Suitability Letter Generator

Suitability Letter Generator
The letter has been initial personalised to the clients circumstances utilising the user interface on
the online software as demonstrated below, where further personalisation is required this is
highlighted yellow in the letter for speed and ease of use. The letter comes in 2 distinct parts the
main body containing the recommendation and an appendix which in this instance is written as
FAQ’s, some firm provide the FAQ’s as a precursor to a meeting or as a reminder of the
Financial Report
Mr A Client
Produced DD/MM/YYYY
By Mr A Adviser
Bankhall Staff Member
The Southmark Building
Barrington Road
Greater Manchester WA14 1GY
Telephone 0161 941 6076
Fax 000
E mail
Further to our recent discussions, I have provided a summary of your current situation, your goals and
needs as I understand them and my recommendations in order to meet these. As part of the process I
have considered all of the information you have provided to me. If any of the details below are
incorrect, or if your circumstances have changed, please let me know as this may affect my
Your current situation
Personal details:
You are a XXXXX aged XX.
You are in XXXX health.
You are married/unmarried/divorced/widowed.
Your husband/wife (if applicable) is age XX.
You have X children who are/are not dependent / you have no children.
The current annual household income is £XXXX and your current annual expenditure is £XXXX. This
leaves you with an annual surplus/ deficit of £XXXX
Attitude to risk
We have discussed and agreed that your overall attitude to risk is XXXXXX. This means that
Reference should ideally be made to how the ATR was arrived at, the client's capacity for loss and
how this fits in with the client's goals and needs
Emergency Fund
When considering any form of financial planning, a key area to consider is having sufficient monies for
emergencies. When considering this we agreed that you should have/ should be building up to a
minimum reserve of £xxxx for such circumstances.
You have not made a will and I strongly advise you to do so. Should you die without having made a
will then you will be deemed to have died 'intestate' and your estate will be distributed in accordance
with the intestacy rules. This will mean that your assets will not necessarily pass to the people whom
you would want to benefit (or, if so, not necessarily in the proportions you would wish) and, in
addition, your estate may not be distributed in the most tax efficient manner.
Your Objectives
You are concerned about your beneficiaries having to pay Inheritance Tax on the value of your estate
and requested advice on ways to reduce or provide funds for your beneficiaries to meet this liability in
the event of your death.
Summary of current IHT position
I have outlined brief details below of the potential Inheritance Tax that could be payable on death
should you die tomorrow. As you have made gifts during the last 7 years these would become
assessable to inheritance first and thus use some or all of the nil rate band that would usually be
available to set against your estate in full - I have provided a summary below of the amount of nil rate
band used up by this gifts and, where applicable, any IHT due on these transfers.
Lifetime Transfers
Gifts by XXXX
Gifts by XXXX
Available Nil Rate Band
Amount subject to IHT
IHT (40%)
Nil Rate Band remaining
Gifts made in last 7 years
Residual Estate
Based on above their would be £XXXX of the nil rate band remaining to set against your estate - The
table below shows the IHT that could be therefore be due depending on who died first and the
subsequent liability on the death of the survivor.
If XXXX died first
If XXXX died first
Assets left to spouse
Available Nil Rate Band
Net taxable estate
IHT on 1st death
Spouse assets (including those inherited from 1st to die)
Spouses Available Nil Rate Band
Net taxable estate
IHT on spouses 2nd death
A detailed explanation of my recommendations has been provided below but I have first summarised
what your position would be in respect of your liability to IHT should you put into effect my
This of course makes the assumption that the value of your estate remains unchanged whereas, in
reality, your assets are likely to increase in value. It is essential therefore that we meet for regular
reviews in order to monitor the situation and so that any further steps can be taken if necessary.
Alternatives - Whole-of-Life Assurance
Perhaps the most straightforward method of mitigating the effects of Inheritance Tax is to set up a
suitable life assurance policy in trust to provide your beneficiaries with the funds required to meet the
IHT due on your death.
My research demonstrated that a single life/joint life, last death (delete as appropriate) whole-of life
policy written on a 'balanced'/guaranteed premium (delete as appropriate) basis with a sum assured
of £XXXXXX (equivalent to the potential IHT liability identified) would cost £XX per month.
I have not recommmended this solution because XXXX
Alternatives - Lump Sum IHT planning
There are other methods of reducing the value of your estate and we discussed the following lumpsum IHT solutions that were equally viable based on your circumstances:XXXXXX
The reason(s) I did not recommend the solution(s) detailed above was/were XXXX.
Discounted Gift Trust
During our discussions I identified that you also have a requirement for monthly income of £XXXX. I
have therefore recommended that you/XXXX invest £XXXX into an investment bond written under a
Discounted Gift Trust arrangement which will provide monthly/quarterly/annual income (delete as
appropriate) of £XXXX and immediately reduce your IHT liability.
I have recommended the arrangement be written with you as sole settlor/yourself and your wife as
joint settlors (delete as appropriate) because XXXX.
When effecting this type of arrangement, under the terms of the trust you reserve a right to certain
future payments for the rest of your life whilst making a gift of the balance into trust for your chosen
beneficiaries - The 'notional' value of benefits you have retained is calculated actuarially (based on
the applicants age, gender, and state of health). The difference between the amount invested and the
value of retained rights (the 'discount') is the amount that is deemed to have been gifted away.
