GIFT TRUST (CREATING FIXED TRUST INTERESTS) ESTATE PLANNING WITH THE GIFT TRUST

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1 GIFT TRUST (CREATING FIXED TRUST INTERESTS) ESTATE PLANNING WITH THE GIFT TRUST

2 THE GIFT TRUST MAY BE SUITABLE FOR YOU IF: You would like to take advantage of the favourable potentially exempt transfer (PET) regime for lifetime giving to reduce your tax liability. You want to avoid the costs and complexities that will generally apply where assets are transferred to trust. You are able to make an outright, irretrievable gift and have no requirement for access to the gifted amount or the income it generates. You are willing to make a decision now on who should benefit from the amount you invest and accept that you will not be able to change your decision at a later date. You are content that adult beneficiaries could choose to direct the trustees how the funds should be invested and may call for payment of the trust fund at any time. It is appropriate for the beneficiary or beneficiaries to have a trust interest which is treated as part of their estate. You require a straightforward and low-cost set-up method. You wish to avoid delays in distributing the proceeds of your investment which may otherwise arise were probate (or confirmation) required before payment could be made. The tax treatment depends on your personal circumstances and may be subject to change in the future. Tax rules and your personal circumstances can change.

3 PAGE 1 INTRODUCTION PAGE 2 THE GIFT TRUST PAGE 4 TECHNICAL QUESTIONS AND ANSWERS

4 INTRODUCTION WITH THE NIL RATE BAND FROZEN AT 325,000 FOR TAX YEARS UP TO AND INCLUDING , YOU MAY BE LOOKING FOR WAYS TO PROTECT YOUR ASSETS FROM POTENTIAL LIABILITY TO INHERITANCE TAX IN FUTURE YEARS. An obvious way to reduce an inheritance tax liability is to make outright lifetime gifts of income or capital to reduce the value of your taxable estate. Such gifts may be exempt from inheritance tax altogether or may be potentially exempt. A potentially exempt transfer (or PET) will fall out of account, and so become exempt, on your survival for seven years from the date the gift is made. A lifetime gift made on or after 22 March 2006 will generally be a PET only if it is a gift to another individual. A gift to a trust other than a disabled trust will be a chargeable transfer and may give rise to an immediate liability to inheritance tax at the lifetime rate of 20%. The trust would also be subject to an onerous reporting and tax regime that could give rise to costs and further inheritance tax liabilities at each ten-year anniversary of the gift and when distributions are made from the trust. However, transferring property to a trust such as the Gift Trust will be treated as a gift to another individual and will thus be a PET. This is because under the Gift Trust you create fixed trust interests. The trustees hold the trust fund as nominees for your chosen beneficiary or beneficiaries who are absolutely entitled to the trust fund. In technical terms, it is a bare trust which is effectively ignored for inheritance tax purposes as long as the person making the gift survives for seven years from the date of the gift. This inheritance tax benefit of being able to make a PET and to avoid the onerous tax and reporting regime governing other trusts is not without its disadvantages. In making the gift you make an outright irretrievable gift to your chosen beneficiaries and then give up control. You may be a trustee of the Gift Trust but adult beneficiaries could choose to direct the trustees how to deal with the trust fund and may call for payment of the trust fund at any time. You will also need to recognise that the beneficiary s share of the trust fund will be treated as an asset in his or her own estate for inheritance tax purposes and would be dealt with in accordance with the beneficiary s will or the rules on intestacy. It would also be taken into account in the event of the beneficiary s divorce or insolvency. However, in many family situations the Gift Trust will allow you to take action to reduce the inheritance tax liability on your own estate whilst knowing that your chosen beneficiaries will be content for the funds to be invested and managed by the trustees until it is appropriate to take control of the trust fund. 1

