ESTATE PLANNING BOND Information for financial advisers AXA: smarter investment solutions

Transcription

1 e bl s la ee ai nt Av ara u ow G N th i w ESTATE PLANNING BOND Information for financial advisers AXA: smarter investment solutions 14341_IOMEPB4_BRO.indd 1 18/1/07 3:35:07 pm

2 Estate Planning Bond CONTENTS Contents Introduction 4 Trusts and Taxation 6 Estate Planning Bond Discretionary Trust 8 Estate Planning Bond Absolute Trust 12 Income Tax on Chargeable gains 13 Income Guarantee & Legacy Guarantee options 15 Funds 17 Additional charges 20 Charging Option A 21 Charging Option B 22 Charging Option C 23 Charging Option D 24 Charging Option F 26 Charging Option G 27 Charging Option H 28 Important Information 30 Please note that Charging Option E is not currently available 3

3 INTRODUCTION Estate Planning Bond Introduction This document has been approved for use by financial advisers only, and is not to be used with private clients. It is designed to give financial advisers more information about the tax treatment of the Estate Planning Bond Discretionary and Absolute Trusts, charging options and fund choices. It is envisaged that you will use this information to assist in formulating a recommendation and that your client will then be presented with a client specific illustration showing the appropriate charges for the selected charging option, premium size and commission level. Illustrations can be obtained online at for advisers who have registered. This document should be read in conjunction with the Estate Planning Bond Product Guide. A recommendation to invest should not be made on the basis of this document alone. Product type The AXA Isle of Man Estate Planning Bond is an offshore single premium Capital Redemption Bond (CRB), written in trust to provide Inheritance Tax mitigation and an income paid as withdrawals of capital from the CRB. Two types of trust are available to suit your clients estate planning requirements, an Absolute Trust and a Discretionary Trust and further details of these can be found in the sections below. The information contained in this guide is based on AXA Isle of Man s interpretation of taxation and legislation in the UK and Isle of Man, as at 1st January 2007, and in particular our interpretation of the changes to the tax treatment of trusts introduced by the UK Finance Act Eligibility Available on an individual basis or joint basis as husband and wife or civil partners. Your clients must be UK domiciled for Inheritance Tax purposes, regardless of their country of residence. Not available to Isle of Man residents. Restrictions may apply in other territories of the world. Please contact your AXA Consultant if you require further information. Age at entry Minimum: 18 years attained. Maximum: 99 years attained. Currency The Estate Planning Bond is only available in Sterling. Minimum premium 50,000. If applying for both an Absolute and Discretionary Trust Estate Planning Bond, using the one application pack, the minimum investment is 100,000 ( 50,000 per Trust). In these circumstances, AXA Isle of Man will issue two separate Bonds. This means that both Bonds will have their own charges. Additional Single Premiums No additional investments can be made during the lifetime of the Settlor(s)/Donor(s). The minimum Additional Single Premium is 5,000. Full details of the terms and conditions applying to any additional single premiums are available on request from AXA Isle of Man Limited ( AXA Isle of Man ). 4

4 Estate Planning Bond INTRODUCTION Investment Adviser Client(s) may appoint a suitably qualifi ed Investment Adviser, from whom we can accept instructions regarding fund selection. Where the Investment Adviser makes a charge for the advice provided, we will pass on that charge to the Bond. The appointment of any Investment Adviser is subject to approval by AXA Isle of Man. Discretionary Fund Manager and Custodian Client(s) may appoint a Discretionary Fund Manager and Custodian (DFMC) who will manage the investments in the Bond and hold those investments with their own appointed custodian. Where a DFMC is appointed the quarterly administration charge will increase to 150 per quarter. The appointment of any DFMC is subject to approval by AXA Isle of Man and if more than one DFMC is to be appointed to the Bond, you must first obtain acceptance of this from AXA Isle of Man. In the event that more than one DFMC is appointed, the quarterly administration charge will increase by a further 150 for each additional appointment. The appointment of AXA Isle of Man Administration Limited as Trustee Your clients must specify in the application pack that they wish to appoint AXA Isle of Man Administration and execute the Power of Attorney to enable the Trust Deed to be created on their behalf. The information contained within the application pack will be used to create the Trust Deed so clients are requested to take particular care when submitting information on their beneficiaries and completing the letter of wishes. The letter of wishes has been provided for those clients applying for an Estate Planning Bond Discretionary Trust wishing to appoint AXA Isle of Man Administration as Trustee. The information will be used when considering distributions to potential beneficiaries after the death of the Settlor and the letter has been created so as not to form part of the Trust Deed or be legally binding on the Trustees. The letter is issued for use by the Settlors but they should seek their own legal advice as to the suitability of it and if they prefer, use an alternative provided by their own legal advisers. Included within the application pack is a statement of investment principle which should be completed for all cases when AXA Isle of Man Administration is appointed as Trustee. In accordance with the duty to review the Trust Fund investments on a regular basis, this information will be used to assess the performance of the underlying investment. Finance Act 2006 The Estate Planning Bond was launched in 1999 as an interest in possession trust, whereby intended beneficiaries had an interest in the trust that was subject to a power of appointment vested in the Trustees. That meant those beneficiaries could be replaced and their interest defeated. The Finance Act 2006 introduced changes to the tax treatment of interest in possession trusts. All new trusts created on or after the 22nd March 2006 are no longer taxed as interest in possession trusts but as discretionary trusts in accordance with Part III, Chapter III IHTA. No longer are intended beneficiaries appointed with an interest in the trust fund but Trustees will have discretion over who is to benefit in accordance with the terms of the trust. To be compliant with these changes, AXA Isle of Man has created an Estate Planning Bond Discretionary Trust which replaces the original trust declaration. The new rules do not affect Bare Trusts which remain outside the scope of Chapter III, Part III IHTA and therefore AXA Isle of Man has also created an Estate Planning Bond Absolute Trust. 5

