Some features of the Quilter Absolute and Discretionary (Settlor excluded) Trusts. This overview is not exhaustive and should be read in conjunction with Quilter’s other technical material available here.
Absolute Trust
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Absolute trust |
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| Non exempt gifts into trust taxed under IHT rules in relation to: |
Potentially exempt transfer (PET) See important note below concerning protection policies |
| Trust property | Single premium investment bond/protection policy (life) |
| IHT payable initially Gifts up to NRB* Gifts above NRB |
Important Note:- Protection policy premiums to Absolute Trusts do not qualify as PETs and will be treated as Chargeable Lifetime Transfers (CLT). See the section below on Discretionary Trusts. |
| IHT payable on death within seven years | 40% on the gift, less any available NRB. Taper relief may apply. |
| Ongoing IHT | Nil |
| Reporting for IHT purposes | Only if the settlor dies within seven years of making the gift into trust |
| Beneficiaries | Named absolute beneficiaries only (but excluding the Settlor(s)). Note: the trust allows the Settlor's spouse or civil partner** to be a beneficiary from the arrangement without affecting the IHT efficiency, provided any money paid to the spouse/civil partner is to the exclusion of the Settlor. |
| Can the trustees change the beneficiaries? | Unable to do so under the terms of the trust. |
| Death of beneficiary | The capital value of a beneficiary’s interest forms part of their estate, even where the Settlor is still alive. |
| Options available to trustees on death of the Settlor(s) | Surrender and pay out only to the named beneficiaries. Assign the bond to named beneficiaries***. Maintain the bond subject to the original trust. Where death benefits are received, either pay out proceeds or reinvest for the benefit of the beneficiaries. |
| Can the Settlor also be a trustee? | Yes – the Settlor can also be appointed as trustee. |
| Death of last life assured | Creates a chargeable event for income tax purposes, even if the Settlor(s) are still alive.**** |
| Can the trustees surrender the bond during the Settlor's lifetime? | Yes |
* Assuming no further CLTs have been made in the last seven years.
** As defined by the Civil Partnership Act 2004.
*** Beneficiaries must be adults.
**** UK resident Settlors can reclaim any chargeable event tax liability from the trustees.
Advantages
- Subject to potentially exempt transfer (PET) regime.
- No entry, exit or 10-yearly periodic charges.
- Settlor knows exactly who will benefit from his trust.
Disadvantages
- Trustees cannot vary beneficiaries or their entitlement.
- Value of trust fund forms a part of the beneficiaries’ estate and may be liable to IHT on the beneficiary’s death.
- An adult beneficiary can demand satisfaction of rights immediately.
- Value of trust fund may be used in divorce or bankruptcy settlements of a beneficiary.
Settlor Excluded Discretionary Trusts
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Settlor Excluded Discretionary Trusts |
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Non exempt gifts into trust taxed under IHT rules in relation to: |
Chargeable Lifetime Transfer (CLT) |
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Trust property |
Single premium investment bond/protection policy (life) |
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IHT payable initially |
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IHT payable on death within seven years |
40% on the gift less any available NRB but with allowances for any IHT paid when the gift was made and for any available taper relief. |
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Ongoing IHT |
Periodic and exit charges apply |
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Reporting for IHT purposes |
Reporting required where the CLT is greater than current reporting levels. |
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Beneficiaries |
Classes of beneficiary such as children and grandchildren. |
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Can the beneficiaries be changed? |
Yes |
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Death of beneficiary |
The value of the policy is not included within the beneficiary’s estate for inheritance tax purposes. |
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Options available to trustees on death of the Settlor(s) |
Surrender and pay out only to the beneficiaries. |
Advantages
- Flexibility for trustees to consider a wide class of beneficiary.Trust asset does not form part of any beneficiaries’ estate for IHT purposes.
- No one beneficiary can demand income or capital.
- Value of beneficiary’s share of the trust fund unlikely to be used in divorce or bankruptcy settlements of that beneficiary.
Disadvantages
- Subject to chargeable lifetime transfer (CLT) regime. Transfers into trust are CLTs to the extent they are not exempt. Exit and 10-yearly periodic charges may also apply.
- Reporting required where CLT is greater than current reporting levels. Reporting levels vary by asset class and previous gift history over the previous seven years.