The value of your estate is reduced immediately by the value of the 'discount' which for a
male/female/couple (delete as appropriate) is estimated to be around £XXXX based on the
investment of £XXXX recommended. There will be no IHT for your beneficiaries to pay in respect of
the gifted element provided you survive for 7 years.
In choosing a suitable product/provider I have taken the following factors into consideration when
researching the market:XXXXX
Based on the above criteria I have recommended a Discounted Gift Trust scheme be effected with
XXXX (insert name of provider) because XXXX. The investment policy underpinning the arrangement
is a XXXX and I provided details below of the contract recommended.
Investment Amount
Allocation Rate
Early Surrender Penalties
We identified your attitude to risk in respect of investments as XXXX and I have therefore
recommended the investment be split between the following asset classes in the following
Percentage Split
Government Bonds/Gilts
Corporate Bonds
UK Equity
Overseas Equity
Based on the above asset allocation model I have therefore recommended your investment be split
amongst the following funds;
Amount (£)
I have recommended the arrangement be underwritten by the insurer. Following underwriting the
discount could be revised to a lower amount if there are any health issues to consider.
I have recommended the Discounted Gift Trust arrangement be based around a
bare/flexible/discretionary (delete as appropriate) because XXXX. The discounted gift, to the extent it
exceeds the annual gift exemption, will be a potentially exempt transfer/chargeable lifetime transfer
(delete as appropriate).
It is important that you spend the 'income' that is received from the Discounted Gift Trust otherwise
this will simply build up within your estate and reduce the tax efficiency of the arrangement. You
should also be aware that your only entitlements will be to the regular payments you have reserved
for yourself. These payments will continue for the rest of your life or, in the event of sustained poor
investment performance, until the value of the investment has been exhausted.
It is important to be aware that the value of the discount is an estimate and could be challenged by
HM Revenue and Customs (HMRC) on death, however HMRC generally accept the validity of figures
calculated at outset where the arrangement has been fully underwritten.
Payment for services
We agreed on the basis that I will be remunerated at outset, details of which were provided in the
appropriate documentation.
We supplied the following documents to you on XX/XX/XX
Client Agreement
Disclosure Document (Key Facts about our services and costs)
My business card.
When providing our advice, we have relied on the information you have provided to us during the
information gathering process. If you feel this information is not a true reflection of your situation, then
please let us know as this may affect the recommendations made.
We are authorised and regulated by the Financial Services Authority, as detailed in the Disclosure
Document / Client Agreement letter. We would particularly draw your attention to the information
concerning charges, cancellation and risk contained in the documentation provided. As the Disclosure
Document / Client Agreement letter explains, you may be entitled to take your complaint to the
Financial Ombudsman Service
Please note that in all our dealings with you, we will treat you as a Retail / Professional client. If we
have categorised you as a professional client, then you will lose certain protections provided for retail
clients, details of which we have previously provided to you.
You may also have full rights to the Financial Services Compensation Scheme (FSCS). The FSCS
provides compensation should your chosen provider become insolvent and be unable to honour a
claim under your policy. The levels of compensation vary depending on the type of contract
The Key Features Document/Plan Literature, which I have explained to you, provides a great deal of
information concerning the terms under which this policy has been issued. You should read this
document carefully and contact me if you have any queries concerning it. I would like to draw your
particular attention to the sections on charges and cancellation.
Signed............................................... Dated.................
Adviser's name
I confirm that I have received and have had the contents of this report explained to me including its
Signed............................................... Dated.................
Client's name
Appendix I - Inheritance Tax FAQ
This aim of this document is to answer the most frequently asked questions in respect of
Inheritance Tax and should be read in conjunction with the suitability report which
summarises the recommendations your Financial Adviser has made based on your individual
It should not be viewed as an exhaustive summary of what can be a complex area of taxation You should always seek guidance from your Financial Adviser.
Q1. How is Inheritance Tax charged
Inheritance tax becomes payable where the value of the deceased's estate exceeds the 'nil rate band'
(i.e. - the band at which IHT is charged at 0%) - The amount in excess of the nil rate band is subject
to IHT at a rate of 40%.
You must also first add in gifts that the deceased made in the 7 years prior to death when calculating
IHT (although some may be exempt and do not have to be included) - See Question 2
If the value of the deceased's estate is below the nil rate band no inheritance tax will be due on it. In
addition, there may be exempt gifts left by way of will or intestacy that do not need to be included The most common type of exempt gifts are those between spouses.
The nil rate band for the tax years 2009/10 to 2014/15 inclusive is £325,000. Where the deceased
individual is a widow or widower then, where the second death occurs on or after 9 October 2007,
their personal representatives may be able to claim an amount of the nil rate band that was unused by
their husband/wife.
Arthur died on 6 April 2011 (tax year 2011/12) and had assets of £750,000. His wife, Vera, died in a
previous year on 10 June 2007 (tax year 2007/08) with assets of £400,000, which her Will had split
50/50 between Arthur and their son David.
IHT on Arthur's estate would be calculated as follows
Step 1 - Calculate Nil rate band (NRB) unused on Vera's death
Gift to Arthur (exempt)
Amount assessable to IHT
Nil Rate Band for 2007/8
Nil Rate Band unused (£300,000 - £200,000/£300,000)
Step 2 - Calculate IHT due on Arthur's estate
Nil Rate Band for 2011/12
plus Spouses unused nil rate band (£325,000 x 1/3rd)
Total Nil Rate Band Available
IHT due (£750,000 - £433,333 x 40%)
Q2. How are lifetime gifts treated for Inheritance Tax?
