IHT Planning something old, something new

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IHT Planning something old, something new

• Deborah Moon ACII AIFP DipPFS TEP
• Chartered Insurer
• Tax and Estate Planning Manager, Skandia
  International

2
IHT planning for UK Dom Investors

• Something old
• Exemptions
• Spouse/Civil Partner
• Annual, small gifts, out of income, etc.
• Reliefs
• BPR, APR, Taper
• Transfers of value

3
IHT planning for UK Dom Investors

• Something new
• BN25 2006
• Schedule 20 Finance Act 2006
• Brave New World?
• Is it really new?
• PBR transferable NRB

4
Terminology
PET
GWR
CSI

• IIP

IHT
IPDI
CLT
TSI
NRB
5
IHT planning for UK Dom Investors

• IHT Planning
• Do nothing
• Fund for the liability
• Make outright gifts

• Beneficiaries will pay the tax
• WOL in trust
• Survive 7 years

6
IHT planning for UK Dom Investors

• IHT Planning Using Trusts
• Gift trusts (no access)
• Discounted gift trusts (income)
• Loan trusts (access)
• Back to back arrangements
• PBR transferable NRB

7
PETs RIP?

• No, you can still make a PET as long as it is
• Outright to an individual or
• Into a Bare Trust
• Anything else Chargeable Lifetime Transfer
  (CLT)

8
Discretionary trust regime

• The basics

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Back to basics - making outright gifts

• Outright gift for 500,000
• to other than spouse or civil partner
• assume no previous transfers, ignore annual
  exemptions
• If you survive 7 years
• No IHT to pay
• If you dont survive 7 years
• PET becomes chargeable

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Back to basics - outright gifts
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Dont forget about taper relief!
100
80
60
of relief
40
20
1
4
2
3
5
6
7
gt7
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Dont forget about taper relief!
0
20
40
of relief
tax payable
60
80
1
4
2
3
5
6
7
gt7
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Back to basics - making outright gifts
500,000 PET Assume NRB increases at c 4 pa
after 2010/11
PET500,000
Year ofdeath1
NRB300,000
Taxable200,000
Tax aftertaper80,000
Tax beforetaper80,000
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Back to basics - making outright gifts
500,000 PET Assume NRB increases at c 4 pa
after 2010/11
PET500,000 500,000
500,000 500,000
500,000 500,000500,000
Year ofdeath12345678
Tax aftertaper80,000
NRB300,000
Taxable200,000
Tax beforetaper80,000
312,000325,000350,000365,000380,000395,000
188,000175,000150,000135,000120,000105,000Nil
75,20070,00060,00054,00048,00042,000 Nil
75,20070,00048,00032,40019,200 8,400
Nil
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Back to basics gift into flexible trust
500,000 CLT
assume no previous transfers,
ignore annual exemptions
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Back to basics gift into flexible trust
500,000 CLT
200,000
Taxable
Settlor pays tax at 25
50,000
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Back to basics gift into flexible trust
500,000 CLT Assume NRB increases at c 4 pa
after 2010/11
Position on death
CLT500,000
Year ofdeath1
NRB300,000
Taxable200,000
Total tax paid80,000
Total tax after taper80,000
Further tax to pay40,000
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Dont forget about taper relief and CLTs
50
50
50
50
50
50
50
further tax payable
tax already paid
of relief
10
30
50
50
50
1
4
2
3
5
6
7
gt7
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Back to basics gift into flexible trust
500,000 CLT Assume NRB increases at c 4 pa
after 2010/11
CLT500,000 500,000
500,000 500,000
500,000 500,000500,000
Year ofdeath12345678
NRB300,000312,000325,000350,000365,000380
,000395,000
Taxable200,000188,000175,000150,000135,000
120,000105,000Nil
Tax aftertaper80,00075,20070,00048,00032,4
0019,200 8,400 Nil
Tax beforetaper80,00075,20070,00060,00054,
00048,00042,000 Nil
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Back to basics gift into flexible trust
500,000 CLT Assume NRB increases at c 4 pa
after 2010/11
Position on death
CLT500,000 500,000
500,000 500,000
500,000 500,000500,000
Year ofdeath12345678
NRB300,000312,000325,000350,000365,000380,
000395,000
Taxable200,000188,000175,000150,000135,000
120,000105,000Nil
Total tax after taper80,00075,20070,00048,00
032,400 19,200 8,400Nil
Further tax to pay40,000
Total tax paid80,000
72,50070,00048,00040,00040,00040,00040,000
35,28030,000 8,000NilNilNilNil
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PETs v CLTs
500,000 PET v 500,000 CLT
Year ofdeath12345678
PET total tax paid80,00072,50070,00048,0003
2,40019,200 8,400Nil
CLT total tax paid80,00082,58079,05760,343
40,00040,00040,00040,000
Additional tax post 22 March 200600007,600
20,80031,600 40,000
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Dont forget about taper relief and CLTs
50
50
50
50
50
50
50
further tax payable
tax already paid
of relief
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It doesnt work like that!
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50
50
50
1
4
2
3
5
6
7
gt7
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Discretionary trust regime

