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Guide to Bypass Trusts and Pension Freedoms

    Guide to Bypass Trusts and Pension Freedoms


    The new measure is set to apply to all inherited pensions received from April 2015, including when passed on following the second death of the initial beneficiary.

    He said: “Children and grandchildren, and others who benefit, will get the same tax treatment on this income as any others, but only when they choose to draw it down.”

    So what does this mean for the good old bypass trust, which is generally used to pay death benefits into, quite often, from a pension scheme?

    Historically the primary purpose of the bypass trust is to give access to the capital to the beneficiary of the deceased without it forming part of their estate on their death and thus excluding it from the 40 per cent inheritance tax.

    A bypass trust also has powers to distribute income and capital and also to lend monies to the beneficiary. This means that the survivor can have the benefit of the monies even though the funds are the property of the trust.

    A loan to a beneficiary is particularly useful as the loan does not incur an inheritance tax charge on the trust, but it is deductible from the borrower’s estate if it is still outstanding at the time of his or her death.

    This guide will make sure you understand what constitutes a bypass trust, whether action needs to be taken for clients who already have this arrangement in place and what part these vehicles can play in your toolbox for clients moving forwards.

    Contributors to the guide were: Claire Trott, head of technical support at Talbot & Muir; Paul Evans, pension technical manager of Suffolk Life; Danny Cox, head of financial planning at Bristol-based Hargreaves Lansdown; and Tracyann Kneen, tax and trusts technical manager at James Hay Partnership.

    In this guide


    Please answer the six multiple choice questions below in order to bank your CPD. Multiple attempts are available until all questions are correctly answered.

    1. When does the 55 per cent apply to payments from a pension on death?

    2. Payments to a bypass pilot trust can still be refused under the discretionary power of the provider?

    3. How often is a bypass trust subject to periodic charges, according to Ms Trott?

    4. According to Ms Kneen, is the value of the trust assessable for the purposes of state assessment of long-term care costs?

    5. Why are spousal bypass trusts less attractive for crystallised benefits, according to Mr Cox?

    6. How often does Mr Evans recommend reviewing bypass trusts?

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