Inheritance tax can be avoided by dependents of those in drawdown through a little known trust arran...
Inheritance tax can be avoided by dependents of those in drawdown through a little known trust arrangement.
The so-called spousal bypass trust is something IFAs can initiate on behalf of their clients, according to Paul Tinslay, an IFA with Wentworth Rose Annuities.
A member entering drawdown can fill out an expression of wish form, asking for the death benefits to be paid into a trust, John Page, pensions consultant with Technical Connection, said.
The expression of wish is not a guarantee the funds will be paid into the trust upon the member's death. It is at the discretion of the scheme administrators whether or not they pay the benefits into the trust or to one or more of the other eligible beneficiaries.
Assuming the scheme administrators follows the member's wishes and pay the death benefit into the trust, it can then loan the money to the remaining spouse.
Tinslay said: "The remaining spouse can receive loans from the trust during his or her lifetime, although the income must be taken at a sensible level. The Revenue would likely consider a large loan to be IHT avoidance." Upon the spouse's death the value of the estate is assessed and IHT is liable on amounts above the £234,000 nil rate band.
Because the spouse had a loan from the trust, this debt is then subtracted from the value of the estate, which excludes the trust, and is given back to the trust.
Tinslay said: "Once the debt has been paid, the trust closes and pays the capital value to the children, again IHT free."
Page added: " This can be a useful tool for tax planning but a full knowledge is required of the death benefits options applicable where a member dies while taking income withdrawal."
In order for the spousal bypass trust to be set up correctly, the member entering drawdown must first avoid a number of other options available for the handling of death benefits. For example if the member makes a nomination of a spouse or a dependant then the death benefits are paid into what is called the survivor's fund, or annuitant's fund.
If such a nomination has been made then the client cannot make use of the trust scenario.
First time in history
Hymans Robertson’ Guided Outcomes
Our weekly heads-up for advisers
More than £167,000 raised
Beware ‘temporary’ vulnerability