• The basics

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IHT Planning in the new regime

• Flexible Discounted Gift Trusts
• Joint settlors
• Different gifting histories (KISS)
• Different health histories
• Bare Discounted Gift Trusts
• The importance of WOL underwriting for DGTs
• Loan Trusts

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IHT Planning in the new regime / contd

• Trusts in combination
• Planning with multiple trusts
• The importance of getting the order right

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Flexible Discounted Gift Trust

• Settlors withdrawals taken from an absolute
  trust which is not settled property
• no relevant property no exit charges
• CLT is value of the total investment less the
  value of the settlors rights (i.e. the discount)

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Flexible Discounted Gift Trust

• Example Professor Plum, male age 50
• DGT for 700,000 taking 5 pa (taken monthly)
• Professor Plum is underwritten at outset
• Settlors interest - the discount
  400,627
• CLT- the gift 299,373

Less than 300,000 therefore no tax to pay
Ever??
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Flexible Discounted Gift Trust

• Is underwriting compulsory?
• On creation?
• On decennial anniversaries?
• HMRC have confirmed it is acceptable to add 10
  years to settlors age at each ten-year
  anniversary providing
• Settlor is underwritten at outset
• Trustees take into account any significant
  deterioration in health

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The importance of WOL underwriting?

• The Open Market Value (OMV) of the retained
  rights
• will depend on
• the settlors sex, age, health and thereby
  insurability
• If the settlor were to be uninsurable, for any
  reason
• the OMV of the retained rights would be nominal
  and
• the (value)would be close to the whole amount
• HMRC technical note dgs-tech-note.pdf

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The importance of WOL underwriting?

• This is because s160 IHTA 1984 provides that, in
  
• valuing the retained rights, we assume that a
  sale of
• them takes place.
• HMRC technical note dgs-tech-note.pdf

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The importance of WOL underwriting?

• We consider it to be fundamental that the open
  market
• valuation of the retained rights should be
  carried out
• having regard to what market evidence is
  available.
• HMRC technical note dgs-tech-note.pdf

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The importance of WOL underwriting?

• Additionally we have been unable to find any
  evidence
• that it is possible to effect cover on lives
  older than 90
• next birthday.
• HMRC therefore regard lives older than that,
  true or
• equivalent (mortality rated), as being
  uninsurable
• with the resultant ramifications in respect of
  the gift value.
• A technical note from HMRC

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The importance of WOL underwriting?

• Bower v CIR SC/3070/2007
• HMRC view only nominal discount available
• Taxpayer view discount should only be slightly
  lower than someone of slightly younger age
• Special Commissioner seems minded to seek the
  middle ground
• Watch this space

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Flexible Discounted Gift Trust

• Example Professor Plum, male age 50
• DGT for 700,000 taking 5 pa (taken monthly)
• Professor Plum is underwritten at outset
• Settlors interest - the discount 400,627
• CLT- the gift 299,373

Less than 300,000 therefore no tax to pay
Ever??
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Flexible Discounted Gift Trust

• Professor Plum remains insurable

c 4 pa after 2010/11
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Flexible Discounted Gift Trust

• Professor Plum is uninsurable after 19 years

c 4 pa after 2010/11
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Flexible DGT Joint Settlors

• Each settlor can give up to the value of their
  respective NRB without incurring an immediate
  charge to lifetime tax
• At each ten year anniversary, the trust will be
  treated as comprising two settlements and the NRB
  available to each will, again, be determined by
  the history of each individual.

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Flexible DGT joint settlors contd.

• how to lose a million!
• Rev. Green, aged 70 Mrs. Green aged 65
• 1million (i.e. 500,000 each) into joint
  Flexible DGT,
• taking 5 pa (payable monthly)
• Rev. Green 246,664 discount 253,336 CLT
• Mrs. Green 306,441 discount 193,559 CLT

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FDGT joint settlors contd.

