Recent proposals offer protection from pre-owned asset tax
Scottish Equitable has re-launched its Reserved Interest Trust, following recent proposals in the UK Finance Bill that ensure that these types of trusts would not be affected by the new pre-owned asset tax.
The trust is a discounted gift scheme that is generally used in conjunction with an offshore bond such as Scottish Equitable International's Dublin Investment Portfolio. It allows investors to take a regular withdrawal stream from an insurance bond while potentially reducing inheritance tax.
Under the Reserved Interest Trust, the client sets up a trust and the trustees buy a bond, such as the Scottish Equitable International Investment Portfolio. The client has a fixed right to annual payments from the trust. This is determined at outset. Under the current version of the trust each payment must equate to 5% of the amounted gifted to the trust. The latest development means clients now have the flexibility to select the fixed percentage of withdrawal according to their income requirements.
In addition, clients can fix their level of withdrawal for selected periods. For example, a client who wants to gradually retire could elect to take, say, 1% withdrawal in the second year preceding retirement, 3% the year before retirement and 5% in the year of retirement and thereafter.
Under current legislation the withdrawal stream will not be subject to immediate liability to income tax providing it is no more than 5%. The amount of investment in the trust is classed as a Potentially Exempt Transfer and will be outside the investors' estate for inheritance tax purposes if they survive for seven years or more.
If they die before the end of the seven-year period, the amount of inheritance tax payable might be reduced, because the trust offers a potential 'discount' based on the client's sex, age and health.
Magaret Jago, tax and trust technical manager at Scottish Equitable, said: "The additional flexibility on offer through the Reserved Interest Trust makes it a hugely attractive tax and income planning tool, particularly for investors approaching retirement. Often this type of investor has an IHT problem as a result of having paid off their mortgage.
"However they are unable to completely tie their investment up in an IHT-efficient trust because they need the income in retirement. The Reserved Interest Trust gives investors a flexible income from an IHT-efficient investment."
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