Estate Planning Guide

47 ESTATE PLANNING OPTIONS 46 ESTATE PLANNING OPTIONS Collective Investment Based Arrangements (Loans or Gifts into Trust) These arrangements mirror the structures discussed in the previous section, but instead of using life assurance products, they involve investing in collective investments (i.e. Unit Trusts or Open-Ended Investment Companies – ‘OEICs’). This means that capital returns are subject to the CGT regime rather than to IT. Also, hold-over relief will normally be available to defer any CGT when capital distributions are made to beneficiaries by the trustees. By restricting investment to collective funds which yield little or no income, any potential IT charge can be minimised. The trustees will be liable to CGT at 20% on chargeable gains realised in the trust. Such gains include those made on investment sales, reversions or loan repayments made to the settlor, and capital distributions to beneficiaries. The trustees can call on their own annual CGT exemption equating to 50% of that available to individuals, spread over up to five trusts. Instead of triggering a CGT bill for the trust by encashing investments and distributing the proceeds to the beneficiaries, the trustees could consider making an in-specie transfer of units to the beneficiary, with both parties jointly claiming holdover relief. This relief allows CGT to be deferred until the relevant holdings are disposed of by the beneficiary, who can then take advantage of their full annual CGT exemption, maybe over multiple tax years, to mitigate a tax liability and if a liability arises, may also reduce the tax rate from 20% to 10% for basic rate taxpayers. Some collective investment based arrangements incorporate a specially designed Interest in Possession (IIP) trust that allows wealth to pass down the family generations. The terms of the trust are modified according to the type of plan. The settlor will normally provide guidance over how he/she would like the trustees to use their discretionary powers by writing them a non- binding letter of wishes. 2.5 This is a document that can be used with any discretionary trust, even where a gift is made during a lifetime. It normally accompanies a Will, written by the testator. Although not legally binding, it is intended to guide the executors and trustees to ensure personal wishes are carried out. It may be used to express the testator’s views, or to explain their actions. The guidance may be directed at various interested parties, including family members, trustees, beneficiaries or even tax advisers. Items that a letter or statement of wishes might refer to could include the style of funeral wanted, guidance to executors or trustees on how any money or trusts created in the Will should be managed/run, details of how children should be raised, or explanations as to why someone has been excluded from the Will or trust. Statement/Letter of Wishes Trustee investments can cover a spectrum of asset classes and traditionally life assurance companies have utilised investment bonds both onshore and offshore. In addition to investment bonds collective investments (i.e. Unit Trusts or Open-Ended Investment Companies – ‘OEICs’) can be used. Where the trustees need to generate real income to distribute to the beneficiaries collective investments could be a suitable asset as they offer either dividend income from equity funds or a coupon from a fixed interest asset. If an absolute trust is selected this can be applied to the beneficiary’s taxable income or if a discretionary trust this will lose its identity on distribution and be charged at the rate applicable to trusts after a small basic rate allowance. Unlike life assurance bonds the collective does not defer the income tax liability so allowances, exemptions and reliefs can be utilised on an annual basis compared to the investment bond which defers the income tax liability to the event crystallisation. Collective investments also do not benefit from the ability to assign segments to beneficiaries which life assurance bonds offer and while the settlor is alive, the investment bond is liable to tax on chargeable events at the settlor’s tax position which can be advantageous. Finally, unlike an investment bond which enables fund switching within the bond wrapper without tax crystallisation, collectives will attract a tax liability. COLLECTIVE INVESTMENT BASED ARRANGEMENTS Thought Leadership EDWARD GRANT FPFS CHARTERED MCSI FRSA DIRECTOR, TECHNICAL CONNECTION Who would your clients prefer to leave a significant proportion of their wealth to, their family or the taxman? JOHN HUMPHREYS, HEAD OF SALES , WAY GROUP Technical Connection provides applied tax, technical and financial planning ”know how”. www.technicalconnection.co.uk