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FINDING THE RIGHT BALANCE

According to UK Government figures, over £5.38bn in UK inheritance tax (IHT) receipts was collected by HMRC in the 2018/19 tax year[1]. This is a phenomenal amount, especially when we consider that most of the tax could have been mitigated through some careful financial planning. With IHT set at 40%, there is a clear opportunity for you to help your clients manage their potential tax exposure and demonstrate real value in the advice you provide.

How does a trust reduce IHT?

A trust is simply a way of transferring the ownership of property. It can help reduce any potential IHT liability by progressively removing the assets from a person’s estate. Once seven years have passed, the assets will be outside a person’s estate and therefore exempt from IHT. For transfers above the nil rate band, if the person dies during the seven year period, taper relief may apply, so there could still be some IHT saving.

The importance of flexibility and access

However, saving IHT doesn’t have to come at the expense of other needs, and the demand for clients to have increased flexibility is becoming greater. People are living longer, so there is less certainty over what money they will need to support them in later life. Access to funds to help support a longer retirement, or flexible access to savings to fund future financial goals, such as their children’s education, may be important.

Assessing the client’s requirements for IHT efficiency, access, and flexibility will help you find the right solution for your clients.

Old Mutual International’s Lifestyle Trust

The Lifestyle Trust is a simple, innovative solution designed to open up trust planning to a new generation of savers. It helps savers who don’t want to lock away their savings, but want to start the seven year clock, to help ensure their savings are IHT efficient.

It’s proving increasingly popular, and here’s why.

  • Ability to access funds in the future: The Lifestyle Trust entitles the settlor to access a pre-agreed proportion of the trust fund for future use. This is divided into a series of ‘entitlements’ that become available in line with an agreed schedule of dates.
  • Flexibility: as the settlor approaches each date, they have the flexibility to decide whether or not to take the entitlement. If they decide not to take the entitlement, or postpone the entitlement to a later date, the funds stay within the trust, and will continue to be outside of the settlor’s estate for inheritance tax purposes (once seven years have passed). If the settlor takes the entitlement, it is held for their benefit and can be accessed immediately, or at a later date.
  • Assignment: there is also flexibility to assign an approaching entitlement directly to loved ones, for example, to pay for a grandchild’s education. This prevents the money entering the settlor’s estate and the payment being treated as a potentially exempt transfer.
  • Ongoing review: clients’ needs continually change, and the setting of entitlement dates can help provide a perfect opportunity for you to revisit your client and offer further financial planning at key points. These key points are likely to be linked to important life stages of the client, such as retirement or children going to university, where further financial planning may be beneficial.
  • Top-up: there is also the flexibility to top-up the Lifestyle Trust at any point.

Choosing the right trust solution

There are a number of trusts which deliver varying degrees of flexibility. For a summary of the different solutions available, and the combination of access, flexibility, and IHT efficiency they provide, please see our sales aid.

Helping to simplify trust planning

There is a perception that trusts are too complicated for clients to understand. However, through better understanding, more advisers and therefore clients have realised the effectiveness that trusts can have as a financial planning tool. Not only can they significantly reduce an individual’s exposure to IHT, they can also ensure the right people get the right proportion of assets at the right time.

For support in this area, and to find out more about the benefits of trust planning, please visit our trust planning section. Alternatively, please contact your usual Old Mutual Wealth consultant today, or contact your local offshore specialist.

 

[1] HMRC receipts, last updated Sept 2019.

 

The information provided in this article is not intended to offer advice.

It is based on Old Mutual Wealth or Old Mutual International's interpretation of the relevant law and is correct at the date shown on the title page. While we believe this interpretation to be correct, we cannot guarantee it. We cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.

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