Cashing in investment bond held in flexible trust

poseidon1

DT2001 said:

poseidon1 said:

DT2001 said:n

Brother and sister are beneficiaries of an investment bond which is held in a flexible trust created 6 years ago. It is performing poorly and they are thinking of encashing the bond as there are no options to change the fund. Should they wait until the 7th anniversary for the bond to be outside of estate or does the encashment just mean the cash equivalent to the original bond premium is a PET until the 7th anniversary?

Are there any other alternatives or implications to consider apart from timing?

Two entirely separate issues here. Potential encashment of the bond, and termination of the trust. Important not to conflate the two.

Encashment of the the bond  by the trustees should not mean the trust has been terminated, merely that the trust then holds cash subject to the beneficial rights conferred  by the trust deed on the beneficiaries. Indeed the terms of the trust should permit reinvestment in an entirely separate and distinct investment bond ( with more flexibility and fund choices) if the settlor considers the original purpose of the trust remains valid.

 In this regard, it would be helpful to provide a redacted copy of the trust deed to determine if beneficiaries are entitled to trust income as it arises or income and capital  is distributable at the trustees discretion.

As for IHT, there is no especial advantage or disadvantage in delaying the termination of the trust ( if that is  what is desired) by awaiting the expiry of 7 years after making the trust gift.

The gift into the trust is set in stone, all that would happen if death occurs inside 7 years is that the settlor's nil rate band on death would be diminished by the value of the original gift. That potential  diminution in the nil rate band is entirely unrelated to the current value of bond or whether or not it is  retained.

 If the settlor is happy for the trust to be terminated and funds released to his children to use as they please, the only immediate issue is potential income tax on the bond gains. If the settlor is currently a higher rate tax payer, investment bond gains are taxable on him if the bond is  encashed by the trustees.

 You say the  children are basic rate tax payers so  it might make sense to terminate the trust in their favour and then assign equal shares in the bond to them to encash in their own names. The following technical guidance explains further.

https://techzone.aberdeenadviser.com/public/iht-est-plan/Taxation-of-Bonds-in-Trust

Finally you have not indicated whether the bond is a UK policy ( where income tax is deemed deducted at source at 20%) or an offshore policy accruing profits on a gross untaxed basis. If Offshore, the bond chargeable event regime may give rise to tax liabilities on the children ( when they encash)  even if they are only basic rate tax payers in their own right and despite the availability of 'top slicing relief'.

https://www.lvadviser.com/service/documentlibrary/get/2CBD5CC3763F40E8AB2761EE6871FBCA/flexible-trust-guide?_gl=1*12w75a7*_up*MQ..*_ga*MTIyNjE3OTk0LjE3NDk4MTcwMzM.*_ga_WY6LDH7LBT*czE3NDk4MTcwMzIkbzEkZzAkdDE3NDk4MTcwMzIkajYwJGwwJGgw

This appears to be the format of the trust with settlor and 3 other trustees and 2 default beneficiaries.

settlor is BR tax payer with at least £20k of the band available.

This one is an onshore bond.

OK, could not read the sample document embedded within the Lv link, but found the proforma pdf deed on the internet per attached

https://assets.reassured.co.uk/pdfs/lv-flexible-trust-deed.pdf

Findings are as follows:

1) Per clause 1 on page 4,  the trust is fully discretionary in that any income is distributable from the trust at the trustees' unfettered discretion.

2) As a result of 1 above, the original gift to the trust constituted a 'chargeable lifetime transfer' (CLT) ( ie not a PET) which is liable to lifetime rates of IHT at 20% if exceeding the available NRB.  In this case  gift was well under NRB and also less than 80% of the NRB. On this basis, no IHT charge on gift into trust, neither did the gift have to be reported to the IHT arm of HMRC by way of form IHT 100. However as set out in Lv's guidance the trust should have been reported to HMRC's Trust Registration service.

3) Notwithstanding 2) above, settlor still has to survive 7 years for the CLT to fall out of account on death.

4) By clause 4(a) on page 4 of the deed, trustees have wide powers of investment, and therefore not constrained from disposing of the Lv bond should they wish and investing in another more flexible product from another life company. The trust therefore is not tied to the Lv bond. However if the intention were to keep the trust and invest elsewhere, I would avoid being liable for ongoing adviser fees, given I do not see what the trustees are getting by way of on going advice here, especially since there appears to be no alternative fund switch possibilities. Certainly doubtful whether the original adviser has the knowledge base to advise on specific tax and trust restructuring options.

