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04/03/2010

Skandia's absolute trusts and discretionary trusts – at a glance

This article is a summary of some of the features of the Skandia Absolute and Discretionary (Settlor excluded) Trusts. It is not intended to be exhaustive and should be read in conjunction with Skandia’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 NTB*
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 
Can the trustees pay any tax due? 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.

Discretionary trust

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% (grossed up to an effective rate of 25% if paid by Settlor) on the excess of the gifted part over the NRB.
Note: the NRB available may be reduced by any CLTs made in the last seven years.
IHT payable on death within seven years Additional 20% (ie 40% in total) on the gift less any available NRB.
Taper relief may apply. Tax previously paid is credited but there is no refund on tax overpaid.
Ongoing IHT At each 10-yearly anniversary of the trust, a 10-yearly periodic charge may apply, up to a maximum of 6% of the then trust fund. The value of the trust fund is the trust fund plus any previous CLTs in the previous seven years and assumes no additions. Any available NRB can be offset against this amount. 
Reporting for IHT purposes Any gift in excess of the current reporting threshold is immediately reportable to HMRC using the IHT100 form.
There are also reporting requirements where tax is payable at 10-yearly points and on exit.
Beneficiaries No named beneficiaries (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? Trustees have discretion over who will benefit and when.
Death of beneficiary Not applicable.
Options available to trustees on death of the Settlor(s) Surrender and pay out to any beneficiaries included within the class of beneficiaries under the trust.
Assign the bond to any beneficiaries included within the class of 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
Can the trustees pay any tax due? 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

  • 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.

Details of Skandia’s Investment and Protection contracts can be found in their respective brochures, Key Features documents and Policy Terms. These are available from Skandia head office. Investors should be aware that the value of unit-linked contracts is not guaranteed as the prices of units may fall as well as rise. The information in this document is based on Skandia’s interpretation of legislation as at March 2010. While we believe this interpretation to be correct, we cannot guarantee it. Tax relief and the tax treatment of investment funds may change in the future. The value of any tax relief will depend on the investor’s financial circumstances.

Skandia cannot accept any responsibility for any loss or liabilities arising from action taken as a result of the information contained in this article.

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