HSBCJul 21 2017

HSBC under fire for inheritance tax advice

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HSBC under fire for inheritance tax advice

HSBC has been told by the Financial Ombudsman Service to cough up compensation for inheritance tax advice.

In 2007 HSBC advised the settlors of a discretionary gift trust to invest £60,000 for the purpose of inheritance tax planning. 

Three of the trustees are the children of the settlers while the fourth trustee was the surviving settlor. 

The children of the settlors were also confirmed as the only beneficiaries of the trust. 

The trust was duly set up – in 2007 – and it held a Standard Life investment bond within it that also included an arrangement for 5 per cent annual withdrawals of capital. 

HSBC explained this as being required in order to supplement the settlors’ income and to replace income lost by the beneficiaries’ mother when she cashed in a mature investment in order to invest in the trust. 

The arrangement for these withdrawals was and remains irreversible. 

Around 2014 the beneficiaries learnt about the effect of this arrangement. 

They discovered that the withdrawals had been paid into an account and that the money appeared to have been unused. 

A balance of almost £18,000 – accumulated from the payments from the trust/investment bond – remained in the account. 

In 2016 a complaint was submitted to HSBC about the withdrawal arrangement. 

The complaint asserted that the settlors neither requested nor required withdrawals from the trust. 

But HSBC argued the trust catered for the settlors’ inheritance tax planning objective while the withdrawal arrangement catered for the need to supplement their income and cover the income lost by the beneficiaries’ late mother. 

HSBC said the settlors were advised, at the time, on how to use such a surplus efficiently in terms of inheritance tax planning. 

The surviving settlor confirmed to the Financial Ombudsman Service that the withdrawal arrangement was a secondary suggestion by an HSBC adviser at the time with whom he and his late wife were unfamiliar. 

He asserted that it was not an objective for them.

In a final decision, ombudsman Roy Kuku said: “HSBC says the arrangement was needed to cover income lost by the cashing in of one of the settlor’s investment prior to the discretionary gift trust. Income from that investment had been around £130 per month. 

“I am not persuaded by the logic (or lack of) in covering such an amount with an arrangement for payments of £250 per month (almost double the amount supposedly being covered) and in the context of evidence – available to HSBC at the time – that suggests the settlors already had a relatively healthy surplus income position anyway. 

“Overall and on balance, I am satisfied that the settlors did not need the withdrawal arrangement and that the unused balance discovered in the recipient account lends support to this conclusion. The arrangement was unsuitable for the trust, the settlors and the beneficiaries. 

“It defeated the main objective for the discretionary gift trust. It resulted in the return, from the discretionary gift trust, of almost £18,000 to the estate – whereas it was supposed to safeguard money moving in the opposite direction. Until its maturity, the arrangement remains irreversible.”

HSBC was told to calculate the value, as of the date of settlement, of the discretionary gift trust/investment bond as it presently stands then calculate the value, as of the date of settlement, that the discretionary gift trust/investment bond would have had without the withdrawal arrangement. 

If the fair value is greater than the actual value, the ombudsman said the difference will be the total amount of compensation due and this should be divided equally by three. 

The surviving settlor should also be paid £500 for the trouble and upset caused by the unsuitable advice and by the pursuit to have the matter redressed. 

emma.hughes@ft.com