5) If disappointment in the bond performance is a trigger to encash the bond and distribute the resulting cash to the children thereby terminating the trust, you have indicated the settlor is a BR taxpayer with £20k headroom. On the figures you quote for bond gains,  interim withdrawals and years the bond has been running, it seems to me the settlor's BR status together with top slicing relief should suffice to ensure there is no further income tax liabilty arising on full encashment. As a precautionary measure Lv should be approached to run a 'what if' chargeable event gain calculation and confirm the level of ' top sliced gain' attributable to the settlor as a result. The top slice figure should be well within the settlor's BR headroom.



Finally, in passing you mention there maybe a couple of other more longstanding investment bond trusts of durations in excess of 25 years, where regular withdrawals ( to the settlor?) are being made.

These by definition will be pre March 2006 trust entities benefiting from a much more advantageous IHT regime. However, given that the bonds in those trusts will have long since exhausted their 5% 'tax free' withdrawal facilities, annual chargeable event gains may now being triggered which need to be monitored in conjunction with any intention to encash the present Lv bond under discussion.

Perhaps a review of those bond trusts' aims and objectives should be considered by the trustees,  whilst  determining the future  ( or otherwise) of the Lv bond trust. Whether the firm that set these up have the technical 'nous' to help undertake such a review, remains to be seen.

DT2001

poseidon1 said:

DT2001 said:

poseidon1 said:

DT2001 said:n

Brother and sister are beneficiaries of an investment bond which is held in a flexible trust created 6 years ago. It is performing poorly and they are thinking of encashing the bond as there are no options to change the fund. Should they wait until the 7th anniversary for the bond to be outside of estate or does the encashment just mean the cash equivalent to the original bond premium is a PET until the 7th anniversary?

Are there any other alternatives or implications to consider apart from timing?

Two entirely separate issues here. Potential encashment of the bond, and termination of the trust. Important not to conflate the two.

Encashment of the the bond  by the trustees should not mean the trust has been terminated, merely that the trust then holds cash subject to the beneficial rights conferred  by the trust deed on the beneficiaries. Indeed the terms of the trust should permit reinvestment in an entirely separate and distinct investment bond ( with more flexibility and fund choices) if the settlor considers the original purpose of the trust remains valid.

 In this regard, it would be helpful to provide a redacted copy of the trust deed to determine if beneficiaries are entitled to trust income as it arises or income and capital  is distributable at the trustees discretion.

As for IHT, there is no especial advantage or disadvantage in delaying the termination of the trust ( if that is  what is desired) by awaiting the expiry of 7 years after making the trust gift.

The gift into the trust is set in stone, all that would happen if death occurs inside 7 years is that the settlor's nil rate band on death would be diminished by the value of the original gift. That potential  diminution in the nil rate band is entirely unrelated to the current value of bond or whether or not it is  retained.

 If the settlor is happy for the trust to be terminated and funds released to his children to use as they please, the only immediate issue is potential income tax on the bond gains. If the settlor is currently a higher rate tax payer, investment bond gains are taxable on him if the bond is  encashed by the trustees.

 You say the  children are basic rate tax payers so  it might make sense to terminate the trust in their favour and then assign equal shares in the bond to them to encash in their own names. The following technical guidance explains further.

https://techzone.aberdeenadviser.com/public/iht-est-plan/Taxation-of-Bonds-in-Trust

Finally you have not indicated whether the bond is a UK policy ( where income tax is deemed deducted at source at 20%) or an offshore policy accruing profits on a gross untaxed basis. If Offshore, the bond chargeable event regime may give rise to tax liabilities on the children ( when they encash)  even if they are only basic rate tax payers in their own right and despite the availability of 'top slicing relief'.

https://www.lvadviser.com/service/documentlibrary/get/2CBD5CC3763F40E8AB2761EE6871FBCA/flexible-trust-guide?_gl=1*12w75a7*_up*MQ..*_ga*MTIyNjE3OTk0LjE3NDk4MTcwMzM.*_ga_WY6LDH7LBT*czE3NDk4MTcwMzIkbzEkZzAkdDE3NDk4MTcwMzIkajYwJGwwJGgw

This appears to be the format of the trust with settlor and 3 other trustees and 2 default beneficiaries.

settlor is BR tax payer with at least £20k of the band available.