5 TRUSTS AND TAXATION Estate Planning Bond Trusts and Taxation What is the Estate Planning Bond and how does it avoid a gift with reservation? The Estate Planning Bond is a Discounted Gift Trust designed to mitigate IHT and provide an income for the lifetime of the Client or both Client(s) if a joint application. Your Client(s) carves out a right to the withdrawals from the underlying CRB prior to the CRB being settled into trust. Your Client(s) retains the absolute right to these income payments but is excluded from benefiting from the capital in the Trust. This carve out is known as a horizontal severance of rights whereby an asset is split into individual rights, in this case the regular withdrawals and the capital, and is a principle acknowledged by the Courts in the case of Ingram v IRC This case is most relevant to a discounted gift trust because it supports that retaining the income rights prior to settling the capital into trust avoids a gift with reservation as defined in s102 of the Finance Act The right of your Client(s) to receive regular withdrawals ceases on their death to avoid the value of those rights being included in the estate of your Client(s) when they die. The Estate Planning Bond immediately reduces the size of the gift into Trust. Section 3 IHTA states that the transfer of value is the loss to the estate of the person making the transfer. The value of the retained income rights shown as the notional Grantee s Fund are immediately removed from the estate and the balance remaining from the initial investment, shown as the notional Residuary Fund, is the transfer of value. For the purposes of s43 IHTA the Residuary Fund is the settled property. Whether this transfer of value is a Potentially Exempt Transfer or a Chargeable Lifetime Transfer depends on the type of trust selected by your client and information on the differences can be found below. Pre-Owned Assets Tax The Pre-Owned Assets Tax (POAT) legislation is contained within schedule 15 of the Finance Act 2004 and provides for the payment of tax on benefits derived by the donor from settled property. AXA Isle of Man has obtained legal opinion from Queen s Counsel and written confirmation from HM Revenue & Customs that the settled property is the Residuary Fund from which your Client(s) is excluded. As such the income rights retained absolutely by your Client are outside the scope of the POAT legislation and no POAT tax charge is payable by your Client on the income payments. What Types of Trust are available for use with the Estate Planning Bond? The Estate Planning Bond is available as either an Absolute (Bare) Trust or a Discretionary Trust. The following information is designed to assist you in explaining the differences between the two trusts and how these differences affect your clients. Please note that the client is referred to in this Guide as either the Donor or the Settlor dependant on if it is an Absolute Trust or Discretionary Trust respectively. Applying for an Estate Planning Bond using a combination of the Discretionary Trust and Absolute Trust versions. The order in which chargeable lifetime transfers (CLTs) and potentially exempt transfers (PETs) are made can, in certain circumstances, have an important effect on future Inheritance Tax liabilities. Where both forms of transfer are being made at broadly the same time, it would normally be preferable to make the CLT at least a day before the PET. If the PET is made prior to the CLT and death occurs within seven years the PET will become chargeable and will 6

6 Estate Planning Bond TRUSTS AND TAXATION affect not only the amount of charge on the CLT, but also the subsequent ten-yearly anniversary (periodic) and exit charges in respect of the trust created by the CLT. Important Information concerning Absolute Trusts and Minors HM Revenue & Customs (HMRC) is currently in discussions with the Association of British Insurers as it does not consider it possible to create a bare trust for minor beneficiaries. When a bare trust is created the donor makes a Potentially Exempt Transfer. However, if as a result of having minors as beneficiaries, HMRC tax the trust in accordance with the Relevant Property regime (Discretionary Trusts), a potential liability to inheritance tax can arise at outset, then every ten years and again when capital is paid to beneficiaries after the death of the settlor. 7