On death there may be IHT payable on any lifetime gifts the deceased made (that are not exempt
gifts) during the previous 7 years. These gifts are assessed to IHT before the residual estate and
therefore will use up the nil rate band first
Where the nil rate band has been fully exhausted any excess is charged to IHT at 40% although only
a proportion of the tax may be payable if the gift was made more than 3 years before death
Certain types of gifts made during lifetime may also attract an immediate liability to IHT at the time the
gift is made. Please see Question 5
Where, however, IHT is payable on a lifetime gift and the gift was made more than 3 years before
death, the taper relief is applied on a sliding scale as follows:
Years elapsed since gift
Percentage of IHT payable
0 to 3 years
3 to 4 years
4 to 5 years
5 to 6 years
6 to 7 years
Q3. What types of gifts are exempt from IHT?
Lifetime Gifts Only
Gifts of up to £3,000 in total - known as the annual gift exemption - can be made each year and will
be immediately exempt from IHT. If the £3,000 annual exemption is not used (or only partially used)
then any unused amount can be carried forward for one year only.
In addition individuals can make small gifts of up to £250 per recipient which are exempt (although
this exemption cannot be combined with the annual gift exemption of £3,000 for example to make an
exempt gift of £3,250 to one individual). Regular gifts from income (not capital) may also be exempt
from IHT provided that they are habitual and do not affect the donors standard of living
Other gifts which are exempt are:•
Gifts to UK registered charities
Gifts to Political Parties
Gifts for National Purposes
Gifts made to a person who is about to get married/enter into a Civil Partnership up to the
following amounts
£5,000 if made by their parent
£2,500 if made by their Grandparent
£1,000 if made by anyone else
Q4. Who is liable for the IHT on death?
The personal representatives are liable for any IHT due on the deceased's estate. In respect of any
IHT due on lifetime gifts made to an individual then it is the recipient who is liable.
In respect of any IHT due on lifetime gifts made to trust then the liability for the IHT usually lies with
the trustees (although they would meet this from the trust assets).
Q5. What is a Chargeable Lifetime Transfer?
Certain lifetime gifts may attract an immediate IHT charge - The most common example of a
Chargeable Lifetime Transfer is a gift to a trust (with the exception of gifts to absolute/bare trusts)
and, less commonly, gifts to 'close companies' (generally defined as a company which is under the
control of five or fewer participators, or of participators who are directors)
Chargeable Lifetime Transfers (CLTs) are cumulated over a 7 year period and, if the cumulative total
of CLTs exceeds the nil rate band (£325,000 from 2009/10 to 2014/15 inclusive) then the excess will
be chargeable to IHT at the lifetime rate of 20% (equivalent to half the death rate). If death occurs
within 7 years of a CLT then further IHT at the death rate of 40% may be due (see Question 2),
although any tax already paid at the time of the gift is taken into account.
Chargeable Lifetime Transfers may also need to be reported to HM Revenue and Customs where
certain thresholds are exceeded.
(a) For Chargeable Lifetime Transfers of cash or shares
If the transfer plus CLTs made in the previous 7 years add up to more than the Nil Rate Band.
(b) For Chargeable Lifetime Transfers of other assets
Two conditions must be satisfied. Firstly, the transfer plus CLTs made in the previous 7 years must
add up to more than 80% of the nil rate band, and secondly the value of the CLT must be more than
the nil rate band minus the previous 7 years CLTs.
e.g.:- John makes a CLT of £80,000 in 2011/12 and CLTs in the previous 7 years total £95,000. The
total of £175,00 is less than 80% of the nil rate band (£325,000 x 80% = £260,000).
The CLT of £80,000 is also less than the nil rate band minus the previous 7 years CLTs (£325,000 £95,000 = £230,000).
Q6. What is a Potentially Exempt Transfer?
A potentially exempt transfer (or PET) is a lifetime transfer which is neither an exempt transfer nor a
chargeable lifetime transfer - These will generally be gifts made directly to another individual (i.e. - not
to a trust).
Provided the transferor survives for 7 years the gift will then be exempt from IHT, otherwise the gift
becomes a chargeable transfer and will be assesed to IHT. Question 2 briefly explains how IHT is
then calculated on gifts that the deceased has not survived by 7 years.
Q7. What assets are included in my estate for Inheritance Tax Purposes?
Simply speaking everything you own, debts owed to you, and certain trusts under which you are
entitled to benefit will all form part of your estate when assessing whether or not it exceeds the nil rate
From 22 March 2006, a person's estate is made up of:•
Assets in the sole name of the deceased
Their share of any jointly owned assets (although their share may depend on the amount they
contributed to it - not just how the current ownership of the asset is split)
assets held in certain trusts under which the deceased held certain interests:- These include
immediate post-death interests (IPDI), a disabled person's interest (DPI), or a
transitional serial interest (TSI) - See Appendix II for an explanation of these terms and
trusts in general
Any ''nominate'' assets (assets which do not pass under the deceased's will or under
intestacy but are transferred directly to beneficiaries due to a nomination made at outset)
Any assets gifted away but subject to a reservation of benefit (Gifts with Reservation)
the value of an alternatively secured pension fund (ASP) from which the deceased benefited
as the original scheme member, or as a dependant who received benefits from the left over
ASP fund of an original scheme member.