• Rev. Green, aged 71 Mrs. Green aged 65
• 1million (i.e. 500,000 each) into joint
  Flexible DGT,
• taking 5 pa (payable monthly)
• Rev. Green 199,185 discount 300,815 CLT
• Mrs. Green 338,820 discount 161,180 CLT
• Underwriting rating 10 years to age, thus
  treated as 81 for calculation

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Flexible Gift Trust joint settlors

• Joint settlorsdont forget about Civil Partners
  and
• differing gifting histories!
• Mrs. Peacock and Miss Scarlet, both aged 61
• 312,000 6,000 annual exemption x 2 300,000
  each
• Miss Scarlet, no previous gifts
• Mrs. Peacock, 250K PET 2 years ago

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Flexible Gift Trust joint settlors

• Nil rate band available on 1st 10 year
  anniversary
• If Mrs. Peacock survives 7 years after PET, full
  NRB
• available for each settlement
• If Mrs. Peacock does not survive 7 years after
  PET, NRB
• available for her settlement will be reduced by
  250,000

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Flexible Gift Trust joint settlors
Miss Scarlet
Mrs. Peacock
Flexible Gift Trust300,000
Flexible Gift Trust300,000
How much NRB in year 10?
444,000 0 444,000
c 4 pa after 2010/11
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Flexible Gift Trust joint settlors
Miss Scarlet
Mrs. Peacock RIP
Flexible Gift Trust300,000
Flexible Gift Trust300,000
How much NRB in year 10?
444,000 250,000 194,000
c 4 pa after 2010/11
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Bare Discounted Gift Trust

• Does the arrangement constitute a settlement
• for IHT purposes within the definition in
• section 43(2) IHTA 1984?
• If Yes CLT
• If No PET

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Bare Discounted Gift Trust

• Bare trust arrangement one trust, two
  interests
• Carve out specified withdrawals for the
  absolute benefit of the settlor
• Gifted fund for the absolute benefit of named
  beneficiaries

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Bare DGT what are the non-tax issues?

• Trustees have no discretion over who ultimately
  benefits
• Beneficiaries are absolutely entitled to trust
  assets
• What if a beneficiary
• Marries someone questionable?
• Divorces?
• Becomes bankrupt?
• Dies?

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Loan Trust

• No gift therefore no CLT
• The growth is relevant property and potentially
  subject to periodic and exit charges
• BUT
• Loan is not relevant property so no exit
  charges on loan repayments

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IHT planning in the new world?

• Early planning multiple use of nil rate band
  within seven years of death
• Use trusts in combination?
• Flexible trust (CLT) up to (available) NRB
• Bare trust (PET) above (available) NRB
• Loan trust
• Get the order right!

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Getting the order right!

• Mr. Black has already used up his annual
  exemption
• for IHT and on the recommendation of his adviser
  he is
• going to effect the following IHT planning
  solutions
• Flexible gift trust for 100,000
• Loan Trust for 200,000

• Care Needed
• Vital to do things in the right order!

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Mr. Black contd.
444,000100,000344,000
c 4 pa after 2010/11
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Mr. Black contd.
444,000 0444,000
c 4 pa after 2010/11
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IHT Planning with multiple trusts Rysaffe

• Mrs. White has a residual potential IHT liability
  of 1m
• She effects a protection policy for 1,000,000
  sum assured
• Tax charge (periodic) may arise if she dies just
  before 10th anniversary and her trustees are
  unable to distribute the sum assured before that
  date

• Solution
• Consider effecting multiple policies and separate
  trusts created on separate days

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Mrs. White contd.

• Sum assured pays out after 9½ years
• Single policy and trust
• Value of trust fund on 10th anniversary
  1,000,000
• NRB assuming increased at c 4 pa 444,000
• Taxable amount 556,000
• Tax _at_ max 6 33,360
• After 2010/11

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Mrs. White contd.

• Sum assured pays out after 9½ years
• Four separate policies effected for 250,000
• Value of trust fund on 10th anniversary
  250,000
• NRB assuming increased at c 4 pa 444,000
• Taxable amount nil
• Tax _at_ max 6 nil
• After 2010/11

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Col. Mustards bond investment
Two Bonds
400,000
400,000
Value in year 10 (5pa)
1,303,116
651,558
651,558
Less NRB in year 10
444,000
444,000
44,000
Taxable
859,116
207,558
607,558
12,453
36,454
Tax at max 6
51,547
48,907
c 4 pa after 2010/11
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IHT Planning using Rysaffe

• Avoid the related settlements provisions by
  creating separate trusts on separate days
• Does not reduce tax payable on creation
• May reduce the 10 year charges
• May, in turn, help reduce exit charges
• But, more trusts more admin more cost
• N.B. Capital trustees gains tax exemption
• How long until legislation against this type of
  planning?

