How life, pension and other investments can be placed in trust

Question 1

Describe how a relevant life policy is set up (4)

Answer 1

• Taken out/proposed by the employer
• The policy is written on the life of the employee
• A discretionary trust is usually set up at the same time to receive the death benefits
• The member can make a non-binding nomination of their preferred beneficiary to guide the trustees

Question 2

Explain the 5 conditions that must be met for the policy to provide favourable tax treatment for both an employer and employee (5)

Answer 2

• The policy must not have a surrender value
• Any ill health benefit can only apply during employment
• The sum assured must be a lump sum designed to pay out on death of the member before age 75
• The benefits must be paid to an individual directly or via trustees/or to a charity
• The main purpose of the relevant life policy must not be a tax avoidance

Question 3

Luca settled a UK resident trust in September 23 through a transfer of collective investments

State the purpose of the Trust Registration Service (TRS) and the timescale in which this trust should be registered (3)

Answer 3

• The TRS provides a single point of access for trustees/agents to record info
• The trust is taxable
• The trust must be registered within 90 days of the date the trust was settled/became taxable

Question 4

State 4 examples of trusts excluded from the TRS requirements (4)

Answer 4

• Personal Injury Trusts
• Statutory trusts/intestacy
• Bereaved minor trusts
• 18-25 trusts
• Vulnerable persons trusts/disability
• Pension scheme trusts
• Charitable trusts
• Life policies in trust (if paid out within 2 years of death)

Question 5

Explain how a nomination on a personal pension operates (6)

Answer 5

• The member can nominate beneficiaries to receive any death benefits which can be updated by the member at any time as the nomination is revocable.
• Potential beneficiaries usually include spouse/children but could also include a trust/bypass trust set up during the members lifetime
• The pension scheme trustees will usually follow a nomination although they are not bound by it

Question 6

Explain the IHT implications if an existing personal pension is transferred into a discretionary trust (5)

Answer 6

• The transfer of an existing personal pension into trust is a transfer of value for IHT purposes
• HMRC regard the value as nominal where the member is in normal health at the time of the transfer
• There may be a value on the transfer if death occurs within 2 years
• Any lump sum death benefit paid to the trustees will normally be free of IHT
  There is normally no exit charge/periodic charge if paid within 2 years of death

Question 7

State the documents the life office are likely to require from the trustees in order to make a successful claim (7)

Answer 7

• Death certificate
• Copy of the trust deed
• The policy document or, if unavailable, a completed ‘lost policy document’ form
• any deeds of appointment of new trustees
• Any deeds of retirement of previous trustees
• A claim form signed by all the trustees of the trust
• Death certificate of any trustees that have a died
• Money laundering ID

Question 8

How will an individual be taxed on the income received from a discretionary trust (4)

Answer 8

• The income is received with a 45% tax credit
• Theo is unable to use the personal savings allowance/dividend allowance
• As the income is treated as trust income and ceases to be savings and dividend income
• The individual can reclaim tax if they are a basic rate taxpayer