply replace the previous version. been met in terms of obtaining This would be relevant where satisfactory client and address the plan owner(s) has a change verification requirements we could of heart over his or her intended make payment directly to the beneficiaries of the trust. beneficiaries.

RL360 Insurance Company Limited. Registered Office: International House, Cooil Road, Douglas, Isle of Man, IM2 2SP, British Isles. Registered in the Isle of Man number 053002C. RL360 Insurance Company Limited is authorised by the Isle of Man Financial Services Authority.

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