This one is an onshore bond.

OK, could not read the sample document embedded within the Lv link, but found the proforma pdf deed on the internet per attached

https://assets.reassured.co.uk/pdfs/lv-flexible-trust-deed.pdf

Findings are as follows:

1) Per clause 1 on page 4,  the trust is fully discretionary in that any income is distributable from the trust at the trustees' unfettered discretion.

2) As a result of 1 above, the original gift to the trust constituted a 'chargeable lifetime transfer' (CLT) ( ie not a PET) which is liable to lifetime rates of IHT at 20% if exceeding the available NRB.  In this case  gift was well under NRB and also less than 80% of the NRB. On this basis, no IHT charge on gift into trust, neither did the gift have to be reported to the IHT arm of HMRC by way of form IHT 100. However as set out in Lv's guidance the trust should have been reported to HMRC's Trust Registration service.

3) Notwithstanding 2) above, settlor still has to survive 7 years for the CLT to fall out of account on death.

4) By clause 4(a) on page 4 of the deed, trustees have wide powers of investment, and therefore not constrained from disposing of the Lv bond should they wish and investing in another more flexible product from another life company. The trust therefore is not tied to the Lv bond. However if the intention were to keep the trust and invest elsewhere, I would avoid being liable for ongoing adviser fees, given I do not see what the trustees are getting by way of on going advice here, especially since there appears to be no alternative fund switch possibilities. Certainly doubtful whether the original adviser has the knowledge base to advise on specific tax and trust restructuring options.

5) If disappointment in the bond performance is a trigger to encash the bond and distribute the resulting cash to the children thereby terminating the trust, you have indicated the settlor is a BR taxpayer with £20k headroom. On the figures you quote for bond gains,  interim withdrawals and years the bond has been running, it seems to me the settlor's BR status together with top slicing relief should suffice to ensure there is no further income tax liabilty arising on full encashment. As a precautionary measure Lv should be approached to run a 'what if' chargeable event gain calculation and confirm the level of ' top sliced gain' attributable to the settlor as a result. The top slice figure should be well within the settlor's BR headroom.



Finally, in passing you mention there maybe a couple of other more longstanding investment bond trusts of durations in excess of 25 years, where regular withdrawals ( to the settlor?) are being made.

These by definition will be pre March 2006 trust entities benefiting from a much more advantageous IHT regime. However, given that the bonds in those trusts will have long since exhausted their 5% 'tax free' withdrawal facilities, annual chargeable event gains may now being triggered which need to be monitored in conjunction with any intention to encash the present Lv bond under discussion.

Perhaps a review of those bond trusts' aims and objectives should be considered by the trustees,  whilst  determining the future  ( or otherwise) of the Lv bond trust. Whether the firm that set these up have the technical 'nous' to help undertake such a review, remains to be seen.

Thank you so much for the information. 

I think the trusts have all been registered as there is a piece of paper with policy numbers and passwords (but not headed up with the website or whatever they relate to).

I will pass on the information. There is a meeting next week when the information I have been given can be double checked. The trusts have been set up by 3 different advisors over the last 26 years. The IHT bands have changed so the whole estate is now £150/200k below the threshold whereas it was above or very close when when the trusts were set up. Income requirement has dropped and surplus is regularly passed on. The goal is to provide high quality care at home if needed which can be achieved by existing pensions/investments and capital.

DT2001

The meeting to discuss all the bonds was held yesterday and I was asked to attend (probably as a result of all of your probing questions). 

The facts, which do differ in parts to those I originally set out, are

2 onshore bonds inside estate.
Canada Life started 12 years ago. After 4 years 60% of the original premium (45% of its then value) was withdrawn and put into the LV bond.
The only paperwork relating to this shows units cancelled do we need to clarify with Canada Life if this considered a part surrender or encashment of a segment?
It is split across 3 funds and growing steadily. 