The total of all these assets is then added to the chargeable value of any gifts made within 7 years of
the death to work out the amount on which tax is charged.
Some assets, although included in the estate, may have their value reduced for IHT purposes.
Examples are assets qualifying for Business Property Relief or Agricultural Property Relief
Additionally, if the deceased is non-UK domiciled for the purpose of IHT then only assets situated in
the UK will be subject to Inheritance Tax - Assets situated overseas will be excluded property for IHT
purposes. For individuals who are or are deemed to be UK domiciled for IHT purposes their estate will
comprise all of their assets (whether situated in the UK or overseas).
Q8. What do you mean by "domicile" and how do I know if I am UK domiciled for Inheritance
Tax purposes?
This can be a subjective area but generally a person's domicile is the country in which they have their
permanent home and, when they are absent, to which they always intend to return.
A person's "domicile of origin" will usually be inherited from their father, wherever the child is born and
although steps can be take to acquire a different "domicile of choice" robust evidence is required to
demonstrate this.
For inheritance tax purposes a person who is non-UK domiciled will be deemed to be domiciled in the
UK for IHT purposes if they have lived here for 17 out of the last 20 years - This applies even if they
have not taken steps to acquire a domicile of choice here.
Q9. What happens if I have not made a Will?
A person is deemed to have died 'intestate' if they have not made a will - Where a will has been made
but some element of it is invalid it is possible to have died 'partially intestate'
There are established rules that govern how a deceased individual's estate is distributed in the event
of intestacy. The rules for England and Wales, Scotland, and Northern Ireland are all different and it is
the rules applicable to the country in which you are domiciled which apply.
It is important to be aware that if you die intestate then your estate may not be distributed to the
people whom you wanted to benefit and may be distributed in a manner that is not the most taxefficient.
For full details of the intestacy rules please see Appendix IV.
Q10. Will all my assets pass under the terms of my Will?
Not necessarily. Where you own assets jointly with another individual (for example your home) your
share in that asset may pass automatically to the surviving owner regardless of what your will states.
These rules are known as the rules of survivorship.
In addition, any assets you have gifted into a trust are no longer owned by you and therefore cannot
be willed. They will be held by the trustees, under the terms of the trust, for the nominated
Q11. What is a 'Gift with Reservation'?
A 'Gift with Reservation' (GWR) is a gift made by an individual who retains some benefit in the
property or asset given away. In order to avoid a GWR the donor (the person making the gift) must be
'entirely excluded or virtually entirely excluded' from benefitting from what they have given away.
For example, if a parent gifts their home (say, to their son or daughter) but continues to reside in it
rent free then its value will still form part of the parents estate for IHT purposes on death even though
legally they no longer own it.
More complex series of transactions can also be caught as HM Revenue and Customs can argue
there have been 'associated operations'. For example, if a parent gifts cash to their son or daughter
who immediately use this to buy a main residence for the parent (donor) to live in, the value of the
property could still be included in the donors estate on death.
Q12. What is Business Property Relief and what assets qualify for this relief?
If you own a business or share of a business its value, although included in your estate, may be
reduced to nil under Business Property Relief provisions. This effectively means that your business
can be left to your chosen beneficiaries free of inheritance tax.
There are rules which restrict this relief to 'trading businesses' so businesses which deal wholly or
mainly in land or buildings, investments, or securities will not qualify for the relief. For example, a
property letting business which would be viewed as an investment rather than a trade.
Business Property Relief is a complex and subjective area and you may need to consult a specialist
tax adviser before relying on the availability of this relief. It is also important to note that whether or
not the relief applies will be decided by HM Revenue and Customs based on the circumstances of the
case at the date of your death.
There is also no guarantee that there will not be legislative changes in the future which affect or even
abolish the availability of this relief.
Q13. Would any Inheritance Tax be due on any pensions which, at death, remained unvested?
The death benefits from stakeholder pensions, personal pensions and occupational pension schemes
will usually be written under trust.
Should you die before taking benefits from these schemes the death benefits should be paid free of
inheritance tax provided the Trustees/scheme administrator have discretion over who they pay the
proceeds to and that they make the payment within 2 years of death. You should ensure that an
'Expression of Wishes' form has been completed confirming whom you would like the payment to be
made. Failure to leave such guidance to the scheme could mean that they simply take the decision to
pay any death benefits to your estate and therefore the proceeds could then be subject to inheritance
Separate trusts usually have to be set up in respect of Section 32 buy-out plans and Retirement
Annuity Contracts (RAC) to ensure the death benefits are not paid to the deceased's estate and
potentially subject to IHT
'Section 32' buyout plans were first introduced in 1981 to facilitate the paid up pension rights
and entitlements in respect of a previous employer's occupational pension scheme to be
transferred without having to go to another employer's occupational pension scheme
Retirement Annuity Contracts (RACs) are a type of individual pension plan available before 1
July 1988, before the current form of Personal Pension Plan (PPP) was introduced. RACs
were available to employed individuals (where there was no company pension scheme
available) and to those in self-employment, provided they had earnings subject to UK taxation
Appendix II - Trusts
This aim of this document is to answer the most frequently asked questions in respect of
Trusts and should be read in conjunction with the suitability report which summarises the
recommendations your Financial Adviser has made based on your individual circumstances.
