Offshore planning – Standard Life Savings & Investment Ezine

Standard Life's Savings & Investment newsletter for advisers

Issue 2: Dec 2006

Grandparents may often wish to help their grandchildren with the financial demands of the modern world. The cost of school education, university fees, getting onto the housing ladder, or even the cost of weddings, are all events which may lead them to consider how they could provide some form of financial support. This aim is frequently combined with the desire to reduce their inheritance tax (IHT) liability.

One way of achieving both goals is by making gifts to their grandchildren via a trust. For many trusts, the full IHT saving would only be made once the grandparents had survived the gift by seven years. For this to be fully effective, the grandparents would not have any access to the money in the trust fund at all. On the other hand, the trustees could make payments for the grandchildren’s needs at any time.

However, in reality, it is not always possible for them to pass on capital during their lifetimes as they rely on the income generated from their investments to maintain a reasonable standard of living. This means that it is not until the death of the grandparents that the money is gifted to the grandchildren, by which time it may have been substantially reduced by IHT. Not a desirable result for most people!

Another option would be to invest some assets into a Standard Life International Discounted Gift Plan for the benefit of their grandchildren., By doing so, an immediate reduction in IHT can be achieved whilst still allowing the grandparents to retain a fixed level of income for their lifetimes (or until the fund is exhausted).

During the grandparents’ lifetime, the capital cannot be paid out to the grandchildren. However, because of the potential savings in IHT, the ultimate fund available to them may well be greater. Additionally, due to the investment contract used, it may be possible that any gains achieved on the investment are only subject to income tax at 10%, 20%, or even not taxed at all!

Example
Mr & Mrs Rodgers, both aged 65, have a combined estate of £800,000 mainly comprised of their home, but also investments totalling £300,000. They are currently in good health, but are concerned about their future IHT liability.

For income purposes, Mr Rodgers receives a company pension which supplements their State pension and the interest and dividends from their investments.

Their family consists of two children and four grandchildren.

It is Mr & Mrs Rodgers' desire that they would like to give their grandchildren a good start in life. However, their dilemma is that at their current ages they are reluctant to gift away capital as they require the income from these investments to top-up their pension.

A solution is to invest £100,000 of their investments into a Standard Life International Discounted Gift Plan which provides them with:

a known level of income during their lifetime
an immediate reduction in their IHT liability
their investment being held within a trust managed by trustees which they appoint
the ability for the trustees (after their deaths) to assign the policy to the grandchildren. Subsequent encashments would then be taxed at the grandchildrens’ income tax rates, which can result in a 10%, 20% or even nil tax on any investment gains

For further information on the taxation of offshore bonds:
Offshore Briefing 3
Offshore Briefing 5

For further information on the taxation of discounted gift plans:
Estate & Inheritance Tax Briefing 2

Tax and legislation are liable to change. The information given here is based on Standard Life's understanding of law and HM Revenue & Customs practice at the date of publication. Tax reliefs may be altered and their value to the investor depends on their financial circumstances. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of this content.