SL with profits fund been in place for 25 years. No withdrawals. Regular small bonuses (2.5% last year). Previous IFA reports do not include final bonus which equals 25% of total (nice surprise on going through all the papers in the file last night)

4 outside 
2 DGT offshore - both in place for 10 years with monthly payments to settlor. They are 15-20% worth less than the original premium. Trustees looking to change funds to medium risk as income withdrawals cannot be altered and in cautious funds capital will be eroded further. 

LV - Performance as dunstonh suggested is okay for its asset mix. Trustees will contact LV as suggested by poseidon1 to check the what if encashed implication. The capital is not needed by the settlor (I know it isn’t theirs legally) so will probably be passed to the beneficiaries to invest more appropriately to their individual circumstances.
Aviva - Flexible Gift trust - taken out in 1999. A with profits sub fund originally with FP. One £5k withdrawal recently paid to settlor for immediate payment to one of the beneficiaries to help with a roof replacement.

Thank you all for your pointers, are there any other suggestions for further research 

poseidon1

DT2001 said:

The meeting to discuss all the bonds was held yesterday and I was asked to attend (probably as a result of all of your probing questions). 

The facts, which do differ in parts to those I originally set out, are

2 onshore bonds inside estate.
Canada Life started 12 years ago. After 4 years 60% of the original premium (45% of its then value) was withdrawn and put into the LV bond.
The only paperwork relating to this shows units cancelled do we need to clarify with Canada Life if this considered a part surrender or encashment of a segment?
It is split across 3 funds and growing steadily. 

SL with profits fund been in place for 25 years. No withdrawals. Regular small bonuses (2.5% last year). Previous IFA reports do not include final bonus which equals 25% of total (nice surprise on going through all the papers in the file last night)

4 outside 
2 DGT offshore - both in place for 10 years with monthly payments to settlor. They are 15-20% worth less than the original premium. Trustees looking to change funds to medium risk as income withdrawals cannot be altered and in cautious funds capital will be eroded further. 

LV - Performance as dunstonh suggested is okay for its asset mix. Trustees will contact LV as suggested by poseidon1 to check the what if encashed implication. The capital is not needed by the settlor (I know it isn’t theirs legally) so will probably be passed to the beneficiaries to invest more appropriately to their individual circumstances.
Aviva - Flexible Gift trust - taken out in 1999. A with profits sub fund originally with FP. One £5k withdrawal recently paid to settlor for immediate payment to one of the beneficiaries to help with a roof replacement.

Thank you all for your pointers, are there any other suggestions for further research 

General observation is of a rather chaotic grouping of investment bonds in and out of trust, probably as a result of various different advisers taking the opportunity to 'load up' a client who  seemingly has a voracious appetite for investment bonds!

Re the past encashment of the Canada Life bond, it would be helpful to enquiry if funds were raised by way of part surrender rather than pro rata encashment of segments. Depending on the residual gains remaining in that bond it would be useful to be able forecast the likely level of current taxable chargeable event gains on future encashment, taking into account the previous encashment.

As for the two offshore DGTs, as products in their own right I generally like them.

However in the present instance not withstanding the immediate potential IHT savings they may have achieved from inception ( by reason of the discounted values)   they are  currently failing in producing extra IHT savings whilst the settlor continues to consume his own original capital, due to annual investment growth lagging behind his fixed withdrawal rate.  I infer this is probably due to the original low risk profile of the investment choices, but surprised it has taken 10 years for anyone to realise this. With the DGTs between 15 to 20% down on the original capital, a fund change to medium risk will have its work cut out to recoup the past deficit, given the withdrawals cannot be halted.

Incidentally, has the father been using his ISA allowances or have investment bonds been the sole vehicles for stockmarket investing?

It should be noted his Canada Life and SL bonds are potentially liable to income tax on the accrued gains on death. No such liabilty would arise on ISAs or indeed on General investment accounts. Therefore there may be a case for encashments of the the Canada Life bond within his BR headroom ( after making the above enquiry), and using the proceeds to fund ISAs in the years to come. Probably less scope for this with the SL Bond if its an 'old school' non unitised with profit  but still worth enquirying into options there.

Finally, executors for the father may have a bit of a task dealing with reporting  for his estate when the time comes, given all these 'moving parts'.

DT2001

poseidon1 said:

DT2001 said:

The meeting to discuss all the bonds was held yesterday and I was asked to attend (probably as a result of all of your probing questions). 