7 DISCRETIONARY TRUST Estate Planning Bond Estate Planning Bond Discretionary Trust The Trust The Trustees of an Estate Planning Bond Discretionary Trust will decide who is to benefit after the death of the Settlor(s) by selecting from the classes of potential beneficiary in the trust document. No individual beneficiary has a right to benefit and no individual beneficiary has an interest in possession which avoids the trust fund being valued as part of their own estate for IHT. The Settlor(s) is recommended to give his Trustees a letter of wishes which, whilst not legally binding upon them, will provide guidance on who the Settlor(s) would like to benefit. Inheritance Tax The discounted gift into trust represented by the Residuary Fund is a Chargeable Lifetime Transfer (CLT) for the purposes of IHT. Provided the Settlor(s) lives for more than seven years after their EPB has commenced, this CLT will no longer be taken into account for the purposes of calculating any IHT liability on their own personal estate. However, Discretionary Trusts are subject to the following tax charges. An immediate entry tax charge of 20% on the amount of the CLT that exceeds the nil rate band ( 285,000 tax year 2006/2007). A periodic charge of 6% payable every ten years if at that time the value of the trust fund is in excess of the nil rate band applicable at the anniversary date. An exit charge when capital is withdrawn from the Trust based on a proportion of the periodic tax charge paid at the previous ten yearly anniversary date. These are the main principles of the taxation of Discretionary Trusts as defined by Part III, Chapter III IHTA. The following is important information explaining the interaction of these tax charges with the Estate Planning Bond and how they affect your clients. a) Immediate Entry Tax Charge When is IHT payable? IHT is payable on a CLT if it, along with any other CLTs made in the previous seven years, exceeds the nil rate band. For the purposes of the Estate Planning Bond, the CLT is the discounted gift as shown by the Residuary Fund and not the whole premium (except if your client has been refused a discount on medical grounds and is effecting a nil-discount Estate Planning Bond). In the current UK tax year, provided the Residuary Fund does not exceed 285,000 when added to any other CLTs made in the previous seven years, no IHT will be payable. For joint Settlors contributing equally to the investment into an EPB, s44 of IHTA states there will be two settlements and thus two nil rate bands available. Each Settlor will be deemed to have made their own CLT of half the Residuary Fund which will be compared to their own available nil rate band for the purposes of calculating any entry tax charge. What rate of IHT is payable and who pays the IHT? The immediate entry tax charge of 20% assumes that the Trustees pay the IHT from the Trust Fund on behalf of the Settlor(s). However, as no capital can be withdrawn from an EPB prior to the death of the Settlor(s), the entry charge will be paid by the Settlor(s) and will be increased to 25% as it is grossed up to account for a greater reduction in the size of the Settlor(s) estate. For example, if the CLT is 500,000 the IHT payable by the Settlor is as follows: 500, ,000 = 215,000 x 25% = 53,750 8

8 Estate Planning Bond DISCRETIONARY TRUST Reporting a CLT to HM Revenue & Customs For every CLT in excess of 10,000 or if, when added to other CLTs made in the previous ten years, the total exceeds 40,000, your clients must submit forms IHT 100 and IHT 100a to HM Revenue & Customs Capital Taxes Office. What happens if the Settlor does not survive for seven years from the commencement of the Estate Planning Bond? If IHT was paid on the CLT at the commencement of the Estate Planning Bond, further IHT may be payable in the event of the Settlor(s) dying within seven years. This can be illustrated as follows: Commencement May 2006 CLT 500,000 NRB 285,000 IHT Paid 53,750 Death May 2009 CLT 500,000 NRB 325,000 IHT Payable 70,000 Balance of IHT payable 16,250 b) Ten Yearly Periodic Charge When is IHT payable? At each ten yearly anniversary date from the commencement of the Estate Planning Bond, IHT will be payable if the value of the trust fund is in excess of the nil rate band at that time. The value of the trust fund for tax purposes will be the value of the underlying CRB less the then value of the retained income rights if the Settlor(s) is still alive at that time. The income paid to the Settlor prior to the anniversary is not included in the valuation. What rate of IHT is payable and who pays the IHT? The periodic tax charge is calculated as a percentage of the trust fund. This is a complex IHT calculation and it is not possible to provide a comprehensive explanation in this guide. The following is a simplified example of how to work out the periodic charge at the first ten yearly anniversary. It assumes that no other Chargeable Lifetime Transfers have been made in the previous seven years and the first ten yearly anniversary has arisen in the UK tax year 2006/2007. The value for IHT purposes of the trust fund is 565,000 and there have been no payments of capital in the first ten years. This does not include any income payments to the Settlor(s). Value of trust fund NRB 565, ,000 = 280,000 Tax on trust fund over 20% 280,000 x 20% = 56,000 Effective rate of IHT 56,000 x 100% 565,000 = % Periodic charge is 30% of effective rate % x 30% = % IHT payable is value of trust fund x periodic charge 565,000 x % = 16,800* *This is the equivalent of 6% of the difference between the value of the trust fund and the NRB. 9

9 DISCRETIONARY TRUST Estate Planning Bond Please note that if the Settlor(s) appoints AXA Isle of Man Administration as Trustee, then during the lifetime of the Settlor(s) responsibility for any IHT is that of the Settlor(s) and it will not be possible to withdraw capital from the Estate Planning Bond to pay it. After the death of the Settlor(s) and if the Estate Planning Bond continues the Trustees will be able to pay any IHT liability from the capital in the Trust fund. Reporting a Periodic Tax charge to HM Revenue & Customs Your client(s) must submit forms IHT 100 and IHT 100d to HM Revenue & Customs Capital Taxes Office. c) Exit Charge When is IHT payable? After the death of the Settlor(s), the Trustees will be able to make withdrawals or surrender policy segments. If at the previous ten yearly anniversary date a periodic charge had been payable then IHT will be payable on the amount of capital that exits the Trust. What rate of IHT is payable after ten years and who pays the IHT? Using the periodic tax charge from the example above and assuming the whole Bond is surrendered on the 15th anniversary for a value of 640,000, the IHT charge will be as follows. Periodic Tax Charge from previous 10 yearly anniversary Number of quarters since last 10 year anniversary Rate of IHT payable on capital leaving the trust % % x = % IHT payable on capital leaving the trust 640,000 x % = 9,515 What rate of IHT is payable before the first ten yearly anniversary and who pays the IHT? If the Settlor(s) dies before the tenth anniversary, the Trustees will be able to withdraw capital from the Trust. The rate of IHT payable is an appropriate fraction of the effective rate depending on the number of quarters that have elapsed since the Estate Planning Bond started. To illustrate this, it is assumed that the capital withdrawn in the above example was paid out on the 8th anniversary in the UK tax year 2006/2007 and the CLT was 500,

