Skandia International today announces the launch of a new, highly flexible tax planning solution designed to enable the transfer of wealth on to the next generation in an IHT (inheritance tax) efficient way.

3 August 2012

Skandia International today announces the launch of a new, highly flexible tax planning solution designed to enable the transfer of wealth on to the next generation in an IHT (inheritance tax) efficient way.

Called ‘The Best Start in Life’ Trust, the arrangement will appeal to those individuals who wish to pass part of their wealth on to the next generation and thus reduce the inheritance tax liability on their estate. Provided the individual lives beyond seven years from the outset of the Trust the proceeds may even qualify for complete exemption from IHT.

The trust, which can invest in a choice of Royal Skandia offshore investment bonds - thus ensuring that any growth sits outside the individual’s estate and is not subject to IHT, is set up at the outset as a Discretionary Trust with the legal ownership of the assets handed over to the Trustees. A Discretionary Trust is a powerful and highly flexible financial planning arrangement, which does not place an onus on the settlor to nominate beneficiaries at the outset or specify the levels of entitlement that are to be paid out in the future.

The settlor is able to complete a ‘letter of wishes’ which, although not legally binding, can be used by the Trustees as guidance to make decisions about the provision of benefits from the Trust. For example, the settlor may indicate that he or she wishes to fund university education for grandchildren yet unborn, or that part of the benefits could be used as a deposit for a house for one of the existing grandchildren.

It is up to the trustees to determine when and how benefits will be paid to the beneficiaries. ‘The Best Start in Life’ trust provides added flexibility which allows them to assign the trust assets to the beneficiary absolutely and therefore it is the beneficiary who the taxable event gain is assessable on. Provided the beneficiary has no other income, the tax liability can either be mitigated if the amount is within the individual’s personal allowance limit, or significantly reduced. Examples provided below*.

Rachael GriffinRachael Griffin, head of product law and commercial development at Skandia International, comments:

‘This area of financial planning can be perceived as somewhat complex, which often results in individuals not realising what options could allow them to legitimately optimise and mitigate potential future tax liabilities. The ‘Best Start in Life’ Trust illustrates that by planning how a withdrawal is taken, the trustees can reduce the tax liabilities on the settlor or the beneficiary by using just one tax-efficient solution. I cannot stress enough that individuals and trustees should not be deterred by the complexity and instead, with the help of a professional adviser, use the available options to their full advantage.’

* When the trustees decide to appoint benefits to a beneficiary, they complete a ‘deed of appointment’ to appoint policies from a discretionary trust into a’ bare trust’ before these are subsequently surrendered by the bare trust trustees. The surrender of policies is treated as a chargeable event, and any resulting tax liability will be assessed on the rate applicable to the beneficiary, who could be a minor or a student in full time education. Where a minor, the chargeable event will be assessable on the parents, where they are settlors of the trust and benefits in excess of £100 are paid to their minor children by the trustees of the trust.

Alternatively, where the trustees want the chargeable event gain to be assessable on the settlor of the trust, they would just fully surrender a certain number of policies or partially surrender the plan.

The remaining policies within the Trust are retained within the Discretionary Trust structure, and provided the settlor survives for more than seven years after setting up the trust, the value of the assets would sit outside their estate for IHT purposes, as would any investment growth on the assets.

This press release is for journalists only and should not be relied upon by financial advisers or customers.