The facts, which do differ in parts to those I originally set out, are

2 onshore bonds inside estate.
Canada Life started 12 years ago. After 4 years 60% of the original premium (45% of its then value) was withdrawn and put into the LV bond.
The only paperwork relating to this shows units cancelled do we need to clarify with Canada Life if this considered a part surrender or encashment of a segment?
It is split across 3 funds and growing steadily. 

SL with profits fund been in place for 25 years. No withdrawals. Regular small bonuses (2.5% last year). Previous IFA reports do not include final bonus which equals 25% of total (nice surprise on going through all the papers in the file last night)

4 outside 
2 DGT offshore - both in place for 10 years with monthly payments to settlor. They are 15-20% worth less than the original premium. Trustees looking to change funds to medium risk as income withdrawals cannot be altered and in cautious funds capital will be eroded further. 

LV - Performance as dunstonh suggested is okay for its asset mix. Trustees will contact LV as suggested by poseidon1 to check the what if encashed implication. The capital is not needed by the settlor (I know it isn’t theirs legally) so will probably be passed to the beneficiaries to invest more appropriately to their individual circumstances.
Aviva - Flexible Gift trust - taken out in 1999. A with profits sub fund originally with FP. One £5k withdrawal recently paid to settlor for immediate payment to one of the beneficiaries to help with a roof replacement.

Thank you all for your pointers, are there any other suggestions for further research 

General observation is of a rather chaotic grouping of investment bonds in and out of trust, probably as a result of various different advisers taking the opportunity to 'load up' a client who  seemingly has a voracious appetite for investment bonds!

Re the past encashment of the Canada Life bond, it would be helpful to enquiry if funds were raised by way of part surrender rather than pro rata encashment of segments. Depending on the residual gains remaining in that bond it would be useful to be able forecast the likely level of current taxable chargeable event gains on future encashment, taking into account the previous encashment.

As for the two offshore DGTs, as products in their own right I generally like them.

However in the present instance not withstanding the immediate potential IHT savings they may have achieved from inception ( by reason of the discounted values)   they are  currently failing in producing extra IHT savings whilst the settlor continues to consume his own original capital, due to annual investment growth lagging behind his fixed withdrawal rate.  I infer this is probably due to the original low risk profile of the investment choices, but surprised it has taken 10 years for anyone to realise this. With the DGTs between 15 to 20% down on the original capital, a fund change to medium risk will have its work cut out to recoup the past deficit, given the withdrawals cannot be halted.

Incidentally, has the father been using his ISA allowances or have investment bonds been the sole vehicles for stockmarket investing?

It should be noted his Canada Life and SL bonds are potentially liable to income tax on the accrued gains on death. No such liabilty would arise on ISAs or indeed on General investment accounts. Therefore there may be a case for encashments of the the Canada Life bond within his BR headroom ( after making the above enquiry), and using the proceeds to fund ISAs in the years to come. Probably less scope for this with the SL Bond if its an 'old school' non unitised with profit  but still worth enquirying into options there.

Finally, executors for the father may have a bit of a task dealing with reporting  for his estate when the time comes, given all these 'moving parts'.

Thanks again for your time and guidance.
We will enquire of Canada Life re the withdrawal. The gain is about £40k according to the annual IFA report for this and £16k for SL (from a £10k premium).

There is a naturally income generating ISA portfolio £350k - bonds inside estate £110k. All ISA income is gifted as excess to requirements to slow estate growth. The idea is that any increased help/care can be funded by switching/reducing the gifting. My guess is that the estate is about £850k inc property and full spouse allowance to use. Slowly trying to help simplify and ensure everything is accounted for (the odd savings account here and there with a few k in them now inside cash ISAs).

poseidon1

DT2001 said:

poseidon1 said:

DT2001 said:

The meeting to discuss all the bonds was held yesterday and I was asked to attend (probably as a result of all of your probing questions). 

The facts, which do differ in parts to those I originally set out, are

2 onshore bonds inside estate.
Canada Life started 12 years ago. After 4 years 60% of the original premium (45% of its then value) was withdrawn and put into the LV bond.
The only paperwork relating to this shows units cancelled do we need to clarify with Canada Life if this considered a part surrender or encashment of a segment?
It is split across 3 funds and growing steadily. 

