Gateway Financial Advisers

Flexible Trusts

A trust that is commonly used in connection with life assurance policies is the power of appointment (interest in possession) trust. This is frequently referred to as a ´flexible trust´.

Revert To Settlor Trusts

For some time it has been accepted by HMRC Inheritance Tax that a trust, where the benefits of a policy revert back to the settlor at a future fixed date or on a future occasion, will not give rise to a GWR as that right is clearly carved out and ´kept back´ by the settlor. In effect, the settlor makes a gift of the other benefits under the policy ´shorn´ of the retained rights which are held on flexible trusts (similar to that described above) and from which he is excluded from benefit (see the Revenue letter dated 3 November 1986 to the Association of British Insurers (ABI)).

Discounted Gift Trusts

The idea behind discounted gift trusts is that, under the terms of a trust, the settlor reserves certain benefits to himself by way of a reversion of those benefits when the settlor survives to future specified dates. The reversion of benefits under the trust at regular intervals provides the settlor with regular tax-free capital. The value of the rest of the trust fund will be held on power of appointment trusts, typically, for the benefit of the settlor´s family. These power of appointment trusts will apply to the whole trust fund on the settlor´s death when the settlor can no longer satisfy the reversion condition.

Retained Interest Trusts

A retained interest trust is a special type of trust that carves out a proportion of the initial trust capital for the absolute benefit of the settlor with the balance being held on flexible power of appointment trusts for the benefit of his family but from which he is excluded from benefit.

Investment growth accrues across the value of both shares of the trust fund but the settlor can draw down capital from his share of the trust fund and spend this cash as income.

The trust is not subject to the gift with reservation rules because the settlor´s interest is distinctly carved out from the property gifted and he cannot benefit from the gifted share. Neither should the POAT rules apply because neither part of the trust fund, when separately tested, is caught by s660A(now in sections 622 and 624 to 627 ITTOIA 2005).

Loan Trusts

The basis of gift and loan trusts and “loan-only” trusts (collectively referred to as “loan trusts”) is that a settlor establishes a power of appointment interest in possession trust under which he is excluded from benefit. This will be done either by making a small gift or merely declaring a trust. He then makes an interest-free loan repayable on demand to the trustees who invest in a single premium bond. From time to time the settlor can demand a part repayment of his loan and the trustees can finance this by making an encashment from the bond. Where no initial gift to the trust is made it is the making of the interest-free loan that fully constitutes the trust.

Probate Trusts

Probate trusts are often used in connection with offshore life assurance policies as a means of avoiding the need to obtain probate on the trust assets on the settlor´s death. This may otherwise be necessary in both the country of the settlor´s domicile and the jurisdiction in which the life office is based.

The purpose of the probate trust is simply to avoid the need for probate. Clearly the probate trust offers no inheritance tax advantages because the trust property remains fully in the taxable estate of the settlor.