5 THE GIFT TRUST REDUCING INHERITANCE TAX LIABILITIES WITH THE GIFT TRUST The initial trust capital will usually be provided by the issue or assignment of an investment policy or bond to the trustees of your Gift Trust. Inheritance tax effect of establishing the Gift Trust In establishing the Gift Trust, you will be treated as having made a PET (to the extent that your gift is not exempt). The value of your gift will usually be the amount invested or, in the case of an existing policy, the market value of the policy at the date the Gift Trust is created. No tax is payable when a PET is made and, if you survive the subsequent seven-year period, your gift will remain exempt from inheritance tax. The investment or its proceeds can then pass to your chosen beneficiaries entirely free of inheritance tax on your death. Note that regardless of whether or not you survive the seven-year PET period, any growth in the investment will be outside your estate from the moment the trust is created and there may be further savings after three years if the value of your gift is in excess of the nil rate threshold. Speak to your financial adviser for further details. Joint settlors Where the Gift Trust is created by joint settlors who are legally married or are in a registered civil partnership with each other, each of you will be treated as having made a gift equivalent in value to one-half of the total amount gifted. In other circumstances, you will need to have evidence of the amounts each settlor contributed; the value of the gift that each of you make will be determined accordingly. If you die within seven years of making a PET, the gift will become chargeable to inheritance tax and will use all or part of your nil rate band for the purposes of calculating tax on your free estate. However, tax savings may still be possible. 2

6 FURTHER GIFTS Once your Gift Trust is in place, it is possible for you to transfer other policies to the trust or to gift further sums to the trustees for them to invest or to top-up the investment. Additional investments into your trust plan will be treated as further gifts to the trust. These gifts will usually be potentially exempt transfers but will be exempt from inheritance tax, and so outside your estate with immediate effect, if made under one of the following headings: MAKING REGULAR PREMIUM INVESTMENTS IN ASSOCIATION WITH THE GIFT TRUST Where regular premium investments are made into a Scottish Widows bond or regular savings plan held under a Gift Trust, the premiums paid will be potentially exempt transfers to the extent that no exemption applies. Often, premium payments will be made out of surplus income and so will qualify for an exemption. Annual exemption Gifts of up to 3,000 can be made each year without any liability to inheritance tax. Normal expenditure out of income exemption Gifts made regularly out of surplus income can qualify for exemption from inheritance tax. Regular premium payments will often fall into this category. Provided certain conditions are satisfied, the exemption will be available regardless of the monetary value of the payment. Speak to your financial adviser for further details of this exemption. Gifts in consideration of marriage Where the Gift Trust is established for one beneficiary only, a single further gift would be exempt if made in consideration of and on the occasion of the marriage of the beneficiary. If the gift is to be entirely exempt, it must not exceed: 5,000 if you are the parent of the beneficiary 2,500 if you are the grandparent of the beneficiary 1,000 if you are not the parent or grandparent of the beneficiary. If additional investments do not fall within an inheritance tax exemption they will be PETs, falling out of account after seven years as far as any inheritance tax liability in your own estate is concerned. 3

