A draft trust designed to avoid Isle of Man probate and Inheritance Tax issues associated with life assurance policies has been launched by Scottish Life International.
The company based on the Isle of Man says the ‘Bare Trust For Settlor’ proposition will help investors steer clear of the costs and delays associated with obtaining probate in the Island.
Life assurance policies issued by SLI are classed as Isle of Man assets, so when a policyholder dies, probate is required before ownership of the policy can be changed or payment of the policy proceeds can be made.
In addition the company says as the settlor is the primary beneficiary, the ‘reservation of benefit provisions’ will apply and the trust fund will be treated as being in the settlor’s estate, leading to a potential IHT charge.
But by placing the policy in a simple trust SLI points out trustees replace the individual policyholder as the owner, and there is no need for probate to be obtained on the individual’s death.
Originally to avoid this issue investors could use probate trusts, but since the Finance Act 2006 probate trusts established on or after 22 March 2006 fall within the relevant property regime, and as a result their establishment triggers a chargeable lifetime transfer charge.
However the company says the new Bare Trust, where the settlor is the only possible beneficiary - although the trust can be set up on a joint settlor basis – is designed specifically so there is no IHT chargeable transfer.
It says the trust can be established in one of two ways, either the settlor transfers an existing life assurance bond to trustees, or the settler transfers cash to trustees who then apply for a bond.
However when the settlor dies, as the bond is held by trustees, it is not classed as an asset of their estate for probate purposes, in addition SLI says as the trust does not fall within the ’relevant property' regime, settlors do not need to report the setting up of the trust to HM Revenue & Customs (HMRC).
Alan Blackburne, head of UK sales at Scottish Life International, says: "Traditionally Isle of Man probate was avoided by use of a probate trust. However the changes to the IHT treatment of trusts enacted in Finance Act 2006 means the use of probate trusts has unwelcome IHT implications.”
As a result he says: “Scottish Life International has had Counsel draft a trust which is designed to sidestep both the need for Isle of Man Probate and an IHT chargeable transfer."
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