International Loan trust - A technical FAQ for financial advisers

Transcription

1 Iteratioal Loa trust - A techical FAQ for fiacial advisers

2 Cotets Please ote This documet is for fiacial adviser use oly. It should ot be distributed to, or relied upo, by retail cliets. 04 A BRIEF OUTLINE OF HOW THE LOAN TRUST WORKS 05 ARE THE TRUSTEES PERSONALLY LIABLE FOR REPAYING THE LOAN? UPON DEATH OF THE SETTLOR (LENDER) CAN THE EXECUTORS POSTPONE REPAYMENT OF THE LOAN? CAN THE TRUSTEES BE RELEASED FROM THEIR OBLIGATION TO REPAY ANY OUTSTANDING LOAN? 10 WHY ARE OUR LOAN TRUSTS ONLY AVAILABLE TO SOLE SETTLORS? 11 WHY ARE IN-SPECIE PREMIUMS NOT PERMITTED UNDER OUR LOAN TRUSTS? OTHER FREQUENTLY ASKED QUESTIONS CONTACT US 2

3 Iteratioal Before you begi AXA Wealth Iteratioal is the brad used for the promotio of iteratioal ivestmet products offered by AXA Isle of Ma Limited ad AXA Life Europe Limited. The iformatio i this guide is limited to the loa trusts provided by AXA Isle of Ma ad AXA Life Europe. It is based o our iterpretatio of curret law ad taxatio practice i the UK, the Isle of Ma ad Irelad as at 1 November 2015, which could chage i the future ad is depedet o idividual circumstaces. The followig iformatio does ot costitute legal or tax advice ad we recommed that ivestors, ad their advisers, should always seek idepedet tax ad legal advice. This documet should be cosidered alog with Your guide to the loa trust (cliet guide), the relevat Product Guide, Key Features documet ad ay other supportig literature. 3

4 A brief outlie of how the loa trust works A trust is established with the promise of a loa beig made to the trust by the 01 settlor (the trust deed). The settlor makes a loa of cash to the trust - this loa is iterest free ad 02 repayable o demad by the settlor to the trustees (the loa agreemet). The trustees use the loa to purchase a uit-liked life assurace policy or 03 capital redemptio policy (the bod). The trustees repay the loa through ad hoc or regular withdrawals usig the 5% 04 aual tax-deferred etitlemet available uder a bod (the loa repaymets). For more details of how the loa trust works, please read Your guide to the loa trust. Plaig poit As the bod is take out by the trustees, ay ivestmet growth is immediately outside the settlor s estate for UK iheritace tax (IHT) purposes. It is importat that the loa repaymets are take by the settlor ad spet i order to remove the loa from their estate over time ad provide more flexibility i terms of the future distributio of beefits. As the trust property is comprised of a uit-liked bod, there is a possibility that at ay poit i time the amout of the outstadig loa may be greater tha the value of the bod. However, our curret trust deeds are desiged to protect the trustees from becomig persoally liable to repay ay shortfall. This is explaied i detail o page 5. 4

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6 Are the trustees persoally liable for repayig the loa? CAPPING THE TRUSTEES LIABILITY Our curret loa trusts cotai a clause i the Loa Agreemet that limits the trustees liability to repay the loa. The trustees are persoally liable to repay the loa oly up to the value of the trust fud. Therefore, if the value of the trust fud falls below the value of ay outstadig loa the trustees will ot be persoally liable for ay shortfall. If the trustees have made ay distributios to beeficiaries these amouts will still be treated as part of the trust fud whe calculatig ay outstadig liability. This is icluded i the clause as it prevets the trustees from distributig trust property to the beeficiaries i order to avoid their liability to repay the loa. This clause was added after receivig a legal opiio from Quee s Cousel. AN EXAMPLE OF HOW THIS CLAUSE WORKS A loa trust is established with a loa of 100,000. The trust fud (the bod) decreases i value to 80,000. The trustees have made o loa repaymets to the settlor, or have they made ay distributios to beeficiaries. If the settlor requests that the loa is repaid i full at this poit the the trustees will oly be liable to repay 80,000. If the settlor dies before the loa is repaid i full, the debt owed to the deceased settlor s estate is limited i the same way, for the purposes of calculatig ay IHT liability. I the above example, 80,000 would eed to be icluded i the settlor s estate. NOTES ON OLDER TRUST DEEDS Please ote that the loa trusts provided by AXA Isle of Ma ad AXA Life Europe did ot cotai this clause prior to July 2014 ad November 2014 respectively. Therefore, if the settlor of oe of these older trusts were to demad the full repaymet of the loa at ay time, the trustees would persoally eed to make good ay shortfall if the value of the trust fud has falle below the amout of the outstadig loa. I the example provided opposite this shortfall would be 20,000. To check if the loa trust documet cotais this clause you ca: check the date o the fial page of the loa trust documet agaist the dates metioed above. read sectio (d) of the Loa Agreemet (part E of the loa trust documet). If the documet cotais this clause the uder sectio (d) it will make referece to the fact the trustees liability i respect of the loa is capped. PLEASE NOTE We have take every care i preparig the trust deeds, but we caot take ay resposibility for the legal/tax cosequeces of usig them. It is strogly advised that your cliet cosults their ow professioal advisers ad seeks taxatio advice i their coutry of domicile ad/or residece. 6