7 TECHNICAL QUESTIONS & ANSWERS SETTING UP THE TRUST 1. How is the Gift Trust established? Where you are making a new investment, you should complete the Gift Trust at the same time as you make your investment application. The investment will be issued to the trustees to hold as nominees for your chosen beneficiaries. The trust is established as soon as the bond or other investment comes into force. If your policy is already in existence, completion of the Gift Trust document will transfer ownership of your policy to the trustees. 2. Who can be the settlor? The settlor is the person who establishes the trust. A settlor must be over 18 years of age with full mental capacity. Scottish Widows will not normally accept a trust created under a power of attorney. For tax purposes, a person will be regarded as the settlor where he or she provides assets to the trust either directly or indirectly. The Gift Trust can be established by joint settlors if the investment application (or the existing policy) is also in joint names. 3. Can a joint cheque be used to establish the Gift Trust? For the reason given above, it is important that any assets being gifted to a trust are those of the settlor only. Provided that the Gift Trust is established by joint settlors who contribute in equal shares, a cheque for the initial investment drawn on a joint account is perfectly acceptable. Otherwise, the cheque must be drawn on an account in the name of the settlor (or each settlor). 4. Can my existing life insurance investment bonds be transferred to the Gift Trust? Yes. The existing investments can be included in Part B of Box E of the trust form and will be assigned to the trust automatically once you and the additional trustees sign the trust document. Alternatively you can transfer the existing investments by completing a separate deed of assignment (available on request) after the trust has been established. Speak to your financial adviser for advice about the value of the initial or further gift and to arrange the assignments. 5. Is investment restricted to particular products? No, but the Gift Trust is designed to be used only in conjunction with life insurance based investment products. TRUST ISSUES 6. On the settlor s death is probate (or confirmation) required? Probate will not be required on the settlor s death (provided there is at least one surviving trustee) as no change of ownership occurs. The trustees hold the trust fund as nominees for the trust beneficiaries and this continues after the death of the settlor. 7. Who should be appointed as trustee? As settlor, you will automatically be one of the original trustees. We strongly recommend that you appoint at least one other person to act with you as a trustee. As mentioned above, there must be at least one surviving trustee if the proceeds of your investment are to be distributed after your death without the need for probate (or confirmation). It is, of course, your decision who should be the other trustees to act with you. The other trustees will generally be members of your family. Trustees must be adults of sound mind and should ideally be living in the United Kingdom. In some circumstances it may be appropriate to appoint a professional person such as a solicitor or accountant, although such a trustee may charge for his or her services (and there will be no trust income from which the fees can be met). 4

8 8. Can trustees be removed and new trustees appointed? Yes. During your lifetime you are able to appoint new or additional trustees and, by giving 30 days notice in writing, to dismiss any trustee (provided at least one corporate trustee or two individual trustees remain). Bear in mind, however, that adult beneficiaries could choose to direct the trustees how to deal with the trust fund and may call for payment of the trust fund at any time. 9. What happens if one of the trustees dies or no longer wishes to be a trustee? You, or the remaining trustees after your death, may appoint a new trustee to act in place of a trustee who has died. Any trustee who no longer wishes to act may retire so long as a replacement is appointed simultaneously or, if no replacement can be found, there are at least two trustees or a corporate trustee remaining after the retirement. 10. On what terms do the trustees hold the trust fund? The trustees hold the trust fund as nominees for the trust beneficiary or beneficiaries under bare trusts. This means that a beneficiary has a fixed and absolute interest in the trust fund and an adult beneficiary is able to direct the trustees how to deal with the trust property. 11. Who should be the trust beneficiary? The trust beneficiary (or beneficiaries) should be the person (or persons) you intend to benefit from the proceeds of the investment. You may name more than one beneficiary but you cannot subsequently change a beneficiary, or the share in which they benefit. 12. Can I write the trust for a class of beneficiaries for example, all of my grandchildren born in my lifetime? No. All beneficiaries must be identified and named at outset. Otherwise the trust fund would be treated as settled property for inheritance tax purposes and would then be subject to the more complex tax and reporting regime which governs such settlements. 13. What is the position of a beneficiary under the Gift Trust? As the trustees hold the trust fund as nominees under bare trusts, a beneficiary who has full legal capacity may direct the trustees how to deal with the trust fund and may call for payment of the trust fund at any time (although your chosen beneficiaries will often be content to leave the investment and management of the trust fund with the trustees and to take benefits only at the appropriate time). As each beneficiary will have a fixed and absolute trust interest, this also means that: the beneficiary s share of the trust fund will be treated as an asset in his or her estate for inheritance tax purposes the trust interest would be taken into account in the event of the beneficiary becoming divorced or insolvent the trust interest passes under the beneficiary s will or intestacy (and in some circumstances may thus become comprised again in the estate of the settlor if the beneficiary pre-deceases the settlor) if a chargeable event arises under the investment, any chargeable event gains will be assessable to income tax on the beneficiaries unless the bare trust was created by a parent and is subject to the parental settlement rules. 14. Can I access the trust fund during my lifetime? No. Under the terms of the Gift Trust, you are irrevocably excluded from benefit. 15. Can my spouse/civil partner benefit from the trust fund? No. A spouse or civil partner should not be named as a trust beneficiary as transfers to a spouse or civil partner would, in any event, normally be exempt from inheritance tax. 5