It should not be viewed as an exhaustive summary of what can be a complex area of law - You
should always seek guidance from your Financial Adviser.
Q1. What is a trust?
A Trust is an obligation binding a person ('trustee') to deal with property on particular terms for the
benefit of another person or persons (the beneficiary or beneficiaries). A trust is usually created in
writing (via a trust deed or a will), or may be imposed by statute (for example where a legacy is left to
a minor)
The settlor is the person who creates the trust and puts assets into it at the start. The trust deed (or
will) will state how the trust capital and income may be used.
The trustees are the legal owners of the trust property and may only deal with the trust property in
accordance with the terms of the trust.
The beneficiary (or beneficiaries) are the individual(s) who can benefit under the terms of the trust.
The trust may given certain rights to particular beneficiaries (e.g.- a right to income generated by the
trust property) or it may give no rights to entitlement but grant power to the trustees to exercise their
discretion with regards to who benefits and in what proportions.
Q2. Can I take money back from the Trust if I need it in the future?
No. In order to make sure the Trust is not included as part of your estate for Inheritance Tax purposes
it is essential that your are excluded from benefitting from it. The terms of the trust will specifically
state that the settlor be excluded as a beneficiary.
Q3. What is an "interest in posession"
An "interest in possession" is a right that a beneficiary currently has to something from the trust. This
may be:
(a) a right to income generated by the trust property; or
(b) a right to both the income and the trust property itself
Q4. What types of Trust are there?
Strictly speaking, all trusts fall into one of two categories - Trusts with an 'interest in possession' or
trusts without an 'interest in possession' (see Q2 above) but can be split down further into the
Bare Trust
A bare trust (or 'simple' trust) is a trust under which the beneficiary has an absolute right to the trust
property (and income). Provided the beneficiary has reached the age of majority he/she can take
personal possession of the trust property.
Bare trusts are commonly used to pass assets to children. A Bare Trust is the least flexible trust as
the trustees have no discretion over who can benefit - The role of the trustee is simply to look after the
trust assets until the beneficiary takes possession.
Interest in Possession (IIP)Trust
Although strictly speaking a bare trust is also a type of IIP trust (see Q3), the term is more commonly
used to describe trusts where one beneficiary has a right to trust income during their lifetime (known
as a life interest) but someone else is entitled to the residual trust fund on their death.
The person entitled to the trust fund after the death of the IIP holder is known as the remainderman
and is said to have an 'interest in residue'
Discretionary Trust
Under a discretionary trust no beneficiaries have an automatic right to either trust income or capital The trustees decide how much of either (if any) to pass on to each of the beneficiaries.
This type of trust offers the most flexibility and can enable you to retain some control during your
lifetime as to who benefits and when.
Q5. What is a Flexible Power of Appointment Trust?
This is essentially a type of "interest in possession" trust - Under the terms of the trust the nominated
beneficiares (usually described as the 'default' beneficiaries) initially have the right to both the income
and capital from the trust.
The trust, however, will also have a class of 'potential beneficiaries' to whom trustees can appoint
capital or income under their 'power of appointment'. As the default beneficiaries rights can therefore
be defeated by the trustees they do not have an absolute entitlement (like a bare trust) but, in the
absence of any action by the trustees, hold the current interest in the trust.
Q6. How is the trust income treated for income tax purposes?
"Interest in Possession" Trusts
Under an IIP trust the trustees are liable for tax at 10% on dividends and 20% on other income
generated by the trust property. The beneficiary holding the IIP - as they hold the right to this income may then be liable for further tax on this income (or be able to reclaim some or all of the tax)
depending on their own tax position.
NB. Parental settlement rules: There are special rules to prevent tax avoidance by individuals.
Broadly this means that income arising from trusts created by parents for their children will be taxed
as the parent's income if it exceeds £100 per year.
Trusts without an 'interest in possession'
For discretionary trusts (non-interest in possession trusts), the trustees are liable for tax on the first
£1,000 of income at rates of 10% (dividend income) and 20% for other income. In 2010/11 and
2011/12, for income in excess of £1,000 tax is levied at a rate of 42.5% on dividend income and 50%
on other income.
Where the trust income is 'rolled up' within the trust there are no further issues. Where the income is
paid out to a beneficiary the position can more complicated where the income is derived from
dividends - beneficiaries may end up with less net income when compared to a dividend they might
receive from an investment held personally.
Trust taxation is a complex area and if you are unsure of the position you should query this with your
Financial Adviser.
Q7. How are trust capital gains treated for capital gains tax purposes?
Under a bare trust any capital gains made on disposal of trust assets are treated as the beneficiary's
(as the trust fund is essentially theirs). For other trusts any capital gains are generally taxed as the
Individuals can realise capital gains of up to the annual CGT exemption (£10,600 for tax year
2011/12) without having to pay capital gains tax. The trust exemption is equal to half the individual
annual exemption (£5,300 for tax year 2011/12). However, where a settlor has created more than one
trust then the trust exemption is divided by the number of trusts, subject to a minimum of 1/5th of this.
For disposals made after 22 June 2010 trustees pay capital gains tax at a rate of 28% on capital gains
in excess of their available annual exemption.