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IHT Planning using Rysaffe definitive order

• No transfer of value, e.g.
• Loan Trust
• Minimal CLTs, e.g.
• Seven year term under Flexible Gift Trust
• Whole of life under Flexible Gift Trust.
• Significant CLTs, e.g.
• Flexible Gift Trust
• Flexible DGT.
• PETs, e.g.
• Bare Gift Trust
• Bare DGT.

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PBR transferable NRB

• If a UK domicile dies after 9th October 2007
• any portion of NRB unused from earlier death of
  spouse or civil partner
• expressed as a percentage
• can be transferred to his/her estate.
• As defined by the Civil Partnerships Act 2004

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PBR transferable NRB

• Example
• Harry died in April 2007 leaving 75K of the then
  available NRB (300K) to his children (i.e.
  non-exempt beneficiaries) and the rest of his
  estate to his widow, Hermione.
• Expressed as a percentage, only 25 of the
  available NRB was used. When Hermione dies, her
  NRB will be increased by 75.

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PBR transferable NRB

• Example
• Where someone survives more than one spouse or
  civil partner
• any unused proportions can be transferred
• subject to a total amount from all transfers of
  100.
• This limit may be relevant where a person
  survived a spouse / civil partner who themselves
  had survived a spouse / civil partner.

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PBR transferable NRB

• Example
• After Harry died, Hermione married Ron.
• If Ron also predeceases her, in May 2008 and
• if Ron also uses only 25 of his NRB and
• if Hermione finally dies in June 2009, leaving an
  estate worth 800,000
• her NRB will be increased to reflect the unused
  NRB for both Harry and Ron.

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PBR transferable NRB

• Example
• But the maximum that can be used is 100 of the
  current limit.
• So, although her husbands each left 75 of their
  NRB unused, her NRB will only increase by 100,
  i.e. 325,000.
• Leaving 150K liable to IHT.

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IHT planning for UK Dom Investors

• IHT Planning
• Do nothing
• Make outright gifts
• Fund for the liability

• IHT Planning Using Trusts
• Gift trusts
• Discounted gift trusts
• Loan trusts
• Trusts in combination
• Multiple trusts
• Transferable NRB

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Summary

• The need to plan has not been affected
• Most gifts may be under the NRB
• Its a different regime similar results as pre
  22 March, 2006
• Substantial gifts over NRB may well still save
  tax, but careful cost/benefit analysis required
• Planning requires more knowledge of IHT and more
  knowledge/information about the client!

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IHT Planning something old, something new

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• This presentation is designed for the use of
  financial advisers only. Private clients should
  not rely on the information contained within.
• This presentation is based on Skandias
  interpretation of the law and
• HM Revenue Customs practice as at November
  2007.
• While we believe this interpretation is correct,
  we cannot guarantee it. Tax relief and the
  treatment of investment funds and trusts may
  change in the future.
• The value of tax reliefs will depend on
  individual circumstances.
• Skandia does not accept any responsibility for
  any losses or liabilities arising from actions
  taken or omissions as a result of the information
  contained in this presentation.

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• Skandia Life Assurance Company Limited a member
  of the Skandia Life Group of Companies
• Registered Number 1363932 England
• Registered Office and Head Office Skandia House,
  Portland Terrace, Southampton SO14 7EJ, United
  Kingdom.
• Authorised and regulated by the Financial
  Services Authority
• FSA Register number 110462
• Royal Skandia Trust Company
• Registered number 095926C Registered Office
  Skandia House, King Edwards Road, Onchan, Isle of
  Man, IM99 1NU
• Royal Skandia Life Assurance Limited (an
  incorporation company limited by shares)
• Registered Office Skandia House, King Edward
  Road, Onchan, Isle of Man IM99 1NU, British
  Isles. Member of the Association of International
  Life Offices. Authorised and Regulated by the
  Financial Services Authority.
• The rules and regulations made by the FSA under
  the Financial Services and Markets Act 2000 for
  the protection of investors may not apply to
  persons outside the UK.

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