Helping future generations
There are many reasons that you may want to pass assets on to your children, grandchildren or others. You may wish to help your children to buy a property, ensure that they are financially secure, or perhaps provide for your grandchildren’s education. You may also want to give assets away as early as possible so that on your death they are not charged to 40% UK Inheritance Tax (IHT).
There are a number of ways you can ensure that assets are passed down efficiently to future generations. The most straightforward is an outright gift. However you may be reluctant to make such a gift for a number of reasons:
- It may reduce the recipient's / recipients' incentive to work.
- It exposes your assets to future claims arising on a divorce or a failed business venture.
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Overview of estate planning vehicles
For these reasons careful estate planning often includes the use of vehicles that are designed to facilitate a gift but at the same time allow you to retain some control over how the gifted assets are used and invested.
The best example of this is the trust, but others include Family Limited Partnerships and Family Investment Companies.
Please note that this information does not constitute legal, accounting or tax advice. Factual tax information is high level general information based upon our understanding of current legislation, which may change in the future and may not apply to your individual circumstances. As Credit Suisse does not provide tax advice, you should consult with your legal and tax advisors before entering into or refraining from entering into any investment, structure or transaction.
Trusts
You make a gift into a trust, typically established to benefit your children and/or grandchildren (known as the beneficiaries). You, your spouse and other family members can act as trustees and you control the distribution of income and capital to these beneficiaries.
The advantage to you is that you have made a gift which will be outside of IHT after seven years. However, since 2006, any gift to a trust in excess of the inheritance tax nil rate band, currently GBP 325,000 per person, has attracted an immediate charge to IHT at 20%. Therefore you should carefully consider whether a trust could meet your needs.
Trusts using offshore bonds
There is also a selection of plans that use offshore bonds (OBs) held inside specially designed trusts. These plans not only facilitate sensible estate planning, but also give you the advantages associated with OBs. Credit Suisse can help you with this planning although we would always recommend that you take independent legal and tax advice in relation to the trusts.
Discounted gift trusts
These are worth considering if you would like to make a gift but would also like to retain an income from those gifted assets for the rest of your life.
You establish a trust that holds an OB and under the terms of the trust you are entitled to an annual income for the rest of your life, but not to any of the capital in the trust. As you will receive an income, the gift you have made is discounted for IHT purposes by the estimated amount of this future income. If you die within seven years of making the gift a discounted amount is charged to IHT.
Loan trusts
Loan trusts should be considered if you would like to establish a trust to benefit future generations but are reluctant to make an outright gift as you may need your capital back in the future.
You establish a trust with a small gift but also make a loan to the trust. The trustees invest through an OB, and you can recall the loan at any time or alternatively ask for partial repayments which the trust can fund by way of the OB’s 5% withdrawal facility. When you die the loan amount outstanding is still included in your estate for IHT purposes. However, any growth in the value of the trust fund is available to benefit future generations in full.
Nil Rate Band (NRB) trusts
NRB trusts are worth considering if you would like to establish a trust to benefit future generations but are keen to restrict this to the amount of the nil rate band only and retaining control is important to you.
You establish a trust with a gift of up to GBP 325,000. This is an outright gift by you to the trust and you cannot benefit from any income or ask for repayment of your gift. After seven years the gift will be outside of your estate for IHT purposes and so you can make subsequent gifts to the trust after this time if you wish to.
Family Limited Partnerships (FLP)
Similar in many ways to trusts, one or more parents establish an FLP appointing themselves as senior partners and transfer assets to it. At a future date they bring their children in as junior partners and grant them a percentage partnership share. At that point a share of the family assets is transferred to the next generation, but importantly the assets cannot leave the FLP without the agreement of the senior partners.
Family Investment Companies (FIC)
The ultimate objective is often the same as with a trust or FLP: the ability to make a gift but control access to the gifted assets. In the case of a FIC, different share classes are typically employed and children and grandchildren are given shares that have limited rights to income and redemption.
Life insurance
Often the simplest solution to fund a future IHT liability. You might want to take out a whole of life insurance policy, which will pay out when you die, and where the premiums and sum assured can be guaranteed. Alternatively, you could consider a term policy where the insurance is only in place for a defined number of years.
This strategy might suit you if, for instance, you were planning to start gifting assets to your children in a few years’ time and were keen to cover your current IHT exposure and that arising in the seven years following any gifts that you make.
Credit Suisse refers all clients interested in life insurance to a specialist broker who will then look across the entire market to find the most suitable product for you.
Main residence nil rate band
This new individual allowance was phased in from the 2017/2018 tax year, and is available where residential property belonging to and resided in by the deceased is left in their will to direct decendants. The allowance started at GBP 100,000 and has been increased to GBP 175,000 in the 2020/2021 tax year. The value of the allowance will be the lower of the nil rate band or net value of the property, and may only apply to one property. The allowance can be transferred between spouses if unused. If the net value of the estate is above GBP 2 million, the additional nil rate band is tapered away by GBP 1 for every GBP 2 of excess.
Additional considerations/risks
- Your invested capital is at risk, the value of which can go down as well as up.
- Tax legislation can change and sometimes changes can have retroactive impact.
- It may be difficult to unwind some of the structures above quickly.
- In the case of life assurance premiums, you should make sure that you can pay the premium for the complete term otherwise your policy may become worthless.