10 Estate Planning Bond DISCRETIONARY TRUST CLT minus NRB 500, ,000 = 215,000 Tax on excess over 20% 215,000 x 20% = 43,000 Effective rate of IHT IHT charge 43,000 x 100% 500,000 (30% x 8.6%) x = 8.6% = 2.064% IHT payable on surrender of 640, ,000 x 2.064% = 13, Reporting an Exit Tax charge to HM Revenue & Customs Your client(s) representatives must submit forms IHT 100 and IHT 100c to HM Revenue & Customs Capital Taxes Office. Please note that if the Trustees pay the exit charge out of capital in the trust fund the chargeable amount must be grossed up. This does not have to happen if the beneficiary receiving the capital pays the IHT charge. d) What is the 14 year trap? The 14 year trap can occur when a person has made both Chargeable Lifetime Transfers and Potentially Exempt Transfers. It means that rather than having to only consider transfers made in the seven years prior to death, transfers made within 14 years of death could be liable to IHT. This is best illustrated using the following example. Client A made a Chargeable Lifetime Transfer (CLT) of 250,000 (on which IHT was paid) on 1st September The client then made a Potentially Exempt Transfer (PET) of 100,000 on 2nd August 2004 and then died on 1st June 2006 leaving an estate valued at 300,000. The PET has become a chargeable transfer and as it was made within seven years of the CLT they must now be cumulated, to calculate the excess on which IHT is payable over and above the nil rate band at the date of death. A CLT does not drop out of account until seven complete years have elapsed from the date it was made. Whenever a chargeable transfer is made it is assessed for IHT with any other CLTs made within the previous seven years. If having made a PET the donor dies within seven years of its making, it too becomes a chargeable transfer subject to cumulation. In the example above, the nil rate band on death is 285,000, which means that of the failed PET, 65,000 is liable to IHT. CLT + Failed PET - NRB = Excess liable to IHT 250, , ,000 = 65,000 The amount of tax due on the failed PET which has become a chargeable transfer is 26,000. In addition the death estate is subject to IHT on the excess over the available nil rate band as follows: 300, ,000 (available NRB) = 115,000 x 40% = 46,000 If the client had made the PET one month later, in excess of seven years would have elapsed since the CLT was made which would therefore have fallen out of account saving IHT of 26,

11 ABSOLUTE TRUST Estate Planning Bond Estate Planning Bond Absolute Trust 12 The Trust The Estate Planning Bond Absolute Trust is a Bare trust and as such the beneficiaries are fixed when the EPB commences. The Trustees will have no discretionary powers to decide who should benefit and what their share of the trust fund should be. After the death of the Donor(s), a beneficiary who is sui juris will be entitled to receive their share of the trust fund. A person is sui juris when they are aged at least 18, mentally capable of conducting their own affairs and not an undischarged bankrupt. In Saunders v Vautier (1841) the Courts ruled that an absolute sui juris beneficiary does have the right to demand the Trustees distribute to them their interest in the trust. However, AXA Isle of Man has received confirmation from Queen s Counsel that the policy conditions, preventing an early surrender prior to the death of the Donor, will prevail over the case law in the event a beneficiary asks for payment. Inheritance Tax The discounted gift into trust represented by the Residuary Fund is a Potentially Exempt Transfer (PET) for the purposes of IHT. Provided the Donor(s) lives for more than seven years after their Estate Planning Bond has commenced, this PET will not be included in their estate for the purposes of calculating their IHT liability. Where Donors apply jointly for an Estate Planning Bond Absolute Trust, current HMRC practice is to divide the PET equally between them in the event that either should die within seven years of the commencement date. Should the Donor(s) die within seven years of the commencement of the Estate Planning Bond, the PET will become chargeable to IHT. The amount of IHT payable will depend on the size of the nil rate band at the time of death and whether other chargeable transfers have been made by the Donor(s). Taper relief may reduce the amount of IHT payable depending on when the Donor(s) died and the size of the PET. What happens if a beneficiary predeceases the Donor? If someone dies as the beneficiary of the Absolute Trust, their share of the trust fund will be included in their own estate for Inheritance Tax and can be distributed in accordance with their will. However, if the Donor is still alive at the time the beneficiary dies, the money cannot be released until after the Donor s death. What happens if a beneficiary dies intestate? The laws of intestacy in section 46 of the Administration of Estates Act 1925 define how the residuary estate of the deceased will be distributed in the event that they have not made a will. On the death of a beneficiary his share of the Estate Planning Bond Absolute Trust will be included in his residuary estate. Should he die before the Donor(s) his relationship to the Donor(s) and his own personal circumstances can have a negative effect on the IHT planning of the Donor(s). If the deceased beneficiary was not married and had no children, the assets in his residuary estate would be distributed in a specified order as follows, parents; brothers and sisters (or their issue); half brothers and sisters (or their issue); grandparents; uncles and aunts (or their issue); and parents half brothers and sisters (or their issue). Therefore any Donor(s) for the Estate Planning Bond Absolute Trust should be aware that to appoint a beneficiary who has not made a will may result in the trust fund reverting to the Donor(s). This issue should be of particular concern to Donor(s) appointing minor beneficiaries who are unable to make a will. If more than one beneficiary is appointed, they will share in the trust fund as tenants in common which means that on death only their respective share is passed on in accordance with their will or the laws of intestacy. Please note that the benefits cannot actually be paid until such time as the Donor(s) has died.

