Investment Bonds in trust beginning to return as an IHT mitigation tool

poseidon1

I speculated last year that investment bonds in trust might see a revival as a means to help counteract new IHT liabilties due to arise as a result of proposals to tax pension pots from 2027.

The article below ( if taken at face value) would suggest there is now underway a notable uptick in financial planning firms reccomending life company bonds in trust to their client bases.

https://moneyweek.com/personal-finance/inheritance-tax/inheritance-tax-pension-rule-onshore-bonds

Can only hope permissions to sell theses products will be restricted to a relatively small group of individuals who have undergone thorough training in the intricacies of HMRC tax compliance and the basic elements of  trust law applicable to the structures being sold.

 Nonetheless it is a concern that the article has flagged discretionary trusts as a prominent example of trust solutions being offered, a structure where even seasoned professionals have been known to make errors.

NorthYorkie

I never trust journalists (or politicians for that matter) on the subject of tax. In this article it says;

"When you place an onshore bond into a discretionary trust, you're making a gift that begins to move the value of that investment outside your estate. Provided you live for seven years after the gift is made, it typically won’t count towards your inheritance tax bill." Wrong! This would not be a Potentially Exempt Transfer.

Later on it says;
"That said, trusts come with their own tax rules and responsibilities. There may be charges when setting them up, and if the amount placed in trust exceeds your available inheritance tax allowance, there could be an immediate inheritance tax charge."

The article highlights the proposed inclusion of pension pots in a person's estate for IHT, but does not explain how such a trust would help in such a situation. How do you get the funds into an 'onshore bond'? From drawing down the remaining pension fund (and paying higher rate income tax) or from realising other assets (and paying capital gains tax)? and then putting the bond into a discretionary trust (and, depending on the value, perhaps paying IHT). In addition there will be the costs of setting up and maintaining these arrangements. Sometimes the best course of action is to do nothing!

poseidon1

NorthYorkie said:

I never trust journalists (or politicians for that matter) on the subject of tax. In this article it says;

"When you place an onshore bond into a discretionary trust, you're making a gift that begins to move the value of that investment outside your estate. Provided you live for seven years after the gift is made, it typically won’t count towards your inheritance tax bill." Wrong! This would not be a Potentially Exempt Transfer.

Later on it says;
"That said, trusts come with their own tax rules and responsibilities. There may be charges when setting them up, and if the amount placed in trust exceeds your available inheritance tax allowance, there could be an immediate inheritance tax charge."

The article highlights the proposed inclusion of pension pots in a person's estate for IHT, but does not explain how such a trust would help in such a situation. How do you get the funds into an 'onshore bond'? From drawing down the remaining pension fund (and paying higher rate income tax) or from realising other assets (and paying capital gains tax)? and then putting the bond into a discretionary trust (and, depending on the value, perhaps paying IHT). In addition there will be the costs of setting up and maintaining these arrangements. Sometimes the best course of action is to do nothing!

Yes you are correct that gifts into discretionary trusts are not potentially lifetime transfers but represent chargeable lifetime transfers ( CLT). However they will nonetheless fall out of account after 7 years have elapsed as long as;

  1) The total gifted remains under the nil rate band during the 7 year cumulative gifting period
  2) No new CLTs are made during that period that take the total above NRB.

 M& G has useful guidance on this point- 

https://www.mandg.com/wealth/adviser-services/tech-matters/iht-and-estate-planning/gifting/gifting-inheritance-tax#:~:text=CLTs are cumulative and CLTs,be no IHT due immediately.

By the time one gets to the 10th anniversary of a discretionary trust, it will have acquired its own NRB for the purposes of the dicennial 10 year IHT charge.

The problem with articles by financial journalists producing pieces for consumption by the general public, is these nuances and potential pitfalls are too often glossed over, to give a broad brush overview.  This may often leave the reader with an incomplete assessment of discretionary trust disadvantages, whilst overly focusing on the benefits.

I personally am in no doubt that trusts ( discretionary  or otherwise) using investment bonds will increasingly be rolled out by advisers to those clients with sufficient liquid resources, as a direct result of  future IHT to be levied on pension pots.

My primary  concern is the high degree of competency required of  advisers not only with regard to intial planning and execution, but the years of assiduous tax compliance and administration  (expecially for discretionary trusts) , that follow. The skill pool for the administration of complex trusts is an ever diminishing one.

NorthYorkie

Personally I don't think the journalists do 'gloss over' the nuances; they simply have no knowledge of them. They simply regurgitate the marketing blurb of the promoter (Which, of course, needs to keep things simple to attract more punters).