Simon Martin, Head of UK Technical Services, shows how a UK national and long-term resident can prepare for possible Autumn Budget changes to inheritance tax (IHT).
By using a reversionary interest (lifestyle) trust, clients can retain access to capital, support family gifting in a controlled manner, and move future growth outside the estate.
The Client
Mr Cooper, aged 55, lives in southern England and is a UK national and long-term resident. As such his worldwide estate is potentially liable for UK inheritance tax.
He has accumulated significant wealth from an online business selling musical instruments.
He is divorced, lives alone, and has two married adult children who live near London.
Client requirements
- Reduce inheritance tax (IHT) on his estate.
- Ensure his children and grandchildren are looked after, both while he’s alive and after he dies. He wants to have an element of control over how and when beneficiaries will benefit from his estate in future.
- He hasn’t made any recent gifts nor considered IHT planning but is now interested in planning opportunities including the use of trusts.
- He wants to travel more in the next few years which could be expensive, so he’s unsure how much money he wants to give away now.
- He’d like the option to add more money to the trust in the future, especially if his expenditure drops but his income remains the same (for example, if he downsizes his home whilst still working).
- He’s also concerned about possible changes to IHT rules in the upcoming UK Budget in November and is keen to implement his strategy before then.
The Solution
- Mr Cooper invests £325,000 in an insurance bond, split into 100 policy segments (£3,250 each).
- He settles the bond into a Reversionary Interest Trust (a special type of discretionary trust). This trust gives Mr Cooper the right to selected reversionary benefits on scheduled dates in the future, but the trustees can defeat these rights by appointing capital away to beneficiaries if they choose to do so.
- A professional trust company is appointed as trustee, ensuring continuity and avoiding family pressure. Mr Cooper writes a non-binding “letter of wishes” to guide the trustees on how he’d like the trust managed.
- He sets up the trust schedule so that each year, he can potentially access 10 policy segments (£32,500), giving him flexibility to access funds if needed.
The Benefits
- IHT planning: If Mr Cooper survives seven years after setting up the trust, the money in the trust will be outside his estate for IHT purposes, reducing the tax bill for his family. All investment growth will be outside Mr Cooper’s estate unless he decides to take the scheduled benefits, if and when they become due.
- Anticipating the Autumn budget: Set up the plan now taking advantage of the current IHT rules.
- No immediate IHT charge applies, as Mr Cooper hasn’t made other large gifts in the past seven years.
- Flexibility: Each year, Mr Cooper can choose to take the scheduled benefits or defer them if he doesn’t need the money, keeping his options open.
- Future contributions: He can add more money to the trust after seven years or make regular gifts from income if his expenditure drops, using the “normal expenditure out of income” exemption.
- Orderly succession planning: As the Lifestyle Trust is a discretionary trust, Mr Cooper can determine how and when his heirs can benefit from his legacy.
- Tax-efficient for beneficiaries: When Mr Cooper dies, the trustees can assign the bond segments to his beneficiaries, who can then surrender them. Any tax due on gains is paid at the beneficiaries’ own tax rates, which may be lower than the rate applicable to trusts.
- Enduring IHT efficiency: The trust fund will not form part of the beneficiaries’ estates for IHT purposes.