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Where Taxpayers and Advisers Meet

Deed of variation creating trust

Brightonian
Posts:137
Joined:Wed Aug 06, 2008 3:31 pm
Deed of variation creating trust

Postby Brightonian » Fri Dec 11, 2015 5:50 pm

I have a client whose mother died in 2014. She is an additional rate taxpayer and does not need the legacy - conveniently around £324,000. She has two minor children (8 and 4) and her financial adviser has suggested that she do a deed of variation and vary the legacy into a discretionary trust. She and her partner would be trustees and beneficiaries, as would their two children. I have been trying to figure out the tax consequences. For IHT, it gets the legacy out of her estate, which is good. For income tax, the deed is ineffective and she will be taxed on all the income of the trust. It is also a settlor interested trust for CGT but I am unsure as to the implications of this. The adviser had two ideas - the trust could invest in investment bonds and take no more than the permitted 5% per annum, thus not triggering a tax charge. When the children achieve majority, the bonds could be assigned to them and they could surrender them using their own personal allowances and marginal tax rates. Would that work or would she still be assessed on the surrender as settlor? And what would happen if the bonds were assisgned to the children, although not necessarily encashed, while they were still minors? Would that even be possible legally?
The adviser's second idea was that the trust could use its cash to buy a property which one of the children might live in when they are adults - he thought that PPR would be available on sale under S225 provided that only the child and not the mother (settlor) had lived in the property. I did find a book where it was suggested that this would work but it was published in 2007 and there may have been changes since then. I do not usually get involved in trust work.

I would be grateful for any thoughts on this matter. Is there any point to varying a will to create a trust (other than the IHT one)? I can't see any huge advantages.

maths
Posts:8507
Joined:Wed Aug 06, 2008 3:25 pm

Re: Deed of variation creating trust

Postby maths » Fri Dec 11, 2015 9:53 pm

Settlor for IHT would be the deceased (assuming reading back) and thus no reservation of benefit on part of parent/settlor beneficiary.

Post 2008, trust gains are not imputed to the settlor (TCGA 1992 s77 repealed).

Assignment of the bonds out of trust to beneficiaries for no consideration precipitate no CGT charge. This applies whether beneficiary is a minor or not. Cashing in by minor beneficiary once aged 18 gives rise to an income tax charge (if any) on part of beneficiary. It is arguable that even cashing in when a minor precipitates an income tax charge on the minor and not the parent. Any assignment to a minor out of trust would be held by parent as bare trustee for minor.

TCGA 1992 s225 is in principle in point on part of trustees; not sure why settlor (ie parent) prohibited occupation of property.

Brightonian
Posts:137
Joined:Wed Aug 06, 2008 3:31 pm

Re: Deed of variation creating trust

Postby Brightonian » Mon Dec 14, 2015 11:03 am

Thabnk you, Maths. That's very helpful. It looks like there may be some point in making this investment after all.

maths
Posts:8507
Joined:Wed Aug 06, 2008 3:25 pm

Re: Deed of variation creating trust

Postby maths » Mon Dec 14, 2015 1:32 pm

Not an investment advisor but single premium bonds can incur large commissions. You need to find someone who really knows his stuff.

Brightonian
Posts:137
Joined:Wed Aug 06, 2008 3:31 pm

Re: Deed of variation creating trust

Postby Brightonian » Tue Dec 15, 2015 1:20 pm

Good advice but I'm happy to say that this is being done with an agreed fee. I see more clients now with bonds from Old Mutual and Fidelity which are just like their portfolios of unit trusts but in a bond wrapper. The old-fashioned high charging bonds issued by insurance companies seem to be out of fashion these days!

maths
Posts:8507
Joined:Wed Aug 06, 2008 3:25 pm

Re: Deed of variation creating trust

Postby maths » Tue Dec 15, 2015 7:46 pm

Interesting; thank you.

Beware any bond which qualifies as a personal portfolio bond.


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