7 Upo death of the settlor (leder) ca the executors postpoe repaymet of the loa? Whe the settlor dies, the amout of the outstadig loa will form part of their estate for IHT purposes. The executors of the deceased s estate would ormally have a legal duty to call i ay debts owed to the deceased s estate ad they may, therefore, request that the trustees of the loa trust repay the outstadig amout of the loa. The executors ca postpoe the actual cash repaymet of the loa i order to leave the bod i force*. The trustees ad the executors may wish to do this for a umber of reasos, for example: If callig i the loa immediately would result i a chargeable evet uder the bod that causes a large icome tax liability. If early surreder charges are still applicable to the bod. If the uderlyig assets of the bod (for example structured/cash deposits) caot be accessed immediately without ivokig early breakage clauses or charges. If poor market coditios exist at the time of the settlor s death. I this case the trustees ad executors may wish to postpoe surreder of, or withdrawal from, the bod i the hope that the uit value of the liked ivestmets improves i the future. *If the bod was established o a life assurace basis ad the settlor is the oly/last life assured the the bod is automatically surredered upo death of the settlor. However, the decisio to postpoe callig i the loa will also deped o a umber of other factors which might iclude: The ature of the other assets i the settlor s estate, ad the total estate value. The beeficiaries of the settlor s estate, their immediate eeds, ad whether they are differet from, or idetical to, the potetial beeficiaries of the loa trust. (Note, the potetial beeficiaries uder the loa trusts provided by AXA Isle of Ma ad AXA Life Europe iclude those persos amed i the settlor s will). The relatioship betwee the settlor ad the trustees, ad betwee the executors ad the trustees. Whether or ot a will was executed ad, assumig that it was, what provisios, if ay, were icluded i respect of the outstadig loa. These matters are discussed i more detail o pages 7 ad 8. PLEASE NOTE As explaied above, it is possible for the executors to allow the trustees to leave the loa outstadig ad keep the bod i force. It is sometimes suggested that, if the loa is left outstadig, the executors could request that the bod (or idividual segmets) is assiged to the desired beeficiaries at a later date. The aim of this is to shift the tax charge o subsequet surreders to the beeficiaries, to icrease tax efficiecy (assumig that the beeficiaries have lower idividual rates of icome tax tha the trust rate of icome tax). However, i our view, it is possible that HM Reveue & Customs (HMRC) would view ay assigmet of the bod i these circumstaces as beig for cosideratio, which may geerate a chargeable evet at the trust rate of tax (which is 45% for the 2015/16 tax year), makig this type of plaig ieffective. 7

