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Trustee Review Service

As part of our Trustee Service we can review an existing trust and advise whether it would benefit from a change in strategy and the method in which underlying investments are held.
 
When considering insurance bonds or collective investments/direct investments the trustees need to consider the tax qualities that may or may not be suitable for a particular trust’s objective and its constitution.

 

Interest in Possession Trusts

 
The trustees of an interest-in possession trust should generally invest in assets that produce income which is either paid to the beneficiaries, or at least, can be clearly identified and ring- fenced for the absolute benefit of the beneficiary entitled to income. 
 
Following the abolition of ‘bed and breakfasting’ opportunities, collective investments have, in our opinion, a considerable edge over direct investments which are often recommended by a stock-broker.  This is because the disposal of investments that have made a gain within these collectives is  not subject to capital gains tax (although a CGT liability may apply on disposal of the collective investment itself).  Also, in these uncertain times, a much greater degree of diversification may be achieved through collectives as well as the ability to choose a range of ‘best of breed’ investment managers which can be blended into a portfolio that may also include passive and actively managed investments.
 
A portfolio including unit trusts, OEICs, investment trusts and ETFs can be particularly attractive as a trustee investment where:
 
· There is scope to use the beneficiaries´ personal allowances.
· There may be scope to use trustees´ standard rate band.
· There is scope to use the trustees´ or beneficiaries´ annual capital gains tax exemptions.
· There is a need to strike a balance between capital and income.
· There is scope for a free CGT uplift on the death of the life tenant.
 
Our approach to portfolio construction uses the same methodology as previously described in this brochure.
 
Discretionary Trusts and Accumulation and Maintenance Trusts
 
Investment bonds issued by insurers, can, in certain circumstances, be tax efficient investment vehicles for trustees looking to provide capital appreciation for beneficiaries in the future.
 
There is no doubt that the changes in the taxation of UK dividends which affect trustees of accumulation and maintenance trusts and discretionary trusts who wish to distribute income to beneficiaries have considerably enhanced the attraction of insurance bonds as non-income producing assets where all those problems are avoided.
 
In our opinion, insurance bond investments should be considered as mandatory for all trustees who invest in equity-based investments i.e. trustees of accumulation maintenance and discretionary trusts who distribute income or capital to the beneficiaries.
 
These bonds can be used to provide tax-efficient payments of capital to beneficiaries. Alternatively, in order to provide tax- efficient income for beneficiaries it will often be better to free assets from the trust and for the beneficiaries to make their own investments in their own name, which can also give rise to inheritance tax planning opportunities.
 
The main advantages of bonds as trustee investments are:-
 
· simple administration
· non-income producing
· avoids post 5 April 1999 tax regime on the taxation of UK dividends
· no capital gains charged to CGT
· tax at trustee rate deferred
· tax in UK underlying funds at a rate of 20% with no additional tax payable on UK dividends from shares and distributions     from unit trusts
· trustee standard rate band available if assessment on trustees

· indexation allowance available in respect of capital gains made by UK life offices

nil tax (apart from unreclaimable withholding/imputation taxes on UK and other dividends) on offshore bonds

 

On the other hand, the disadvantages of bonds as trustee investments are:


· there is no scope to use the trustees´ annual CGT exemption


Note:  as no real income is produced, insurance bonds will not be suitable investments where an income is required to paid to a trust beneficiary.
 
In summary, trustees need to consider the form of their investments and whether a tax wrapper would be suitable, the asset allocation and underlying investments in order to dovetail with their risk/reward position, time-line and income and or growth requirements.

 

If you would like to know more about the services we can offer in terms of professional partnerships, please contact us at: equiries@jacobsfinancial.co.uk