12 Estate Planning Bond INCOME TAX ON CHARGEABLE GAINS Income Tax on Chargeable Gains The taxation of proceeds from the Estate Planning Bond in the UK is subject to the chargeable events legislation contained within Chapter 9 of Part 4 Income Tax (Trading and Other Income) Act How the Bond is treated for Income Tax will depend on whether your clients have selected the Absolute Trust or the Discretionary Trust. It will also depend on whether your Clients, the Trustees and the beneficiaries are UK resident for tax purposes when benefi ts are taken from the Bond. Please note that if AXA Isle of Man Administration Limited has been selected as Trustee, it will not be liable for UK income tax as the Company is resident in the Isle of Man. How this affects the taxation of benefits is explained below. Tax on income during the lifetime of the Settlor/Donor The tax treatment of the income is the same for both the Absolute Trust and the Discretionary Trust. For each investment made, UK tax residents are currently entitled to withdraw up to 5% of the original investment each policy year for 20 years and defer any Income Tax payable. Where the full 5% entitlement is not taken in any policy year, the unused amount is carried forward for use in future years. For example, should your clients select an annual withdrawal of 4% of their original investment, they are entitled to take withdrawals for 25 years free of income tax at the time of the withdrawals. If the withdrawals in any year exceed 5% of the premium paid, the excess will give rise to a chargeable gain and there may be a liability to Income Tax. UK resident investors must include details of any chargeable gain arising in their UK tax return. Also any withdrawals in excess of the 5% entitlement may affect the availability of any age-related allowance(s). Please remember that if your clients select increases in their income in line with the change in UK RPI or at a fixed rate of escalation, once the cumulative 5% entitlement has been exceeded there will be a chargeable gain, and hence Income Tax may be payable in future years. Tax on final surrender The Estate Planning Bond cannot be fully surrendered during the lifetime of your Client (or both lifetimes under a joint application). Following the death of the last surviving Client, the rights of full surrender become available to the Trustees. The proceeds from the Bond are paid out without deduction of tax at the time of final surrender. In the UK, the chargeable gain on which Income Tax is payable is the surrender value plus any previous withdrawals taken less the premium paid, and less that part of any previous withdrawals on which tax has already been paid. Who is liable to tax is dependant on which type of trust has been selected. 13

13 INCOME TAX ON CHARGEABLE GAINS Estate Planning Bond Absolute Trust It is the beneficiaries responsibility to declare any chargeable gain made under the Bond and to pay any Income Tax liability that arises. If the beneficiary is not a higher rate income tax payer, top slicing relief is available to reduce the amount of tax payable on any chargeable gain. The relief is available from the original commencement date of the Bond. Absolute Trust When surrendered Who is liable to pay the tax Rate taxed at During the UK tax year in which the Donor dies By the Trustees in any later UK tax year By a benefi ciary after policy segments have been assigned to them UK Adult benefi ciaries UK Adult benefi ciaries UK Adult benefi ciaries The benefi ciaries highest marginal rate of Income Tax The benefi ciaries highest marginal rate of Income Tax The benefi ciaries highest marginal rate of Income Tax Discretionary Trust If AXA Isle of Man Administration has been selected as Trustee, any of the beneficiaries who are resident in the UK must declare any chargeable gain made under the Bond and pay any Income Tax liability that arises. If UK resident Trustees have been selected it is their responsibility to declare any chargeable gain made under the Bond and to pay any Income Tax liability that arises. If the Bond has been assigned to one or more UK resident beneficiaries before being surrendered it is their responsibility to declare any chargeable gain made under the Bond and to pay any Income Tax liability that arises. The table below explains who is assessed for Income Tax in the UK on any chargeable gain arising after the death of the Settlor(s). If your clients, the Trustees and/or the beneficiaries are resident outside the UK it will be their responsibility to declare to their local tax authority any taxable benefits in accordance with the local tax rules and to pay any tax that is due in their country of residence. We may be required in certain circumstances to notify HM Revenue & Customs of benefits taken or of deemed gains. Discretionary Trust When surrendered Who is liable to pay the tax Rate taxed at During the UK tax year in which the Settlor dies The personal representatives of the deceased Settlor The Settlor s highest marginal rate of Income Tax By AXA Isle of Man Administration in any later UK tax year By UK resident Trustees in any later UK tax year Any UK resident benefi ciary in receipt of benefi ts from the Bond The benefi ciary s highest marginal rate of Income Tax The Trustees The trustee rate of tax, currently 40% 14 By a UK beneficiary after policy segments have been assigned to them The beneficiary The beneficiary s highest marginal rate of Income Tax