9 INHERITANCE TAX 16. What is the inheritance tax effect of setting up the Gift Trust? Amounts transferred into the Gift Trust will usually be potentially exempt transfers (PETs) for inheritance tax purposes unless one of the exemptions from inheritance tax applies. Provided that you survive for at least seven years after making a PET, it will not be subject to inheritance tax on your death. 17. What is the tax position if I should die within seven years of making a PET? Where death occurs within seven years of making a potentially exempt gift to the trust, the value of the gift must be included in your estate for the purposes of the inheritance tax calculation. 20. Is it possible for me and my spouse/civil partner to each create a Gift Trust? Yes, as neither you nor your spouse/civil partner can be a trust beneficiary separate arrangements are possible. 21. Is the Gift Trust affected by the Budget 2006 changes which aligned the inheritance tax treatment of trusts? No. Guidance notes issued by HM Revenue & Customs on publication of the Finance (No 2) Bill 2006 confirmed The Finance Bill makes clear that all future as well as existing bare trusts are not affected at all by the changes. 18. How might the Gift Trust impact on other planning and vice versa? Potentially exempt transfers made to the Gift Trust in the seven-year period preceding your death, will use up some or all of your inheritance tax nil rate band. Exempt transfers will not impact on inheritance tax planning. You should seek further advice from your financial adviser if you are also planning to make other transfers to trust. 19. Could a liability to inheritance tax arise on the death of a beneficiary? Yes. The trust beneficiaries are absolutely entitled to the trust property. This means that if a beneficiary dies, their share of the trust fund will be included in their taxable estate for inheritance tax purposes. Where beneficiaries are likely to have taxable estates in excess of the nil rate threshold, insurance on the lives of the beneficiaries to fund for any tax liability should be considered. It should be borne in mind that if a beneficiary dies without leaving a will and with no surviving spouse/civil partner or issue, the intestacy rules will normally mean that the beneficiary s interest in the trust fund passes to his or her parents. This may have the effect of negating the tax planning by the settlor. 6

10 IMPORTANT NOTES Important. Please read carefully. If there is anything you do not understand or if you would like more information about any aspect, please contact us or speak to your financial adviser. The information given in this brochure is based on our understanding of UK law and HM Revenue & Customs practice at the time of printing. Legislation regarding taxation and Revenue practice may be subject to change, which cannot be foreseen. The Gift Trust is a document with legal significance that may affect the rights, obligations and tax position of yourself and the beneficiaries. You should not proceed unless you are satisfied that you understand its effect and that it achieves your objectives. Your attention is drawn particularly to clause 6 of the Gift Trust document, which has the effect of exempting the trustees from liability in some circumstances. If you have any doubts or uncertainties you should seek independent professional advice. Special consideration may be required where you are either resident or domiciled outside the UK. Many countries have imposed reporting requirements on trustees where a settlor, trustee or beneficiary is resident overseas or any of the assets or rights placed in the trust are located overseas. If you are a trustee or are thinking of becoming a trustee and believe this might apply to you we d recommend that you take immediate legal advice. References to civil partners are references to individuals who have registered their civil partnership under the Civil Partnership Act

11

12 Scottish Widows Limited. Registered in England and Wales No Registered office in the United Kingdom at 25 Gresham Street, London EC2V 7HN. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Financial Services Register number /16

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