SL with profits fund been in place for 25 years. No withdrawals. Regular small bonuses (2.5% last year). Previous IFA reports do not include final bonus which equals 25% of total (nice surprise on going through all the papers in the file last night)

4 outside 
2 DGT offshore - both in place for 10 years with monthly payments to settlor. They are 15-20% worth less than the original premium. Trustees looking to change funds to medium risk as income withdrawals cannot be altered and in cautious funds capital will be eroded further. 

LV - Performance as dunstonh suggested is okay for its asset mix. Trustees will contact LV as suggested by poseidon1 to check the what if encashed implication. The capital is not needed by the settlor (I know it isn’t theirs legally) so will probably be passed to the beneficiaries to invest more appropriately to their individual circumstances.
Aviva - Flexible Gift trust - taken out in 1999. A with profits sub fund originally with FP. One £5k withdrawal recently paid to settlor for immediate payment to one of the beneficiaries to help with a roof replacement.

Thank you all for your pointers, are there any other suggestions for further research 

General observation is of a rather chaotic grouping of investment bonds in and out of trust, probably as a result of various different advisers taking the opportunity to 'load up' a client who  seemingly has a voracious appetite for investment bonds!

Re the past encashment of the Canada Life bond, it would be helpful to enquiry if funds were raised by way of part surrender rather than pro rata encashment of segments. Depending on the residual gains remaining in that bond it would be useful to be able forecast the likely level of current taxable chargeable event gains on future encashment, taking into account the previous encashment.

As for the two offshore DGTs, as products in their own right I generally like them.

However in the present instance not withstanding the immediate potential IHT savings they may have achieved from inception ( by reason of the discounted values)   they are  currently failing in producing extra IHT savings whilst the settlor continues to consume his own original capital, due to annual investment growth lagging behind his fixed withdrawal rate.  I infer this is probably due to the original low risk profile of the investment choices, but surprised it has taken 10 years for anyone to realise this. With the DGTs between 15 to 20% down on the original capital, a fund change to medium risk will have its work cut out to recoup the past deficit, given the withdrawals cannot be halted.

Incidentally, has the father been using his ISA allowances or have investment bonds been the sole vehicles for stockmarket investing?

It should be noted his Canada Life and SL bonds are potentially liable to income tax on the accrued gains on death. No such liabilty would arise on ISAs or indeed on General investment accounts. Therefore there may be a case for encashments of the the Canada Life bond within his BR headroom ( after making the above enquiry), and using the proceeds to fund ISAs in the years to come. Probably less scope for this with the SL Bond if its an 'old school' non unitised with profit  but still worth enquirying into options there.

Finally, executors for the father may have a bit of a task dealing with reporting  for his estate when the time comes, given all these 'moving parts'.

Thanks again for your time and guidance.
We will enquire of Canada Life re the withdrawal. The gain is about £40k according to the annual IFA report for this and £16k for SL (from a £10k premium).

There is a naturally income generating ISA portfolio £350k - bonds inside estate £110k. All ISA income is gifted as excess to requirements to slow estate growth. The idea is that any increased help/care can be funded by switching/reducing the gifting. My guess is that the estate is about £850k inc property and full spouse allowance to use. Slowly trying to help simplify and ensure everything is accounted for (the odd savings account here and there with a few k in them now inside cash ISAs).

On this basis, other than tweaking the DGT investment funds,  appears  investment and estate planning  matters well under control.

With that in mind appears to be  no real reason to keep the Aviva trust going, especially since the settlor is excluded from benefiting so that could form part of the tidying up operation.

poblomov

DT2001 said:

The meeting to discuss all the bonds was held yesterday and I was asked to attend (probably as a result of all of your probing questions). 

The facts, which do differ in parts to those I originally set out, are

2 onshore bonds inside estate.
Canada Life started 12 years ago. After 4 years 60% of the original premium (45% of its then value) was withdrawn and put into the LV bond.
The only paperwork relating to this shows units cancelled do we need to clarify with Canada Life if this considered a part surrender or encashment of a segment?
It is split across 3 funds and growing steadily. 

SL with profits fund been in place for 25 years. No withdrawals. Regular small bonuses (2.5% last year). Previous IFA reports do not include final bonus which equals 25% of total (nice surprise on going through all the papers in the file last night)

4 outside 
2 DGT offshore - both in place for 10 years with monthly payments to settlor. They are 15-20% worth less than the original premium. Trustees looking to change funds to medium risk as income withdrawals cannot be altered and in cautious funds capital will be eroded further. 

