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Trusts and Adviser Charging

This article considers Old Mutual Wealth’s approach to facilitating fees from investment bonds which are subject to a Old Mutual Wealth trust.

Since 31 December 2012, where financial advisers and fund advisers in the UK provide advice to their UK resident retail clients, they are only able to receive remuneration on new cases by charging fees. It is no longer possible to receive commission. The purpose, in essence, is to ensure transparency and separate the cost of advice from the cost of the product, so that a customer may better decide if they are receiving value for money.

There are many ways a client can choose to pay the fees due to the adviser.

In respect of the products provided by Old Mutual Wealth:

  • we will not facilitate fees from the product for any of our protection or savings plans, or our heritage insurance bonds offered through Old Mutual Wealth; See our document explaining these products for more detail;
  • we do not offer a trust range for our Collective Investment Account;
  • individual trust arrangements do not apply to ISAs;

therefore, this article focuses on the Collective Investment Bond which is in trust.

However, please see the section on external trusts below which will apply equally to the Collective Investment Account and the Collective Investment Bond.

Facilitation of fees from an investment bond

Fees (other than initial fees taken out of the premium before it is invested) taken from an investment bond to pay for adviser charging will be withdrawals from the bond. These withdrawals are taken by part surrenders and will reduce the 5% tax-deferred withdrawal allowance available to clients. If withdrawals exceed the 5% allowance in any policy year, this will trigger a chargeable event gain, and then income tax may be payable by the client in respect of the excess.

If your client decides that the fee to you should be paid by full surrender of individual policies, we cannot facilitate the fee and make payment to you.

In this circumstance, the client would request us to fully surrender a specified number of policies and we would pay the proceeds of those policies to your client. They could then make payment to you for the fee you have agreed outside of the policy.

If the surrender value plus any previous withdrawals made from the surrendered policies exceeds the premiums paid and any taxable withdrawals (excess gains) on those policies, this will trigger a chargeable event gain for the client and income tax may be payable by the client.

This is obviously important for your client to consider when deciding whether to pay your fees by instructing the insurer to facilitate the payment or by paying the fee from another source outside of the policy.

This consideration is further complicated where the client intends for the bond to be gifted into a trust.

Facilitation of fees from an investment bond subject to a trust

Where the client (the settlor of the trust) receives advice from an adviser, then the only way to pay for this advice is to use the premium before it is invested or withdrawals from the bond while they own it. Once the bond is gifted into trust it will be legally owned by the trustees.

It is important for trusts that have been set up for inheritance tax mitigation, and where the settlor is not able to benefit, that withdrawals to pay for adviser charging are not taken if the advice has been provided to the settlor. The reason for this is that such an action may impact the IHT efficiency of the trust.

However, if the trustees receive advice, then fees may be taken from the bond as a withdrawal.

This too may mean potential income tax liabilities, or reducing the 5% tax deferred withdrawal allowance. Where the settlor of a trust (other than a bare trust) is alive and UK resident, any chargeable event gain will be assessable on them.

Where the settlor is dead or not UK resident, then the trust will be liable (if UK resident) at the trustee rate of income tax of 45% (for the tax year 2013/14).

Please find a summary of when fees can be taken in relation to trusts offered by Old Mutual Wealth. This assumes that the trust has already been declared:

Discretionary Trust (settlor excluded)/Absolute Trust/Loan Trust (Discretionary and Bare versions)/DGT (Discretionary and Bare versions)

Where advice is provided to the settlor:

We will not facilitate adviser charging as this would be a gift with reservation of benefit for inheritance tax purposes.

Where advice is provided to the trustees:

We would facilitate this* – although chargeable event considerations as described above need to be considered. As does the fact that, for the discretionary trusts, this may be considered a withdrawal from a discretionary trust and therefore IHT exit charges may apply. However, section 65(5)(a) Inheritance Taxes Act 1984 states that no tax shall be charged in respect of a payment of costs or expenses, so far as those costs and expenses are fairly attributable to relevant property. It is generally held that legal or accountancy costs would fall within this and therefore it is our understanding that advice fees would also qualify and no IHT exit charge would apply.

*For the Discounted Gift Trust, we are currently not able to facilitate where the request is made at outset. However, once the trust is declared, the trustees can request fees in respect of on-going advice, investment management or adhoc fees to be facilitated in respect of advice or service they have received.

Discretionary Trust (settlor included)

Where advice is given to either the settlor or the trustees:

We would facilitate this – although chargeable event considerations as described above need to be considered. As does the fact that this would be considered a withdrawal from a discretionary trust and therefore an IHT exit charge may apply.

Summary

Our fees

We offer the following fee facilitation options:

Fee type

Description

Initial Fee

Taken from the lump sum or regular payment before it is invested.
In respect of advice relating to the new investment or top up.

Service Fee

Taken from the bond or CIA as a regular payment for on-going advice or servicing

Fund Switch Fee

Taken from the bond or CIA as a fee each time the funds are switched

Adhoc Fee

A one off fee for adhoc advice or service

After reviewing the considerations mentioned above in relation to their particular circumstances, if the settlor and/or trustees wish us to facilitate adviser charging for a bond subject to a trust, then the following facilitation of fee options are available from Old Mutual Wealth:

Trusts created as part of setting up bond both Old Mutual Wealth or equivalent external trusts

 

Advice given to and request to facilitate received from the Settlor

Advice given to and request to facilitate received from the Trustees

Type of Trust

 Type of fees facilitated by Old Mutual Wealth

     

Loan Trust/Enhanced Loan Trust 
(Bare or Discretionary)

None

Service fee
Fund Switch Fee
Adhoc fee

Discounted Gift Trust
(Bare or Discretionary version)

Initial fee*

Service fee**
Fund Switch Fee
Adhoc fee

Discretionary trust (settlor excluded)

Initial fee

Service fee
Fund Switch Fee
Adhoc fee

Discretionary Trust (settlor included)

Initial fee

Service fee
Fund Switch Fee
Adhoc fee

Absolute Trust

Initial fee

Service fee
Fund Switch Fee
Adhoc fee

* The value of the discount is based on the value gifted into the trust. Therefore, if the initial fee is facilitated from the investment (before the trust is declared), this will affect the discount and also the tax deferred withdrawal allowance available, as the premium for the investment bond will be lower.
** Old Mutual Wealth will not facilitate fees at outset for DGTs. Once the trust is in place, the trustees can request such Service fees in respect of on-going advice or Fund Switch Fees for investment management that is given to the trustees.

Please note that in respect of Old Mutual Wealth trusts, it is not possible for the settlor to reclaim income tax liabilities from the trust fund where the settlor is excluded from benefitting from the trust fund.

Existing trusts investing into a CIB or a CIA

 

Advice given to and request to facilitate received from the Settlor

Advice given to and request to facilitate received from the Trustees

Type of Trust

Type of fees facilitated by Old Mutual Wealth

Loan Trust/Enhanced Loan Trust 
(Bare or Discretionary)

None

Initial fee
Service fee
Fund Switch Fee
Adhoc fee

Discounted Gift Trust 
(Bare or Discretionary version)

None

Initial fee
Service fee
Fund Switch Fee
Adhoc fee

Discretionary trust (settlor excluded)

None

Initial fee
Service fee
Fund Switch Fee
Adhoc fee

Discretionary Trust (settlor included)

None

Initial fee
Service fee
Fund Switch Fee
Adhoc fee

Absolute Trust

None

Initial fee
Service fee
Fund Switch Fee
Adhoc fee

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

It is based on Old Mutual Wealth'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. Old Mutual Wealth 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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