14 Estate Planning Bond INCOME GUARANTEE AND LEGACY GUARANTEE Income Guarantee and Legacy Guarantee options Introduction The Estate Planning Bond is now available with a choice of two guarantees the Income Guarantee and the Legacy Guarantee both of which must be selected prior to commencement of the Bond. Once selected the Guarantees cannot be cancelled. The cost of the Guarantee is met by deducting units from the investment funds linked to the Bond and buying the appropriate AXA Sun Life Guarantee Fund (see below). Both Guarantees are available on one Bond but are limited to Charging Options D and H and to a restricted range of around 50 funds from the AXA Family Funds and Select Funds range. Full details of the funds available can be found in the Guarantee Sales aid ref IOMEPBGTESA. What is the AXA Sun Life Income Guarantee? The Estate Planning Bond requires your Client to take an income from their investment. Because they are taking money out of the Bond, the value of the investment can fall over time. Over the long term this means that the value of their investment could reduce to zero. If this were to happen then the income would cease. The Income Guarantee Fund provided by AXA Sun Life plc prevents this from happening. The way this works is by switching a small percentage of the Bond value each quarter into a fund (The Income Guarantee Fund) which AXA Sun Life plc guarantees will grow at a sufficient rate to ensure there is adequate value in the policy to continue to make these income payments. Please note that in the unlikely event that AXA Sun Life plc is unable to fulfil its obligation to AXA Isle of Man under this guarantee, AXA Isle of Man will not be liable to make up any shortfall. Income payments are only funded from the Income Guarantee Fund if the value of the other funds linked to the Bond falls to zero during your Clients lifetime (or during either lifetime under a joint application). In the event that your Client (or in the case of joint applications, both of your Clients) die before any payments have been made from the Income Guarantee Fund, there will be no monetary value from the Fund although they will have had the peace of mind from the guarantee. The Income Guarantee Fund is only available to applicants aged 60 or over, and is not available if they select the option to increase their income by RPI or by a fixed amount. The guarantee is paid for by switching an amount into the Income Guarantee Fund each quarter starting immediately. The amount switched each year is shown in the table below. The ages shown are based on your client s age at the start of the Bond. For joint investments, the younger of the two ages will be used. The amount is a percentage of the value of the units held in the investment fund or funds. As the value of the Income Guarantee Fund is zero following your Client s death (or following the death of the second Client in the case of joint applications) its value will not be shown on personal illustrations or on any future valuations. Income Withdrawal as a yearly percentage of the initial investment Age Age Age Age Age 80+ 5% 4% Not available Not available Not available 3% 0.5% 0.375% 0.5% 0.4% 0.2% 0.5% 0.4% 0.32% 0.16% 0.3% NIL* 0.24% NIL* 0.12% NIL* 15

15 INCOME GUARANTEE AND LEGACY GUARANTEE Estate Planning Bond *Special Offer For clients aged 70 and over taking withdrawals of 3% or less the Guarantee will be provided at no additional cost to the client for Bonds taken out during the offer period. What is the tax treatment of the Guaranteed Income in payment? Any payments funded by the cancellation of units from the AXA Sun Life Income Guarantee Fund will be treated as withdrawals of capital, and subject to the normal UK chargeable event legislation. Such payments will therefore count towards the entitlement to withdraw up to 5% of the original investment each policy year for 20 years and to defer any Income Tax payable. What is the Legacy Guarantee? The Legacy Guarantee is about protecting the trust fund from market fluctuations. The Legacy Guarantee works by switching a small percentage of the Bond value each quarter into a fund (The Legacy Guarantee Fund) which AXA Sun Life plc guarantees will grow at a sufficient rate to ensure that on the death of your Client (or after the death of the second life under a joint application) the total unit value under the Bond at that time will be at least equal to your client s original investment, less any income already taken (including any income funded from the Income Guarantee Fund). Therefore, should your Client die at a time when markets are low or have underperformed and the other funds linked to the Bond have fallen to a level that is below the original investment, less the income paid to your Client from the Bond, there will be sufficient value in the Legacy Guarantee Fund to make up the difference. Please note that in the unlikely event that AXA Sun Life plc is unable to fulfil its obligation to AXA Isle of Man under this guarantee, AXA Isle of Man will not be liable to make up any shortfall. After your Client s death (or after the second death in the case of a joint application), the units in the Legacy Guarantee Fund will be sold and extra units purchased in the other funds held at the date of death in the same proportion as the units already held in those funds. If there are no fund holdings at that time, units will be purchased in a cash fund of our choice. The Trustees will have the option to switch these units free of charge if required. The value of the units purchased by the switch from the Legacy Guarantee Fund will be calculated based upon the value of the other funds as at the date of death (or on second death under a joint application). If the value of the other funds linked to the Bond is greater than the original investment less the income already received, no additional units will be purchased and the value of the Legacy Guarantee Fund will be zero. In these circumstances, your Client(s) will have switched monies into the Fund without the beneficiaries gaining any financial benefit although your Client(s) will have had the peace of mind from the guarantee. Where additional units are to be added they will be purchased at the next available dealing date after receipt by us of a certified copy of the death certificate(s) (and any other documents that may be required). The Legacy Guarantee is only available to applicants with a rated age of 79 or less at the outset of the Bond or where the younger age is rated 79 or less for joint applicants. The amount that will be switched, quarterly in advance, into the Legacy Guarantee Fund is 0.5%pa (0.125% per quarter) of the value of the units held in the investment funds linked to the Bond. If the Trustees subsequently decide to surrender one or more policy segments, depending on the charging structure chosen, surrender charges may apply in which case the total amount returned may be less than the original investment less the income already received. 16