Q8. How are transfers (gifts) to Trusts treated for Inheritance tax purposes?
For lifetime transfers to most Trusts made on or after 22 March 2006, to the extent the transfer is not
an exempt transfer, it will be treated as a Chargeable Lifetime Transfer. Where such a transfer plus
previous chargeable lifetime transfers made in the preceding 7 years exceeds the nil rate band then
IHT will be payable on the excess at the lifetime rate of 20%.
The only exceptions to this are lifetime transfers to Bare Trusts or Trusts for the Disabled which are
treated as Potentially Exempt Transfers.
Please see Appendix I for details on how lifetime transfers are treated for IHT
Q9. Are there any other Inheritance Tax implications of using Trusts?
Yes, but only in respect of trusts classed as "relevant property" trusts
There may also be Inheritance Tax charges levied on the Trust itself when capital (not income) is paid
out to beneficiaries and also based on its value every ten years. This applies equally to 'relevant
property' trusts created during lifetime or trusts created on death (e.g. - created by a will or on
Periodic charge
There may be IHT payable every 10 years if the value of the Trust exceeds the nil rate band
applicable at the time - The charge equates to a maximum of 6% of the trust assets over the nil rate
band. In calculating this, however, certain gifts made in the 7 years prior to the trust being established
may also need be added to the value of the trust.
'Exit' charge
There may be an IHT charge if capital leaves the trust between each 10 year trust anniversary.
During the first 10 years, where IHT was paid at the time of the original gift, then further tax may be
due based on:(i) the 'effective rate' of inheritance tax originally paid on the gift;
(ii) the number of complete 3 month periods since the trust was established;
(iii) the amount leaving the trust
For capital leaving the trust between subsequent decennial (10 year) anniversaries then the situation
is as above but the exit charge is based on the 'effective rate' of the periodic charge levied at the last
10 yearly anniversary date.
If there has been no IHT payable at the time of the original gift (for capital payments between years 0
- 10) or any IHT due at the last decennial anniversary (for capital payments between subsequent
anniversaries) then there will be no exit charge due
Q10. What is a "relevant property" trust?
From 22 March 2006 most Trusts set up during lifetime and on death are "relevant property" trusts The exceptions are:
(i) Bare trusts
(ii) Trusts for the Disabled - Such a beneficiary is deemed to hold a Disabled Persons Interests
(iii) Trusts created on death for a minor child of the deceased provided the beneficiary becomes
absolutely entitled to the trust assets at age 18 (A Bereaved Minor's Trust).
(iv) Trusts set up by a will where the beneficiary's entitlement commences immediately on the death
of the person who wrote the will. This type of beneficiary's interest is known as an Immediate Post
Death Interest (IPDI)
There are also transitional rules for "interest in possession" trusts established prior to 22 March 2006
that could have otherwise inadvertantly been brought under the "relevant property" rules - These are
know as Transitional Serial Interests (TSI)
Q11. How are gains from investment bonds written in trust taxed?
Where a chargeable event occurs in respect of an investment bond or capital redemption bond a
chargeable gain may occur. The circumstances in which a chargeable event occurs can be:
Death of the last life assured (not applicable to capital redemption bonds as these have no
element of life assurance)
Assignment for money or money's worth
Certain part surrenders
In respect of part surrenders up to 5% of the premiums invested can be withdrawn each policy year
until 100% of the premium(s) have been withdrawn) without triggering a chargeable event. If this 5%
allowance is unused in a policy year then it can be carried forward for use in future years.
If 5% is taken each year then after 20 years any further withdrawals will be fully taxable.
In respect of investment bonds subject to a trust the general rule is that, where the settlor (the person
who created the trust) is alive and UK resident for tax purposes then the gain will be treated as the
Where the settlor is deceased then the gain will be assessed against the trustees who are liable for
tax on the gain at the rate applicable to trusts (50% in 2010/11 and 2011/12).
Where the gain arises from a UK investment bond then this is already deemed to have been subject
to 20% tax so trustees would have a liability to a further 30%
Where a chargeable gain arises in respect of an investment bond (or capital redemption bond) held
subject to a bare trust and the beneficiaries are over 18 then the gain will be assessed as that of the
Appendix III:- Inheritance Tax Planning Schemes
This aim of this document is to answer the most frequently asked questions in respect of the
various IHT planning solutions available and should be read in conjunction with the suitability
report which summarises the recommendations your Financial Adviser has made based on
your individual circumstances.
It should not be viewed as an exhaustive summary of all the technical details - You should
always seek guidance from your Financial Adviser
Q1. What is a Discounted Gift Trust?
A Discounted Gift Trust is a special trust-based scheme. It is designed for individuals who have a
lump sum to invest, wishes to make a lifetime gift, and has a need for regular income/payments in the
The settlor transfers a lump sum to the arrangement under the terms of which the settlor reserves
rights to receive certain future payments from the trust and gives away the balance. The arrangement
will usually be a single premium investment bond or capital redemption policy written subject to this
special trust.
At first glance it may seem that the settlor would be making a 'gift with reservation' (see Appendix I)
but the arrangement is carefully structured to ensure that either:(i) Where the settlors rights derive from the policy itself, the rights that the settlor is retaining from it
are distinct from the benefits he/she is giving away - For example, the settor retains the right to
maturity payments if alive at that date but gifts away the death benefits of the plan. Although both
derive from same investment this distinction is important - This is generally known as a "carve-out"
scheme as the settlor has carved out certain rights for him/herself and gifted the others.
