Estate Planning Guide

Gift Hold-Over Relief from Capital Gains Tax This is where the chargeable gain is postponed, usually until the transferee disposes of the asset, where both transferor and transferee make a claim. (Tax isn’t usually payable on gifts to your spouse or a charity.) It may apply where an individual gives away certain qualifying business assets or shares, or sells them for less than they are worth to help the donee or buyer. Any chargeable gain that the transferor would have made by selling the asset at the current market value is not payable by the transferor. Instead, the transferee or buyer must calculate his Capital Gains Tax liability on any future disposal of the asset, on the uplift in its value from its value at the time it was acquired by the donor. For example: Brian acquires an asset worth £10,000. He gives it to Graham and 10 years later it is worth £20,000. The two parties agree to apply to HMRC for a held-over gain so Brian has no CGT to pay on the £10,000 gain. When Graham comes to sell the asset ten years after it was given to him, it is worth £30,000 and the gain reported to HMRC is £20,000. The conditions for claiming relief depend on whether you’re giving away business assets or shares. If you’re giving away assets, they must be business assets used in the trade of that business and you must be a sole trader or business partner or have at least 5% of the shares and voting rights in the company (known as your ‘personal company’). If you’re giving away shares, the shares must be in a company that’s either not listed on any recognised stock exchange (AIM shares do qualify as AIM is not a recognised stock exchange for these purposes) or shares in your personal company (as explained above). Hold-over relief is available where the disposal is a chargeable transfer for IHT purposes, but not a PET. Absolute and Discretionary Trusts Offshore Insurance Bond Protections The Isle of Man operates a policyholder protection scheme which means that, in the event of a life insurance company being unable to meet its liabilities, the scheme manager will pay the policyholder (regardless of where they reside) out of the island’s policyholders’ compensation fund, 90% of the amount of any remaining liability of the insurer. In Ireland, there is no policyholder protection scheme available, but the FSCS is still likely to be available where advice has been given to an investor habitually resident in the UK by a regulated UK adviser and the investor was resident when the advice was given and the policy started, the UK scheme will apply. This would offer protection up to 100% of the value of the investment. 35 34 ESTATE PLANNING OPTIONS ESTATE PLANNING OPTIONS Trust-based gifts can not only facilitate significant IHT mitigation, but they can also allow the client to keep some control and access over the gifted asset. This will, of course, depend on the type of trust used. Additionally, the use of a trust can provide some security where the direct access of beneficiaries, such as family members with financial or marital issues, might lead to capital loss. The trust arrangements summarised in this section can involve a “carve out” of the rights retained by the settlor, and share the following characteristics: • The property which is given to the trustees is the balance of benefits under the policy or investment and the benefit which is retained is not reserved by the settlor out of property gifted, but is simply a benefit which is excluded from the gift. • “Gift with reservation” issues should not therefore arise in relation to the retained benefit and the arrangement should also not give rise to any charge to POAT. 2.4 Controlled access gifts These arrangements generally facilitate a PET of capital to a beneficiary. At the same time, the donor is able to retain a high degree of control over the date at which the donor is able to benefit and the amount of funds which can be accessed at that point. The plans are based upon insurance bond policies, which are purchased by the trustees using cash gifted into trust. The beneficiary(ies) of the trust can only access the underlying funds in accordance with the specific policy terms and conditions. Trust-based arrangements ABSOLUTE TRUSTS DISCRETIONARY TRUSTS No changes to trust or beneficiaries are allowed after the trust is set up Beneficiaries can be changed and do not have a fixed share of the trust fund Any type of gift into the trust, unless exempt, is a PET The trust must be reported to the local tax office and gifts into it must be notified to HMRC if they are over the relevant limit No IHT applies if the settlor survives for seven years IHT returns are currently required every 10 years, subject to reporting limits IHT taper relief after three years may apply Any gift element into a trust, if not covered by an exemption, is a chargeable lifetime transfer (CLT) - see page 48 Each beneficiary’s share of the trust fund is part of their estate The trust fund may be subject to 10-yearly periodic charges and proportionate exit charges Beneficiaries with legal capacity can demand their vested share of the trust fund at any time While in the trust, none of the trust fund will be part of a beneficiary’s estate SOURCE: PRUDENTIAL Insurance policy based arrangements For the most part, this market offers either UK based or offshore insurance or capital redemption bonds. The offshore insurance bonds are generally Isle of Man or Ireland based and the outcomes of their investor protection mechanisms can be similar to those offered by the Financial Services Compensation Scheme in relation to UK based investments. However, there are some important differences. However, there are alternatives to this structure, including those based on a series of single premium endowments, or a Whole of Life Assurance Policy and a pure Endowment policy. Investments held within an insurance or capital redemption bond, a whole of life or an endowment policy are generally free of CGT but