EXTRA FLEXIBILITY FOR IHT MITIGATION PLANS
August 2009
One way of getting some immediate reduction in the value of an estate for IHT purposes while retaining an income from the asset value donated is to use a discounted gift scheme (covered in another article on this web site). However, it can be argued that the discount turns out to be of no value if the donor survives the usual target 7 years. So a price has been paid and after 7 years may seem to have been a high one: being locked into a possibly inflexible investment product, usually a life assurance bond, and having a fixed income stream, which may not be required after all.
Reversionary Interests
There are other ways of giving money to trusts and “carving out” rights so that some of the value of a given block of investment assets is given away absolutely, but other rights are retained. One such approach is to retain the right to “reversions” of guaranteed fixed proportions of capital at future dates. An initial gift, which may be of securities such as shares or unit trust fund holdings, can be given to trustees and then sub divided into separate parcels by using the right documentation and a suitable administrator (who will usually be the promoter of a branded scheme). Each parcel represents a separate gift into trust with a reversion that is in effect a monthly return of a percentage of the capital. The right to the fixed reversion schedule should mean that the gift can be discounted for IHT purposes.
Tax Differences
So far this probably does not sound much different to a standard plan with income withdrawn from a life assurance bond. Actually, there are some differences: existing assets can more easily be gifted and there may be a more advantageous tax treatment in realising capital gains at 18% from selling securities or funds as opposed to the income tax at possibly 50% on profits from life assurance bonds. The difference in tax rates is really dramatic. The changes to income tax rates come into effect from 6 April 2010.
Flexibility
Furthermore, the trustees can be given money with a mixture of fixed and variable reversion dates. The fixed reversions are there to generate the discount and so run for an 8 year period, but the variable reversions may be deferred or defeated by the trustees (assuming the documentation is properly prepared). This allows the trustees very considerable flexibility in using the trust assets. For example if the fixed reversions were at 5% of the gifted capital per annum over 8 years, there would be 60% of the trust fund available to the trustees to use at their discretion.
This is a simplified explanation of an alternative to the commonly used discounted gift scheme with an offshore life assurance bond. The objective is to demonstrate that there are alternatives available as fully developed “products” and that assets already owned can be kept in the family if that is required. Issues such as investment strategy, the implications of decumulating a capital sum and so on have been ignored for reasons of brevity.
Ethos Financial Management Ltd is an appointed representative of the TenetConnect Services Ltd which is regulated and authorised by the Financial Services Authority
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