Bare Trust v continguent interest

[robseym]

Due to the recent changes in IHT treatment of transfers into interest in possession trusts life assurance companies have introduced new schemes based on absolute trusts.

One company has drafted a trust creating two interests. One to the settlor consisting of the absolute right to a fixed payment for their lifetime and one to the beneficiaries which says it is an absolute trust of the remainder of trust property. This is not contentious as the split trust format has been used for years.

The odd thing is that the beneficiaries absolute interest is subject to the trustees being able to meet their obligations to the settlor. This is designed to avoid the beneficiaries acting on their absolute interest and cashing in whilst the settlor is alive.

However I am suspicious that this is actually a continguent interest (i.e. non vested) making this part a settlement into discretionary rather than a bare trusts during the settlors lifetime.

Any thoughts

[Taxbar]

All leading tax adivsers keep counselling that nobody should do anything regarding IHT planning until the Finance Act is passed in July.

The hope is that there will be amendments to the proposed legislation watering it down.

Also, before commenting on these new schemes it would be necessary to study the documentation in detail.

Daniel Feingold
STP
info@stratax.co.uk

[Anthony Nixon]

I fully agree with Dan that nobody should embark on IHT planning until the final form of the Finance Act is known.

The question robseym raises however is an interesting one. It is not directly affected by the wording of the new Finance Act, except that under the old rules the beneficiaries would have been an interest in possession which would have made any gift a PET.

On the face of it I agree that the beneficiaries' interest under the arrangement described is an interest in a settlement (as defined in Inheritance Tax Act section 43) and not a bare trust. Therefore the initial gift appears to be an immediately chargeable transfer under the proposed new rules and the fund would be subject to ten-yearly and exit charges.

AS Dan also cautions, one would have to study the precise wording of the documentation.

Anthony Nixon
Solicitor, Chartered Tax Adviser and Trust and Estate Practitioner
Partner, Lester Aldridge Solicitors
Southampton

Tel: 023 8082 7442
Email: anthony.nixon@la-law.com
Website:www.lester-aldridge.com

[robseym]

Thanks both

Just to come clean about who I am, I work as the compliance manager for an IFA firm (network affiliated). The scheme in question has been launched by a leading life assurance company specifically with the budget changes in mind.

Network rules currently prohibit the use of IIP trusts until the final position is know but they will allow bare trusts.

The problem we have is whether or not this a bare trust. Life companies employ lawyers we don't so we're are generally reliant on them for the legal info. However I am suspicious enough about this arrangement to considered prohibiting its use in our firm. If you are interested in the exact wording the clause which does the damage is as follows:

"Subject always to the Trustees during the whole of the Donor's lifetime satifying the Donor's rights under the Donor's Fund, the balance of the Trust Fund ('the beneficiaries' Fund') shall be held by the Trustees on bare trust for the absolute benefit of the Beneficiary(ies)"

Thanks again

Rob Seymour

[Anthony Nixon]

Thanks for that Rob

I'm afraid whichever insurance company this is has definitely got this wrong.

For all that this mentions a bare trust, there is no doubt that, as I suggested in my earlier posting, this wording creates a settlement for IHT. Quite clearly the trustees cannot release funds to the beneficiary until the donor's rights are fully satisfied, which will presumably not be known until his death.

Anthony Nixon

[Arnold Aaron]

Many life offices have lauched Bare Trusts operating a Discounted Gift Trusts and others for several months now, and the overwhelming legal concensus is that they are not demmed a settlement for IHT purposes.

HMRC have also confirmed in a meeting with the ABI (08/05/2006) that the definition of a bare trust was the standard definition where the asset was held for one or more persons absolutely.

Only grey area currently is if the beneficiaries are minors - clarification of which is expected shortly.

Arnold Aaron
www.arnoldaaron.co.uk