(ii) The settlor's rights are to cash payments from the trust rather than from specific rights in respect of
the underlying policy - In this respect, therefore, the settlor is not reserving a benefit directly in the
gifted policy. This is usually referred to as a "reversionary" scheme
At outset the settlor must decide on the annual future payment's he/she is reserving a right to - Based
on this, their age, and actuarial life expectancy a "notional" capital value can be placed on these
future entitlements. The difference between the amount invested and the retained rights (the
'discount') is the "discounted" gift being made to trust for the nominated beneficiaries.
The immediate effect should be that the settlor's estate is reduced immediately for IHT purposes by
the value of the "discount". There will be no IHT due on the balance - the discounted gift - on death
provided the settlor survives for 7 years.
It is essential, however, that the arrangement is underwritten by the insurer to take into account any
medical factors. This is because most insurers have agreed with HM Revenue and Customs (HMRC)
the basis for calculating discounts and therefore the 'discount' is less likely to be disputed by them if
death occurs within 7 years (provided full disclosure of all relevant health matters was made by the
applicant). You should be aware, however, that there is never a guarantee that HM Revenue and
Customs will accept a certified discount.
Discounted Gift Arrangments can be based around bare trusts, flexible trusts, or discretionary trusts The choice will depend on the level of flexibility required over who can benefit from the gifted element
and also taxation considerations.
The discounted gift will be treated as either a Chargeable Lifetime Transfer or a Potentially
Exempt Transfer (Please refer to Appendix I and II for further information)
Q2. What are the Inheritance Tax implications of investments made into a Discounted Gift
For schemes based around a bare trust the amount invested less the value of the settlor's retained
rights (the 'discount') will be a Potentially Exempt Transfer. The settlor's estate should be reduced
immediately by the discount and the there will no IHT to pay on the remaining gift provided the settlor
lives for 7 years.
For schemes based around flexible or discretionary trusts the amount invested less the value of the
settlor's retained rights (the 'discount') will be a Chargeable Lifetime Transfer. The settlor's estate
should be reduced immediately by the discount
There may be IHT payable at the lifetime rate of 20% where the value of the discounted gift plus
chargeable lifetime transfers made in the previous 7 years exceed the nil rate band.
Provided the settlor lives for 7 years from the date of the gift then no further IHT will be due on death.
Q3. How is the Discounted Gift Trust itself treated for Inheritance Tax?
This depends on which version of the Discounted Gift Trust is used - Those that are based around
bare trusts will not be classed as "relevant property" trusts and therefore no exit or periodic IHT
charges will apply.
For Discounted Gift Trusts based around flexible or discretionary trusts the "relevant property" rules
will apply - These are explained further in Appendix II
The value of the Discounted Gift Trust every decennial anniversary for the purposes of the periodic
charge will be the value of the investment bond less the value of the settlor's future rights - This
means that the capital value of these future rights need to be recalculated at each decennial
anniversary to reflect the settlor is 10 years older
Q4. What is a Loan Trust?
A loan trust is a generic name given to an trust-based scheme where, instead of making a lifetime gift
into the trust, the settlor makes an interest-free loan to the trustees which is repayable on demand.
The trustees will then use the money to invest in a single premium bond
The settlor and trustees will also sign a seperate loan agreement detailing the terms of the loan Under the arrangement the settlor is only entitled to receive back the amount of any outstanding loan
and any investment growth will be held on trust for the beneficiaries.
The usual practice is that the settlor requests regular repayments of the loan which the trustees fund
be taking withdrawals from the bond (usually up to a maximum of 5% per year to avoid income tax
implications in respect of the investment).
This type of arrangement may therefore be appropriate where the settlor needs a regular 'income'
stream - For example, where annual repayments of 5% of the loan are taken the outstanding loan will
be repaid after 20 years and, if investment growth has been sufficient to sustain these withdrawals,
then an amount equivalent to the original loan will be held on trust for the beneficiaries. The
arrangement may also be appropriate for an individual who requires ad-hoc access to the initial
capital but wants to ensure any investment growth accrues outside their taxable estate.
On death any outstanding balance of the loan will form part of the settlor's estate for IHT purposes (as
this is a debt owed to his/her estate). It is also important to remember that once the loan has been
repaid the settlor will receive no further payments from the arrangement.
Again the type of trust used can be a bare trust, flexible trust, or discretionary trust. Some
arrangements may also require the settlor to make a nominal gift (say £10) to set up the trust - known
as Gift and Loan Trusts - whereas others do not and are simply loan-based.
Q5. What are the Inheritance Tax implications of using a loan trust scheme?
As the initial amount provided is a loan rather than a gift there are no immediate IHT implications on
setting up the arrangement.
Where the loan trust is based around a bare trust the 'relevant property' rules will not be applicable
and there will be no possibility of exit or periodic IHT charges being levied on the Trust (See Appendix
II for an explanation of the relevant property rules)
Where the loan trust is based around a flexible or discretionary trust then the 'relevant property' rules
will apply - There will be no exit charges on capital leaving the trust during the first 10 years, however,
as there was no transfer of value (gift) at outset.