8 THE COMPOSITION OF THE ESTATE AND THE TOTAL ESTATE VALUE IHT is potetially payable o ay estate where the value of the total estate, plus ay previous lifetime trasfers withi seve years of death, exceeds the il rate bad. The il rate bad is set to remai at the curret rate of 325,000 util at least April From 6 April 2017 there will also be a IHT mai residece il rate bad that will apply if a mai residece is left to direct descedats. This will be i additio to the stadard IHT il rate bad of 325,000. The maximum amout of this bad will be 100,000 i 2017/18, icreasig yearly to 175,000 i 2020/21. It will be tapered away for estates valued over 2 millio. Ad, like the stadard il rate bad, ay uused amout will be trasferable to a spouse or civil parter. I some circumstaces where IHT is due o a estate, the executors may ot be able to pay the IHT util they are able to sell certai assets. A perso s home is a good example of a asset where IHT may be payable o the death of the ower, but might ot be able to be paid immediately. This is because the executors eed to value the house ad sell it first. Oly oce they receive the sale proceeds ca they pay ay IHT due. Of course, this may take cosiderable time ad much will deped o market coditios. HMRC therefore allow paymet to be made i istalmets to help alleviate the eed for the estate to borrow moey to pay the IHT due. Coversely, moey held i the deceased s bak accout, or i a isurace bod which will pay out o his or her death, is deemed immediately accessible by HMRC. Paymet of IHT i respect of such assets would eed to be made followig the death of the accoutholder/policyholder, usually withi 6 moths of death. EXAMPLE Daphe dies o 1 December 2015 with a estate which is comprised of her house, valued at 300,000, ad a outstadig loa, uder a loa trust, of 50,000. For this example it is assumed that the value of the bod exceeds the loa amout. The estate s IHT liability is 40% = 10,000. As there are o other liquid assets i the estate, the executors would eed to call i the outstadig loa, or part of it, to pay the 10,000 IHT due. A alterative might be to borrow to pay the IHT liability. However, this optio would eed to be cosidered agaist surrederig the bod held uder the loa trust, surrederig idividual bod segmets or takig withdrawals from the bod to cover the tax due. THE BENEFICIARIES OF THE ESTATE, THEIR NEEDS, AND WHETHER THEY ARE INCLUDED AS POTENTIAL BENEFICIARIES OF THE LOAN TRUST The beeficiaries of the loa trust will ofte be the same as the beeficiaries of the settlor s estate, assumig that the settlor has made a valid will. Provided that there is eough moey i the estate to pay ay IHT due, the executors may, i these circumstaces ad subject to the approval of the beeficiaries, decide to postpoe the actual repaymet of the loa. EXAMPLE Marie dies o 1 December 2015 with a estate which is comprised of a house valued at 350,000, together with 50,000 i a istat access bak accout. She also has a outstadig loa of 30,000 uder a loa trust. The IHT liability o her etire estate would be 40% = 42,000. I this example there is eough moey i the bak accout to cover the total amout of IHT due. I this situatio it may be acceptable to the beeficiaries for the executors to postpoe the repaymet of the loa if this is desirable. It should be kept i mid that it will ot be possible for the executors of Marie s estate to complete the admiistratio of her estate whilst the loa remais outstadig. It is also importat to remember that Marie s executors will still have to accout for the 30,000 debt to the estate for the purposes of calculatig the IHT. It is simply the repaymet of the actual loa that has bee deferred. 8