LV - Performance as dunstonh suggested is okay for its asset mix. Trustees will contact LV as suggested by poseidon1 to check the what if encashed implication. The capital is not needed by the settlor (I know it isn’t theirs legally) so will probably be passed to the beneficiaries to invest more appropriately to their individual circumstances.
Aviva - Flexible Gift trust - taken out in 1999. A with profits sub fund originally with FP. One £5k withdrawal recently paid to settlor for immediate payment to one of the beneficiaries to help with a roof replacement.

Thank you all for your pointers, are there any other suggestions for further research 

As it is a possibility that the LV trust will be wound up, I will just mention that the values of the gifts into the DGT Trusts will reduce/will have reduced the NIL-rate band available for the LV Trust

DT2001

poblomov said:

DT2001 said:

The meeting to discuss all the bonds was held yesterday and I was asked to attend (probably as a result of all of your probing questions). 

The facts, which do differ in parts to those I originally set out, are

2 onshore bonds inside estate.
Canada Life started 12 years ago. After 4 years 60% of the original premium (45% of its then value) was withdrawn and put into the LV bond.
The only paperwork relating to this shows units cancelled do we need to clarify with Canada Life if this considered a part surrender or encashment of a segment?
It is split across 3 funds and growing steadily. 

SL with profits fund been in place for 25 years. No withdrawals. Regular small bonuses (2.5% last year). Previous IFA reports do not include final bonus which equals 25% of total (nice surprise on going through all the papers in the file last night)

4 outside 
2 DGT offshore - both in place for 10 years with monthly payments to settlor. They are 15-20% worth less than the original premium. Trustees looking to change funds to medium risk as income withdrawals cannot be altered and in cautious funds capital will be eroded further. 

LV - Performance as dunstonh suggested is okay for its asset mix. Trustees will contact LV as suggested by poseidon1 to check the what if encashed implication. The capital is not needed by the settlor (I know it isn’t theirs legally) so will probably be passed to the beneficiaries to invest more appropriately to their individual circumstances.
Aviva - Flexible Gift trust - taken out in 1999. A with profits sub fund originally with FP. One £5k withdrawal recently paid to settlor for immediate payment to one of the beneficiaries to help with a roof replacement.

Thank you all for your pointers, are there any other suggestions for further research 

As it is a possibility that the LV trust will be wound up, I will just mention that the values of the gifts into the DGT Trusts will reduce/will have reduced the NIL-rate band available for the LV Trust

The combined premiums for the two DGT trusts were £75k. Can you advise me where to look to understand the mathematics of reducing the NIL rate band? Thank you 

poblomov

DT2001 said:

poblomov said:

DT2001 said:

The meeting to discuss all the bonds was held yesterday and I was asked to attend (probably as a result of all of your probing questions). 

The facts, which do differ in parts to those I originally set out, are

2 onshore bonds inside estate.
Canada Life started 12 years ago. After 4 years 60% of the original premium (45% of its then value) was withdrawn and put into the LV bond.
The only paperwork relating to this shows units cancelled do we need to clarify with Canada Life if this considered a part surrender or encashment of a segment?
It is split across 3 funds and growing steadily. 

SL with profits fund been in place for 25 years. No withdrawals. Regular small bonuses (2.5% last year). Previous IFA reports do not include final bonus which equals 25% of total (nice surprise on going through all the papers in the file last night)

4 outside 
2 DGT offshore - both in place for 10 years with monthly payments to settlor. They are 15-20% worth less than the original premium. Trustees looking to change funds to medium risk as income withdrawals cannot be altered and in cautious funds capital will be eroded further. 

LV - Performance as dunstonh suggested is okay for its asset mix. Trustees will contact LV as suggested by poseidon1 to check the what if encashed implication. The capital is not needed by the settlor (I know it isn’t theirs legally) so will probably be passed to the beneficiaries to invest more appropriately to their individual circumstances.
Aviva - Flexible Gift trust - taken out in 1999. A with profits sub fund originally with FP. One £5k withdrawal recently paid to settlor for immediate payment to one of the beneficiaries to help with a roof replacement.

