The Lifestyle Trust – a modern day trust solution

The Lifestyle Trust is the new discretionary trust being launched for use with an onshore* or offshore bond **. It offers a tax efficient way to leave wealth to future generations. It is designed to help achieve a required balance between access to capital, inheritance tax planning and control over the future distribution of assets, whilst providing a certain amount of flexibility in the future.

The Lifestyle Trust is unique as it entitles the settlor to access a pre-agreed proportion of the trust fund for future use. This is divided into a series of what are known as ‘entitlements’ that become available in line with an agreed schedule of dates. Each ‘entitlement’ is known as a Policy Fund and contains a number of individual policies specified in the trust deed.

Specified at the start within the trust deed, these entitlements can differ from each other in value, and the frequency of the dates can also differ. This allows the settlor to access the Policy Funds when they require them; for an overseas holiday perhaps, or to help fund grandchildren’s education. The entitlements can be deferred or even waived if the settlor decides they don’t need the money when it becomes available.

* available with Old Mutual Wealth in the UK

** available with Old Mutual International Isle of Man or Old Mutual International Ireland

How is the trust established and maintained?

The Lifestyle Trust is established by gifting a life or redemption bond into trust. The trust is single settlor only so the bond application must be made by an individual investor. To ensure the gift of the bond to the trustees does not constitute a gift with reservation, the settlor should not be a life assured on the bond.

Once the bond has been established, it is assigned to the trustees of the Lifestyle Trust by the completion of the deed. Two deeds are available, an English Law version and a Manx Law version.

Once the deed has been completed, the trustees hold the bond for the benefit of the discretionary beneficiaries. After each entitlement date is reached, the policies which make up the relevant Policy Fund are no longer held for the benefit of the potential beneficiaries instead they are held on bare/absolute trust for the settlor. The trustees can then surrender the policies and pass the money to the settlor.

Prior to an entitlement date, the settlor can ask the trustees to defer a Policy Fund date. However, the size of the Policy Fund can’t be changed.

The IHT treatment

Lump Sum Payments into the Lifestyle Trust

Assigning the ownership of the bond from the settlor into the trust will be treated as making a gift for inheritance tax (IHT) purposes. As the trust is a discretionary trust, this will be a chargeable lifetime transfer (CLT) unless any exemptions are available to cover some of the gift.

Any CLT into the Lifestyle Trust which would cause the settlor to exceed their available inheritance tax nil rate band (NRB)* must be reported to HM Revenue and Customs.

* Available NRB is the current allowance, £325,000 (frozen until 2021) minus any CLTs made in the 7 years prior to the gift

When the settlor receives their entitlement

The Lifestyle Trust is designed so there should be no immediate IHT liability for the settlor when they receive their entitlement to the Policy Fund. However, once the Policy Fund vesting date has passed, then the value of that Policy Fund will form part of the settlor’s estate for IHT purposes.

When the settlor dies

One of the conditions for receiving an entitlement to the Policy Funds is that the settlor is alive on the date they become entitled to receive them. If not, the value of the Policy Funds that are yet to be vested will be outside the settlor’s estate for IHT purposes, assuming 7 years have passed since the original gift was made.

Discretionary trust taxation

Discretionary trust taxation can be complex, but in summary:

  • An entry charge may arise on setting up a trust but only if the amount being settled exceeds the settlor’s available nil rate band (see above)
  • A periodic charge may arise every 10 years; and
  • An exit charge may arise when benefits leave the discretionary trust. This does not include benefits that the settlor receives as entitlements. However, if the trustees make a payment to a discretionary beneficiary, this may be subject to this charge.

Who might it be right for?

The Lifestyle Trust could be right for your client if they want to:

  • reduce their inheritance tax liabilities
  • leave their wealth, tax efficiently, to future generations

  • fund a dream holiday or perhaps their grandchildren’s education, by having access to trust
    fund entitlements at pre-determined dates

  • have the flexibility to defer accessing entitlements if circumstances change


Mrs Jones is a retired 73 year old. She has two grandchildren who are due to start private secondary school in a few years’ time and she would like to pay for their school fees.


Her main asset is her house, valued at £1,000,000, owned outright.

She also has an amount of £200,000 on deposit with several banks.


Worried about IHT on her deposit holdings.

Wants to pay for her grandchildren's school fees as and when due.


£150,000 (£50,000 to be kept on deposit)

If she is advised to invest into a bond subject to the Lifestyle Trust……..

The trust includes classes of beneficiaries which cover children and grandchildren so there is no need to decide now how she would like this split.

The gift into trust of £150,000 is below the nil rate band, therefore there is no immediate charge to IHT. The growth will be immediately outside her estate for IHT purposes and if she lives for seven years, there will be no further IHT charge on her estate in respect of the £150,000 gift.

The bond, which was taken out on 1 November 2015, is segmented into 500 policies, worth £300 each. Mrs Jones has specified how she would like to access the policies. She has decided that she would like to withdraw enough to cover the oldest grandchild’s fees for the first two years then a further withdrawal to cover the next three years. She then wants further withdrawals for the youngest grandchild when they are due to start secondary education. She has also decided on a further two entitlements which she can defer or decide not to take if she doesn’t require them.

These policies are held by the trustees in Policy Funds. Mrs Jones specifies on the trust documentation which Policy Funds she would like to be paid out to her, and when (the 'Year of Entitlement') as shown below. 

Policy Number(s)

Total Number of Policies

Year of Entitlement

Policy Fund


























When the Policy Funds are returned to Mrs Jones, there are no immediate IHT consequences. However, the value of each Policy Fund is considered within her estate for IHT purposes. When Mrs Jones uses the money to pay for the school fees, the money will no longer be included within her estate.

When Mrs Jones dies aged 83, having lived more than seven years since creating the trust and having spent all the proceeds from the Policy Funds to pay for the school fees, but before the entitlement dates for Policy Funds E and F, the value of the trust is outside her estate for IHT purposes. Mrs Jones’ Lifestyle Trust has saved her estate £60,000 (£150,000 x 40%) in IHT, plus any growth on the value of the trust which is also excluded from her estate for IHT purposes.

As you can see, the Lifestyle Trust enables someone to make a substantial gift, reducing the impact of IHT on their estate whilst maintaining flexible access to the trust fund and offering control over when money is passed onto potential beneficiaries.*

* A letter of wishes can be provided to the trustees laying out how the settlor would like them to use the trust fund.

For financial advisers only. Not to be relied on by consumers.

The information provided in this article is not intended to offer advice.

It is based on Old Mutual Wealth or Old Mutual International's interpretation of the relevant law and is correct at the date shown at the top of this article. While we believe this interpretation to be correct, we cannot guarantee it. We cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.

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