For the purposes of the periodic charge the value of the Trust at each decennial anniversary will be
the value of the investment bond less the outstanding loan to the settlor - For this reason the chance
of a periodic charge on the first decennial anniversary is minimal
Q6. Why should I consider effecting life assurance in trust to provide the funds for my
beneficiaries to pay the IHT? Surely it is better to use schemes that reduce the value of my
estate than pay out money into a policy?
This will depend on your circumstances - It is important to remember that with any lump-sum IHT
scheme you will be giving up access to either some or all of the initial amount invested, the
investment growth, or even both and therefore lump- sum IHT schemes are not without consequence.
Effecting suitable life assurance in trust is perhaps the most simple solution and, for those who have
excess disposable income, then can be a useful way of 'gifting' this income to your beneficiaries
rather than allowing it to build up within your estate and itself be subject to Inheritance Tax.
Q7. What are the IHT implications in respect of effecting life assurance in trust?
The premiums will be gifts for inheritance tax purposes. Providing they are paid out of income as part
of your regular expenditure (and do not affect your standard of living) then they should be exempt
under the "normal expenditure out of income provisions"
Where the life policy is written subject to either a flexible or discretionary trust then the trust will be
subject to the "relevant property" rules. Generally, however a life policy has little or no current value
(as it only has a value on death) therefore there is unlikley to be a periodic charge at each decennial
anniversary - The main scenario where such a charge could apply, however, is where the life assured
is in serious ill health as the policy could then be deemed to have a "market value"
Where the lifecover required is significant, it is also possible to establish a series of smaller policies in
seperate trusts (established on seperate days - this is essential) in preference to a single policy in
trust - The aim of this is to reduce the likelihood of a periodic charge in the instance mentioned above.
This is often referred to as the Rysaffe principle (after the case of Rysaffe Trustee Co (CI) v IRC
which established this precedent)
Q8. What is a Gift Inter-Vivos Plan?
A Gift Inter Vivos Plan is a 7 year life assurance policy designed to cover any inheritance tax due on a
lifetime gift (inter-vivos simply means "between the living"). The sum assured reduces over the period
to mirror the actual amount of IHT that could be due on the transfer.
Q9. What is a spousal-by pass trust?
The term is commonly used to describe an trust arrangement set up to receive any death benefits
from an unvested pension scheme (although technically the term can apply to a trust set up to receive
any asset(s)).
A spousal by-pass trust is usually set up as a discretionary trust which will allow the trustees to make
ad-hoc payments of income or capital to a range of beneficiaries, including your spouse so that
he/she can still benefit from the lump sum. It is possible, however, to set this up as an 'interest in
possession' trust with the spouse noted as a discretionary beneficiary.
There may be a periodic IHT charge based on the value of the trust assets at each decennial
anniversary, although it is important to note that the anniversary dates will run from the date the
deceased member joined the pension scheme rather than the date that the spousal-by pass trust was
established - The reason for this is that there are rules governing transfers from one settlement (trust)
to another and where funds from one settlement become comprised in another they are treated as still
being comprised in the original settlement for the purposes of the 'relevant property' IHT regime.
As pension death benefits are already written in trust at outset (i.e - when the member joins the
scheme), on death the scheme trustees would be deemed to be transferring funds from the existing
pension trust to the spousal by-pass trust
Appendix IV - Intestacy Rules (England and Wales)
This aim of this document is to explain the Law of Intestacy (England and Wales). Different
rules apply in Scotland and in Northern Ireland. You should always seek guidance from your
Financial Adviser if you have any doubts with regards to the relevance of this document to you
individual circumstances.
The Intestacy rules will apply if someone dies without making a will. People who have not made a will
are said to have died 'intestate'. If this happens, the law sets out who should deal with the deceased's
affairs and who should inherit their estate.
1. Spouse - but no issue, no parent(s), no brother or sister of the whole blood, or issue of
brother or sister of the whole blood
Spouse takes the whole estate absolutely
2. Spouse and issue
Spouse takes:(i) All the chattels
(ii) £250,000 absolutely (known as the statutory legacy) plus 6% interest from date of death to date of
(iii) A life interest in half the residue (i.e. - a right to income) with the remainder to the children
Issue takes the remainder of the residuary estate and, if more than one in equal shares, subject to
'statutory trust' provisions - Broadly the statutory trusts are relevant where issue is below the age of
majority and their terms provide that the issue attains an absolute right to income and capital at age
Where the issue of the deceased are adults they will take their proportionate legacy immediately.
3. Spouse, no issue but other relatives
Spouse takes:(i) All the chattels
(ii) £450,000 absolutely (the statutory legacy)
(iii) The balance of half the residue absolutely
Relatives take the remainder in the following order of priority:(i) Parents (and if more than one in equal shares)
(ii) Brothers and sisters (or if themselves deceased, their issue) in equal shares per stirpes
4. Issue but no spouse
Issue take the entire estate absolutely
5. No spouse or issue
If there is no spouse or issue then the whole estate is taken by other specified relatives in the
following order of priority:
Brothers and sisters of the whole blood
Brothers and sisters of the half blood
Uncles and Aunts of the whole blood
Uncles and Aunts of the half blood
"Per stirpes": This term means that each child takes an equal share and, if the child predeceases the
intestate then his/her entitlement is split equally between his/her children equally and so on