16 Estate Planning Bond FUNDS Funds We give your client access to a comprehensive range of AXA Family, Select and External investment funds. If the investment only includes AXA Family or Select funds, investment will be into the units of the relevant funds. If the investment includes External funds, a separate Fund is created for each contract. AXA Family Funds are a range of funds that bring together the investment expertise of the global AXA Group. The range of funds managed by AXA offers: Expert management of a wide range of funds. Funds across a range of risk categories. Funds invested in most major asset classes. Funds invested across the world. As a multi-specialist asset manager, AXA Investment Managers (AXA IM) offers a broad spectrum of innovative investment solutions and have specialist teams for each area of expertise. The range also includes a number of funds managed by AXA Multimanager, a specialist team within AXA, Alliance Capital Management (ACM) and AXA Framlington. Select funds are a range of funds where we have mirrored certain funds of external fund houses. These enable clients to gain access to the expertise of external fund managers without the need for a Dealing Account. Please note that where a Dealing Account has been created, Select funds are not available and the client s money will be invested directly into the underlying fund. External funds are available from a wide range of the world s major investment management groups. If External funds are not chosen at the outset, the client cannot switch into External funds within three months of making the investment. Fund charges Our AXA Family funds generally have no initial charge and have a variety of ongoing charges. The Select funds have a variety of initial and ongoing charges as set by the manager of the underlying fund. We do not take any additional fund charges from these funds. External funds also have a variety of initial and ongoing charges. A dealing charge is levied when buying or selling these funds. Other investment expenses such as safe custody and banking charges may apply. However, we will endeavour to negotiate improved terms with the fund managers from which your client will benefit. For details of reduced initial fund charges and annual fund management rebates please visit or telephone Dealing Accounts If the initial investment is into AXA Family or Select funds only, a Dealing Account will not be required. Where the client elects to invest in External funds, or a combination of External and AXA Family funds, a Dealing Account will be set up. Please note that once a Dealing Account has been created it will remain in force. A Dealing Account attracts a higher quarterly administration charge. How does the Dealing Account work? When the client elects to invest in External funds for the first time, we will create a Dealing Account in the currency of the Bond. This will act like a bank account, against which all cash transactions, including purchasing and selling of investments, charges and withdrawals, will be credited or debited. The first credit transaction in the Dealing Account, for instance, may be the 17

17 FUNDS Estate Planning Bond premium being invested. A separate Dealing Account will be created when investment is made in a fund denominated in a different currency. The existence of more than one Dealing Account under the Bond is therefore possible. There must be sufficient cash in the Dealing Account, or expected proceeds from fund sales being placed, to cover the cost of any purchases requested. Interest is calculated daily on any cash balances, based on the prevailing rate available from our Bankers and the amount held within the Dealing Account. It will be applied on 31 March, 30 June, 30 September and 31 December in each year. A full statement of transactions will be provided after the end of each calendar quarter, together with a valuation of the funds linked to the Bond. It is possible for a Dealing Account to become overdrawn when, for instance, charges are applied or when clients change investments. Debit interest is currently charged at 5% above the call rate obtained from our Bankers. Clients may, therefore, wish to hold some of their investment in cash to cover any debits which may arise on the Dealing Account. We will clear any overdrawn Dealing Account in the following order: 1. By transfer of cash from a Dealing Account in another currency. 2. By sale of one or more underlying funds selected by your Trustees or your Investment Adviser. 3. Sale of units in the AXA Isle of Man Sterling Money Fund. If we do not hold a standing instruction to clear the overdraft, we will clear it by cancelling units in the highest valued fund. If the fund with the highest value is an AXA Family fund we will clear the overdraft once it reaches 100. On the other hand, if the highest valued fund is an External fund, we will clear the overdraft once it reaches

18 Estate Planning Bond FUNDS This is because at lower levels of overdraft the dealing charges would outweigh the debit interest saved. Where a standing instruction is held by AXA Isle of Man to clear the overdraft, the same overdraft limits per fund apply. For example if the standing instruction asks AXA Isle of Man to cancel units in 2 AXA Family funds to clear the overdraft, the overdraft must be at least 200 (2x 100). Whereas if we are asked to cancel units in 3 External funds the overdraft must equal at least 1,500 (3x 500). We reserve the right to sell assets at any time to cover monies due to us, or to delay purchases to prevent an unacceptable level of overdraft occurring. How charges are taken If the investment is in AXA Family or Select funds only and there is no Dealing Account, charges will be met by a proportionate surrender of units across all funds. Charges for investments in External funds (or where there is a Dealing Account) are charged to the Dealing Account. 19