Thank you all for your pointers, are there any other suggestions for further research 

As it is a possibility that the LV trust will be wound up, I will just mention that the values of the gifts into the DGT Trusts will reduce/will have reduced the NIL-rate band available for the LV Trust

The combined premiums for the two DGT trusts were £75k. Can you advise me where to look to understand the mathematics of reducing the NIL rate band? Thank you 

https://techzone.aberdeenadviser.com/public/iht-est-plan/Tech-guide-Tax-of-discre-trust#anchor_2

If you look at the proforma calculations in the IHT section.

Though in this case the NIL-rate band available should still be at least £250,000 so not an issue

poseidon1

DT2001 said:

poblomov said:

DT2001 said:

The meeting to discuss all the bonds was held yesterday and I was asked to attend (probably as a result of all of your probing questions). 

The facts, which do differ in parts to those I originally set out, are

2 onshore bonds inside estate.
Canada Life started 12 years ago. After 4 years 60% of the original premium (45% of its then value) was withdrawn and put into the LV bond.
The only paperwork relating to this shows units cancelled do we need to clarify with Canada Life if this considered a part surrender or encashment of a segment?
It is split across 3 funds and growing steadily. 

SL with profits fund been in place for 25 years. No withdrawals. Regular small bonuses (2.5% last year). Previous IFA reports do not include final bonus which equals 25% of total (nice surprise on going through all the papers in the file last night)

4 outside 
2 DGT offshore - both in place for 10 years with monthly payments to settlor. They are 15-20% worth less than the original premium. Trustees looking to change funds to medium risk as income withdrawals cannot be altered and in cautious funds capital will be eroded further. 

LV - Performance as dunstonh suggested is okay for its asset mix. Trustees will contact LV as suggested by poseidon1 to check the what if encashed implication. The capital is not needed by the settlor (I know it isn’t theirs legally) so will probably be passed to the beneficiaries to invest more appropriately to their individual circumstances.
Aviva - Flexible Gift trust - taken out in 1999. A with profits sub fund originally with FP. One £5k withdrawal recently paid to settlor for immediate payment to one of the beneficiaries to help with a roof replacement.

Thank you all for your pointers, are there any other suggestions for further research 

As it is a possibility that the LV trust will be wound up, I will just mention that the values of the gifts into the DGT Trusts will reduce/will have reduced the NIL-rate band available for the LV Trust

The combined premiums for the two DGT trusts were £75k. Can you advise me where to look to understand the mathematics of reducing the NIL rate band? Thank you 

You indicated the DGTs were set up 10 years ago.

If the  underlying trusts were bare trusts ( ie children absolutely entitled to the trust fund which support the settlors withdrawals and no discretionary powers reserved to the trustees), then the DGTs were PETs when made and since more than  7 years have elapsed since these trusts were created their original discounted value  would fall out of any potential charge to IHT after the 7th anniversary leaving the NRB intact other than the subsequent effect of the Lv trust discussed below. 

 Incidentally it is not the DGT premiums themselves that represented the value of the PETs, it is the discounted values actuarially  calculated  based on the settlor's rate of  annual withdrawals as those relate to his life expectancy at date of trusts inception. You would need to see the original trust documentation ( to confirm if indeed bare trusts), and actuarial valuations to determine the discounted  value of the PETs. They certainly they should not have totalled £75k since that would have defeated the whole point of the DGTs.

If I am correct with regard to the above then the Lv trust set up less then 7 years ago, is the only trust now impacting the settlor's currently  intact NRB. 

 Since that trust incurred no IHT when funds original gifted, there is no trust IHT exit charge when terminated within its intial 10 year exsistence - the following guidance from Canada Life makes the point 

https://www.canadalife.co.uk/ican-academy/find-learning/principal-and-exit-charges/#:~:text=Exit charges in the first ten years&text=If there was no lifetime,trust in the same period.


If settlor fails to survive the full 7 year period since Lv trust inception,  then as previously advised and as originally surmised by yourself, his NRB at death is reduced by  £116.4k, being the original CLT into the trust.

Finally, if you do not have a qualified tax adviser involved in providing a professional review of all these matters, consideration could be given to engaging a STEP qualified Chartered Accountant with specific trust tax and IHT expertise to advise accordingly. Certainly this level of granular analysis is outside the competency of the FAs who initiated the various investment bond trusts