9 Ca the executors postpoe repaymet of the loa? THE INTERACTION BETWEEN THE DECEASED S WILL (OR THE INTESTACY PROVISIONS) AND THE LOAN TRUST If a UK residet dies without a will, their property will be passed o accordig to a prescribed series of rules called the rules of itestacy. These rules are complex ad will deped o may factors, icludig the total estate value, the marital status of the deceased ad whether there are childre ad other blood relatives. For example, the rules for a married perso (icludig a registered civil parter) with childre, who dies domiciled i Eglad ad Wales without a valid will are as follows: Assets less tha 250,000 - Everythig goes to the spouse or civil parter. Assets more tha 250,000 - Everythig up to 250,000 goes to the spouse or civil parter. Half of the remaiig assets also go to the spouse or civil parter, with the other half passig to the childre. The full rules are too complex to go ito specific detail i this documet but more iformatio o the rules of itestacy i Eglad ad Wales ca be obtaied by followig the liks below: It is clear from these rules that what a survivig spouse or civil parter will receive is depedet o both the size of the estate ad whether or ot there are childre. Ay outstadig loa uder a loa trust will form part of the deceased s estate o death ad will therefore also be covered by the itestacy rules. Plaig poit Leavig ay outstadig loa to a spouse or registered civil parter uder the terms of a will esures that: No IHT will arise o the settlor s death whe the loa passes over to the spouse or civil parter (assumig that perso is a UK domiciled idividual). The spouse or civil parter ca the decide freely what to do with the outstadig loa. ACCOUNTING FOR THE OUTSTANDING LOAN IN THE SETTLOR S WILL Eve where the settlor has a existig will i place, care should be take whe cosiderig ivestmet i a loa trust. The terms of the will may simply leave all the residuary estate to a particular perso. It is importat to make sure that the will is writte clearly ad takes ito accout the outstadig loa uder the loa trust. If the will was writte before the loa trust was effected, the will might eed to be ameded. The followig example shows how failig to accout for the loa i the will ca cause problems: EXAMPLE Joh is married to Hele ad they have oe so, Freddy. Joh has draw up his will as show i the table below: ASSET Share i private residece ad chattels Buildig Society Accout (valued at 100,000) Residuary estate (curretly a small amout i a NISA) LEFT TO Hele Hele Freddy Shortly after Joh has draw up his will, he uses the 100,000 i his buildig society savigs accout to establish a loa trust. Joh dies ad Hele assumes, havig kowledge of the cotets of Joh s will, that she has a right to his etire estate other tha the NISA which is beig left to Freddy. However, the outstadig loa ow forms part of the residuary estate o Joh s death ad, as such, will pass to Freddy uder the terms of the will. Whilst a deed of variatio could be used to rectify this positio, the deed has to be draw up withi two years of Joh s death. Perhaps more importatly, as Freddy is the beeficiary uder the will he must agree to the variatio. Failig this, Freddy will beefit from the remaiig outstadig loa as well as the NISA accout, which was ot what Joh had origially plaed. There is also o scope for postpoig the repaymet of the loa o Joh s death if Freddy is ot i agreemet. PLEASE NOTE It is importat that, whe cosiderig use of a loa trust, iteractio with ay existig will is cosidered to make sure that ay outstadig loa passes i accordace with the settlor s wishes. 9

10 Ca the trustees be released from their obligatio to repay ay outstadig loa? DURING THE SETTLOR S LIFETIME It is possible for the settlor to release the trustees from their obligatio to repay the loa durig their lifetime. If the settlor does waive the loa, the amout waived will costitute a chargeable lifetime trasfer by the settlor for IHT purposes. This chargeable lifetime trasfer will be deemed to have occurred o the date that the settlor waived the loa. This release of a debt, for o cosideratio, must be doe by a appropriate deed (Piel s Case, 1602 WL 4 (QB); 77 E.R 237). For our loa trusts, the appropriate Loa Waiver Deed provided by AXA Isle of Ma or AXA Life Europe ca be used to achieve this. VIA A WILL It should also be possible for the settlor to iclude a provisio i their will to waive ay outstadig loa to the trust o their death. This would costitute a gift to the trust o the settlor s death ad may have implicatios for the trust, i terms of future 10 year aiversary ad exit charges for IHT purposes. Nevertheless, it may facilitate the maagemet of the potetial icome tax liabilities o future chargeable evet gais by the assigmet of the bod (or idividual segmets) to beeficiaries. Ayoe wishig to do this would eed to weigh up these poits. They would also eed to make sure they had sufficiet other liquid assets i the estate to pay ay outstadig IHT. PLEASE NOTE If, after the settlor s death, the loa is released by a beeficiary of the estate, the amout waived would be cosidered a gift to the trust (chargeable trasfer, if the trust is a discretioary trust) by the beeficiary. I effect, they are givig up their right to the loa repaymet through the will ad giftig this ito the trust. This gift will be aggregated with ay other trasfers made by that perso. As ay beeficiary of the will is also a potetial beeficiary of the trust uder our loa trust deeds, such release is likely to be cosidered as a gift with reservatio of beefit by HMRC assumig those beeficiaries were UK domiciled. This is because they may beefit i future (as a potetial beeficiary uder the trust) from the gift they have made. For these reasos this is ot recommeded as a tax plaig strategy. 10

