Standard Life ezine - The Cutting Edge – Standard Life Savings & Investment Ezine

Standard Life's Savings & Investment newsletter for advisers

July 2008

Gift Plan: when, why and how?

Why Gift Plan?
On a general note to start with, a Gift Plan is useful when a client wants to set aside funds for future generations. This could be grandparents helping grandchildren with school fee planning, for example. It does not permit access for the original client with the result that the gift is effective for inheritance tax (IHT) purposes after 7 years have passed. Any growth is outside the estate of the original client immediately.

Which Gift Plan trust for the client?
In choosing which of the 3 trusts to use, the decision will probably be based on a combination of factors looking at the client’s needs and also the position of the beneficiaries. From the client’s perspective, there are 2 types of IHT gift possible with Gift Plan: a potentially exempt transfer (PET) or a chargeable transfer (CT). If the client chooses the flexible or discretionary trust, the gift will be a CT which means there is the possibility of an upfront 20% IHT charge if the gift is over the nil rate band (£312,000 in tax year 2008/09), also taking into account other CT’s made in the last 7 years. Depending on the level of gift therefore, this route will either be unattractive or present no issue at all for the client. In practice, many gifts are under the nil rate band so no tax bill arises. With the absolute trust, no 20% IHT bill arises regardless of the level of the gift, since it is a PET. If IHT is a key driver for your client, this may be an influencing factor in deciding which trust to use.

What about the beneficiaries?
The position and access rights of the beneficiaries can also be a significant driver for clients, however, and this is where wider estate planning considerations apply. The downside of an absolute trust is that it adds value to the estate of the named beneficiaries. This has consequences should the beneficiary have creditors, be going through a divorce or if the beneficiary dies. The beneficiary has a right to the funds at age 18 (or 16 in Scotland). This will either be ideal, if for example the trust is intended to help with higher education costs. Or that level of access at a relatively young age could be the last thing the client wants for their grandchildren! The other downside of the absolute trust is that the trustees cannot add further beneficiaries later, which can be done with a flexible or discretionary trust. The other great benefit of a new flexible or discretionary trust is that no capital value is added to the estate of any beneficiary. This properly ring fences funds outside the estate of all beneficiaries, which is a helpful asset protection measure. The trustees decide who receives the capital and when. Do remember that with the flexible trust, there are some beneficiaries who will have a right to income arising, should there be any. That will depend on the nature of the investment held, which I will now say a little about.

What about investments?
Taking a summary approach, there are a few tax and family scenario indicators which point in favour of mutual funds, onshore bond or international bond combined with certain trusts. If there is a desire to make use of the lower income tax status of beneficiaries, that might point in favour of combining an absolute trust with mutual funds. If there is a growing brood of young grandchildren and the funds are intended for use many years in the future, that might point to a discretionary trust with an international bond. For a more modest investment with no desire for tax compliance, that could point to an onshore bond. There is however no hard and fast rule on investment selection and that is the specialism which the financial adviser brings to the table to consider all factors and made recommendations accordingly.

Health warnings?
Do remember that investment bonds bring with them a huge amount of simplicity: no form 41G needs to be filed with HM Revenue & Customs when the trust is created and no income tax return is needed since there is no income to report in the trust. If a trust is being established which will produce income, it is VITAL to set client expectations around the tax compliance cost associated with selecting mutual funds. This points to mutual funds possibly being a more cost effective choice at the higher net worth end of the market where the tax advice fees are not out of proportion to the value of the trust fund, or perhaps the client already has a tax adviser or accountant who can deal with the tax returns. Dealing with the rules affecting income arising in a discretionary trust is not for the faint hearted! When faced with the complexity of the tax rules for income, it suddenly becomes clear why investment bonds have been a strong trust investment choice for a number of years for some trustees.

Please visit our estate planning pages on adviserzone for more information on the Gift Plan, or speak to your normal Standard Life contact. If you would like to read more about trustee's powers and duties, please read the Techzone article in this newsletter.

Any reference to legislation and tax is based on Standard Life’s understanding of United Kingdom law and HM Revenue & Customs practice at the date of production. These may be subject to change in the future. Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circumstances. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments.