Any chargeable event gains will be taxed on the settlor if alive and a UK resident, otherwise on the trustees at 45 per cent (less a credit for basic rate (20 per cent) tax paid by a UK life fund if it is in an onshore bond).
Main differences if the trust is a bare trust
The initial (discounted) gift will be a PET not a CLT. No tax is payable when a PET is made and it will fall out of account completely if the settlor survives seven years.
There will be no ongoing IHT charges or reporting requirements, however the beneficiaries will own the trust fund for IHT purposes.
Chargeable event gains – arising because of payments made to the settlor – will be taxed on the settlor if they are alive. Any subsequent chargeable event gains will be taxed on the beneficiaries.
Advantages of DGTs
From the example you can see that there are advantages in reducing the value of the gift and the amount of the CLT, and in the potential reduction to IHT. Other advantages to consider are that:
- It can be set up on a single or joint settlor basis.
- It provides access to a form of ‘income’ without infringing the gift with reservation rules.
- The bond can usually continue in force after the settlor’s death as a tax-efficient trust investment if written on joint or multiple lives.
Richard Cooper is a business development manager at The London Institute of Banking & Finance