19 ADDITIONAL CHARGES Estate Planning Bond Additional Charges Additional charges may be incurred if clients take advantage of some of the Estate Planning Bond s options and additional services. These are as follows: Fund trading Purchases and sales of funds may incur a trading charge: AXA Family or Select fund purchase or sale free. External fund purchase or sale for each transaction (applicable for 2007). For clarifi cation on the defi nition of AXA Family, Select and External funds please refer to the Funds section in the Introduction on page 17. Fund charges Any underlying fund management charge, together with the relevant Fund Manager s charge for purchasing or selling an underlying fund, will be payable in addition to the above. Other investment expenses such as safe custody and banking charges may apply. Payments Normally, surrender and regular withdrawal payments will be made by BACS (for UK clearing banks only). Any bank charges for any payment method will be passed on to the client. Additional valuation statements A valuation statement is provided every quarter without an additional charge. If further statements are required there is a charge per statement (applicable for 2007). Advisers and clients can register for our free extranet service at and receive free valuations online at any time. General Administration, dealing, valuation and payment charges will be increased on 1 January each year in line with the UK Retail Prices Index without any notifi cation to the policyholder. Any increases may be rounded to the higher pound. Any other variation in charges will be made by giving the policyholders three months written notice to their last known correspondence address. Charging dates The key dates for regular charges within the Estate Planning Bond are: Policy quarter ( the quarterly charging date ) Establishment/Management charge Administration charge (including any additional fees to cover Discretionary Fund Manager and Custodian charges.) Investment Adviser charge Calendar quarter end Interest (credit/debit) (if applicable) The ongoing commission charge (if applicable) may be taken Monthly, Quarterly, Half Yearly or Yearly from the start date of the policy, at the same frequency as the selected commission payments, depending on the charging structure chosen. Trading fees are currently taken at calendar quarter ends. However with the implementation of a new system in 2007, trading fees will be taken at the time of any trade where applicable. 20

20 Estate Planning Bond CHARGING OPTION A Charging Option A Allocation rate 100% of the premium is invested into the chosen fund(s). Establishment charge An establishment charge of 0.25% of the premium is payable quarterly in arrears for the first four years. This charge reduces where commission is foregone as follows: Initial commission equivalent* 6% 0.25% 5% 0.19% 4% 0.14% 3% 0.08% 2% 0.02% Quarterly establishment charge *The initial commission equivalent is equal to the initial commission rate plus 6 times the annual ongoing commission rate. Management charge A quarterly management charge, based on the higher of the premium or fund value (calculated on the last available fund value held in our records) is payable quarterly in arrears throughout the lifetime of the contract. A reduced quarterly management charge is available for higher investments as detailed below: Total premium 50,000-99, % 100, , % 250, % Quarterly management charge Administration charges If investment is in AXA Family or Select funds only with no Dealing Account, an administration charge of per policy quarter applies. If investment is in External funds (or where there is a Dealing Account), an administration charge of per policy quarter is payable. Both charges will increase in line with the UK Retail Prices Index ( RPI ) each year. RPI increases will take effect on 1 January each year and may be rounded to the higher pound. The above fi gures are applicable for Where a Discretionary Fund Manager & Custodian (DFMC) is appointed the quarterly administration charge will increase to In the event that we agree to the appointment of more than one DFMC under the Bond, the quarterly administration charge will be increased by a further for each additional appointment. Early surrender charge If the Trustees surrender the Bond within eight years of the premium being paid, a charge equivalent to the initial commission equivalent, applied to the higher of the premium or the value of the fund, will be deducted. This charge will reduce quarterly to zero over eight years. Ongoing commission and Investment Adviser options Ongoing commission may be payable monthly, quarterly, half yearly or annually at a rate not exceeding 0.5% per annum. No charge is made for the ongoing commission but the establishment and surrender charges are determined from the initial commission equivalent. Where we are asked to accept investment instructions from a client nominated Investment Adviser, and a fee is required by the Adviser for providing this service, an equivalent charge will be taken from the Bond. Both the fee and the corresponding charge will be payable quarterly in arrears from the date of commencement of the Bond. Where both an Investment Adviser fee and ongoing commission are to be taken from the Bond, the total of both must not exceed 1.5% per annum. 21

21 CHARGING OPTION B Estate Planning Bond Charging Option B 22 Allocation rate 100% of the premium is invested into the chosen fund(s). Establishment charge An establishment charge of 0.43% of the premium is payable each quarter in arrears for the first four years. This charge reduces where commission is foregone as follows: Initial commission taken 6% 0.43% 5% 0.36% 4% 0.29% 3% 0.21% 2% 0.14% 1% 0.07% Nil Nil Quarterly establishment charge Management charge A management charge based on a percentage of the premium is payable each quarter in arrears for the first four years. A reduced quarterly management charge is available for higher investments as detailed below: Total premium 50,000-99, % 100, , % 250, , % 500, % Quarterly management charge Administration charges If investment is in AXA Family or Select funds only with no Dealing Account, an administration charge of per policy quarter applies. If investment is in External funds (or where there is a Dealing Account), an administration charge of per policy quarter is payable. Both charges will increase in line with the UK Retail Prices Index ( RPI ) each year. RPI increases will take effect on 1 January each year and may be rounded to the higher pound. The above figures are applicable for Where a Discretionary Fund Manager & Custodian (DFMC) is appointed the quarterly administration charge will increase to In the event that we agree to the appointment of more than one DFMC under the Bond, the quarterly administration charge will be increased by a further for each additional appointment. Early surrender charge If the Trustees surrender the Bond within four years of the premium being paid, a charge equal to the percentage of commission taken, applied to the premiums paid, will be deducted. This charge will reduce quarterly to zero over four years. Ongoing commission and Investment Adviser options Ongoing commission may be payable monthly, quarterly, half yearly or annually at a rate not exceeding 1% per annum. Where ongoing commission is paid, an equivalent charge will be made on the same date. Where we are asked to accept investment instructions from a client nominated Investment Adviser, and a fee is required by the Adviser for providing this service, an equivalent charge will be taken from the Bond. Both the fee and the corresponding charge will be payable quarterly in arrears from the date of commencement of the Bond. Where both an Investment Adviser fee and ongoing commission are to be taken from the Bond, the total of both must not exceed 1.5% per annum.