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Absolute and discretionary trusts

Some features of the Old Mutual Wealth Absolute and Discretionary (Settlor excluded) Trusts. This overview is not exhaustive and should be read in conjunction with Old Mutual Wealth’s other technical material available here.

Absolute trust

Non exempt gifts into trust taxed under IHT rules in relation to: Potentially exempt transfer (PET)
Trust property Single premium investment bond/protection policy (life)
IHT payable initially
Gifts up to NRB*
Gifts above NRB
Nil
Nil
IHT payable on death within seven years 40% on the gift, less any available NRB. Taper relief may apply.
Ongoing IHT Nil
Reporting for IHT purposes Only if the settlor dies within seven years of making the gift into trust
Beneficiaries Named absolute beneficiaries only (but excluding the Settlor(s)).
Note: the trust allows the Settlor's spouse or civil partner** to be a beneficiary from the arrangement without affecting the IHT efficiency, provided any money paid to the spouse/civil partner is to the exclusion of the Settlor.
Can the trustees change the beneficiaries? Unable to do so under the terms of the trust.
Death of beneficiary The capital value of a beneficiary’s interest forms part of their estate, even where the Settlor is still alive.
Options available to trustees on death of the Settlor(s) Surrender and pay out only to the named beneficiaries.
Assign the bond to named beneficiaries***.
Maintain the bond subject to the original trust.
Where death benefits are received, either pay out proceeds or reinvest for the benefit of the beneficiaries.
Can the Settlor also be a trustee? Yes – the Settlor can also be appointed as trustee.
Death of last life assured Creates a chargeable event for income tax purposes, even if the Settlor(s) are still alive.****
Can the trustees surrender the bond during the Settlor's lifetime? Yes


* Assuming no further CLTs have been made in the last seven years.
** As defined by the Civil Partnership Act 2004.
*** Beneficiaries must be adults.
**** UK resident Settlors can reclaim any chargeable event tax liability from the trustees.

Advantages

  • Subject to potentially exempt transfer (PET) regime.
  • No entry, exit or 10-yearly periodic charges.
  • Settlor knows exactly who will benefit from his trust.

Disadvantages

  • Trustees cannot vary beneficiaries or their entitlement.
  • Value of trust fund forms a part of the beneficiaries’ estate and may be liable to IHT on the beneficiary’s death.
  • An adult beneficiary can demand satisfaction of rights immediately.
  • Value of trust fund may be used in divorce or bankruptcy settlements of a beneficiary.

Settlor Excluded Discretionary Trusts

Non exempt gifts into trust taxed under IHT rules in relation to:

Chargeable Lifetime Transfer (CLT)

Trust property

Single premium investment bond/protection policy (life)

IHT payable initially
Gifts up to NRB*
Gifts above NRB


Nil
20%

IHT payable on death within seven years

40% on the gift less any available NRB but with allowances for any IHT paid when the gift was made and for any available taper relief.

Ongoing IHT

Periodic and exit charges apply

Reporting for IHT purposes

Reporting required where the CLT is greater than current reporting levels.

Beneficiaries

Classes of beneficiary such as children and grandchildren. 
Note: the trust allows the Settlor's spouse or civil partner** to be a beneficiary from the arrangement without affecting the IHT efficiency, provided any money paid to the spouse/civil partner is to the exclusion of the Settlor.

Can the beneficiaries be changed?

Yes

Death of beneficiary

The value of the policy is not included within the beneficiary’s estate for inheritance tax purposes.

Options available to trustees on death of the Settlor(s)

Surrender and pay out only to the beneficiaries.
Assign the bond to the beneficiaries***. 
Maintain the bond subject to the original trust.
Where death benefits are received, either pay out proceeds or reinvest for the benefit of the beneficiaries.

Advantages

  • Flexibility for trustees to consider a wide class of beneficiary.Trust asset does not form part of any beneficiaries’ estate for IHT purposes.
  • No one beneficiary can demand income or capital.
  • Value of beneficiary’s share of the trust fund unlikely to be used in divorce or bankruptcy settlements of that beneficiary.

Disadvantages

  • Subject to chargeable lifetime transfer (CLT) regime. Transfers into trust are CLTs to the extent they are not exempt. Exit and 10-yearly periodic charges may also apply.
  • Reporting required where CLT is greater than current reporting levels. Reporting levels vary by asset class and previous gift history over the previous seven years.

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

It is based on Old Mutual Wealth's interpretation of the relevant law and is correct at the date shown at the top of this article. While we believe this interpretation to be correct, we cannot guarantee it. Old Mutual Wealth 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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