11 Why are our loa trusts oly available to sole settlors? Whilst it is possible to write a joit settlor loa trust, we do ot offer documetatio o this basis. The operatio ad admiistratio of a joit settlor loa trust would be more complex, as the amouts of the loas made by each settlor at the outset would eed to be determied ad the loa repaymets would eed to be clearly idetified betwee both joit settlors. There could also be admiistratio issues should the parties subsequetly divorce. Where a married couple, or registered civil parters, wish to effect a loa trust, it is recommeded that they take out separate loa trusts. Uder such arragemets the settlor of oe of the trusts should exclude the spouse or registered civil parter as a potetial beeficiary. Otherwise, HMRC may treat the arragemets as gifts with reservatio for IHT purposes due to the reciprocal ature of the trasactios. We believe that there are advatages i usig the sole settlor rather tha the joit settlors approach. I particular, with joit settlors, oce the loas have bee repaid, either settlor could beefit from the loa trust i the future. Plaig poit Where a married couple or registered civil parters wish to effect a loa trust each, it is ormally preferable for the spouse/civil parter who is more likely to die first to be the settlor of the trust with the spouse/civil parter icluded as a potetial beeficiary. I these circumstaces it is possible to appoit beefits to the settlor s spouse or registered civil parter should the eed arise. With care this could be achieved durig the settlor s lifetime without ifrigig the gift with reservatio of beefit provisios for IHT purposes (possibly whe the loa has bee repaid), although ay such appoitmets would ormally occur after the settlor s death. It should be oted that, particularly i the case of larger loa trusts, a exit charge to IHT may arise whe beefits are appoited to beeficiaries. The maximum rate of such a charge is curretly 6% of the value of property leavig the trust. 11

12 Why are i-specie premiums ot permitted uder our loa trusts? For other products ad arragemets AXA Isle of Ma ad AXA Life Europe will, uder some circumstaces, accept paymet of a premium by i-specie trasfer of assets, provided certai coditios are met. However, i-specie trasfers are ot permitted uder the loa trust. The loa trust is effective because the settlor leds a cash sum to the trustees ad forgoes the iterest o this sum. The trustees the ivest this loa ad, as they are oly liable to repay the amout of the loa, ay growth o the ivestmets made i their ame is outside the settlor s estate. If the loa trust was established with a loa of assets, from a i-specie trasfer, the loa would effectively be of a asset (or assets) ad ot cash. If a asset is let, the that asset must be paid back ad therefore ay growth will also be repaid. For ay growth i a let asset to be outside the settlor s estate it must be somehow separated from the origial value of that asset. It could be suggested that ay growth i the value of the asset is forgoe by wordig the loa agreemet to state the loa is the cash value of the asset at the time it was trasferred. However, it is ot clear whether HMRC would accept such a wordig, as this does ot egate the fact that there was still a asset let at a value (ot cash) ad the settlor would ot receive the asset back icludig appreciatio, they would simply receive value. For these reasos, i-specie trasfers of assets uder the AXA Isle of Ma or AXA Life Europe loa trust are ot permitted. 12

13 Other frequetly asked questios CAN THE SETTLOR TOP UP THE LOAN TRUST? Yes, it is possible for the settlor to top up the loa trust. However, it may be preferable to keep the amouts i separate bods. The settlor caot beefit further from the trust fud oce both of their loas have bee repaid, due to the IHT gift with reservatio provisios. The trustees would have to keep accurate records to be able to establish the remaiig loa etitlemets. Whichever method is chose, a ew loa agreemet is required for the secod loa ad ay subsequet loas. The settlor would ot eed to set up a separate trust uless they wated to create a ew loa trust. CAN THE LOAN TRUST BE SET UP WITH THE SETTLOR AS SOLE TRUSTEE? A perso caot legally make a loa to themselves. A loa is a cotract ad a perso caot cotract with his or her self; a cotract eeds two parties. The judgmet of Igram v IRS [2007] discusses this poit. For these reasos we isist that at least oe other trustee should be appoited from outset. IS THERE AN ABSOLUTE (BARE) TRUST VERSION AVAILABLE? AXA Isle of Ma offers a absolute trust versio of the loa trust. Usig a absolute trust removes the various complicated tax charges associated with discretioary trusts. However, there are may disadvatages of usig such a trust: Oce a beeficiary reaches 18 years of age they ca request their share of the trust fud (the growth at that time). If the trustees made a distributio the this could create a shortfall irrespective of ay clause to cap the trustees liability. As explaied o page 5, the cap of ay loa to the value of the bod must iclude previous distributios. The beeficiaries are fixed ad caot be chaged to take ito accout chages i family circumstaces. If a beeficiary should die before the settlor, the value of the trust fud (growth) would form part of the beeficiary s estate for IHT purposes. Ay chargeable evet gai uder the bod will ordiarily be assessed o the beeficiary if they are over 18 years of age. Similarly, ay chargeable evet gais will also be assessed o mior beeficiaries (those uder age 18) providig the settlor is ot the paret of the beeficiary ad if the gai exceeds 100. These are referred to as the paretal settlemet rules. This poit could be cosidered advatageous, especially as most childre will geerally be o-taxpayers, however this poit could also create problems. If the trustees created a chargeable evet, perhaps whe repayig the settlor s loa, the this gai would fall o the absolute beeficiary who may ot have ay moey to pay the tax o it. Takig these poits ito cosideratio, great care would eed to be take if this trust were to be used. 13

14 Other frequetly asked questios CAN THE LOAN BE REPAID BY ASSIGNING BOND SEGMENTS? We are ofte asked if the trustees ca assig bod segmets to the settlor i order to repay the loa without creatig a chargeable evet (as a chargeable evet may occur if the segmets were surredered, or if a large withdrawal was take from the bod). However, this optio will geerally ot alleviate tax for the followig reasos: Uder the loa agreemet, the settlor oly has rights to receive his origial capital back. The settlor is ot a beeficiary of the trust. I our view, the assigmet of the bod (or segmets) to the settlor i order to repay the loa would effectively give rise to a assigmet for cosideratio ad thus potetially create chargeable evets (if the bod has icreased i value). Each segmet uder a bod is a separate legal etity ad thus, if ay segmet has icreased i value the there will be a chargeable evet if the policy is assiged for cosideratio. The fact the trustees may be treatig this as a retur of the settlor s capital is irrelevat. Assigmet of the bod segmets may be possible if the value of the bod has decreased. Here the segmets could be assiged to the settlor for cosideratio ad there would ot be ay chargeable gais. However, if there is o gai o the bod there may be o reaso to assig the segmets as they could be surredered without ay chargeable gai i ay case. CAN PAYMENTS BE MADE TO BENEFICIARIES BEFORE THE LOAN IS REPAID? Yes, this is possible but i practice this is ot somethig that the trustees should geerally agree to. Remember that the trustees are liable to repay the outstadig loa o demad by the settlor. Whilst, uder our ew drafts, the liability of the trustees to repay the loa is capped to the value of the trust fud (the bod) at ay time, ay previous distributios to beeficiaries must be icluded i this value. A trustee may therefore create a persoal liability if they decide to distribute moies to beeficiaries before the loa has bee repaid to the settlor i full. 14

15 Cotact us If you have ay queries relatig to this documet please AXA Isle of Ma techical services o iomtechical@axa-iom.co.im Customer Support +44 (0) Telephoe calls may be recorded. helpolie@axa-iom.co.im Please ote that s are ot secure as they ca be itercepted, so thik carefully before sharig persoal or cofidetial iformatio i this way. 15

16 Olie Visit AXA Wealth Iteratioal is the brad used for the promotio of iteratioal ivestmet products offered by AXA Isle of Ma Limited ad AXA Life Europe Limited. Their details are set out below. The provider for ay specific product will be foud i the relevat Product Guide ad the Key Features Documet. AXA Isle of Ma Limited is a Isle of Ma registered compay (No C). Registered Office: Royalty House, Walpole Aveue, Douglas, Isle of Ma, IM1 2SL, British Isles. Tel: +44(0) Fax: +44(0) helpolie@axa-iom.co.im Web: Authorised by the Isle of Ma Fiacial Services Authority. AXA Life Europe Limited is registered i Irelad (No ). Registered Office: 3rd Floor, Guild House, Guild Street, IFSC, Dubli 1, Irelad. Tel: Fax: ifo@ axalifeeurope.ie Web: Authorised by the Cetral Bak of Irelad ad subject to limited regulatio by the Fiacial Coduct Authority ad Prudetial Regulatio Authority. Details about our regulatio by the Fiacial Coduct Authority ad Prudetial Regulatio Authority are available from us o request. Telephoe calls may be recorded. LTTG /November 2015 / MC002806