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The future of existing bypass trusts

This article is part of
Guide to Bypass Trusts and Pension Freedoms

The prime objective of a bypass trust is to save the inheritance tax which might be paid if a spouse in receipt of cash death benefits dies early.

It does not save the current 55 per cent tax charge levied on the death benefits of drawdown in payment, but it can help to control when and where the proceeds are distributed.

Under the new pension freedoms from April 2015, pension funds will be entirely inheritable entirely tax-free with no tax charges either pre or post-vesting (under age 75), subject to the lifetime allowance of £1.25m.

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It is important to remember in light of this that most trusts already established are written on an irrevocable basis and are not intended to be dismantled, says Tracyann Kneen, tax and trusts technical manager at James Hay Partnership.

In the case of a pilot trust, Ms Kneen says it is usually set up with a nominal sum.

If the member subsequently decides that they no longer wish their death benefits to be paid to the trustees of the pilot trust, they can complete a new expression of wish to supersede the earlier one.

In the case of a carve out trust, Ms Kneen says this remains in existence unless the pension arrangements are transferred to another provider.

She says the carve out trust relating to the old scheme may lapse once the pension arrangements have been transferred to a new provider as there is no longer any property held by the original trustees.

Whatever your hopes the new pension freedoms represent a dramatic shakeup in the rules and should prompt a review of trust arrangements that are already in place, says Paul Evans, pension technical manager of Suffolk Life.

For those clients who are solely interested in inheritance tax mitigation, Mr Evans says this protection is unlikely to be required. Some pension scheme rules limit death payments to a lump sum benefit only, which Mr Evans says loses the protection of an IHT wrapper.

In such cases, Mr Evans says a bypass trust may continue to be a plausible solution, if the client wishes to remain with the scheme until death.

Where a client wishes to retain control over the future distribution of their pension benefits, Mr Evans says bypass trusts continue to offer genuine benefits.

The cost of periodic charges should also be considered when assessing whether the client should retain the trust, as well as the ongoing costs arising from changes in the client’s situation or any further legal advice that may be required, he adds.

Ultimately whether or not a bypass trust is still suitable for a client with all the changes to pensions and trusts at present will be entirely based on individual and family circumstances.

Although pension death benefits are less likely to be put in trust following the changes, Claire Trott, head of technical support at Talbot & Muir, says they will still be suitable for some.