TRUST AND ESTATE PLANNING
PARTNERS IN MANAGING YOUR WEALTH
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About St. James’s Place
At St. James’s Place Wealth Management we offer a wide range of high
quality services to both individuals and businesses.
At the heart of the business is the St. James’s Place Partnership, a group
of the most experienced, able and highly regarded professionals working
in wealth management today. They are solely responsible for delivering
our services to clients. Members of the St. James’s Place Partnership
have on average 17 years experience in the industry and build long term
relationships founded on trust.
Your personal wealth management service
The essence of our business is to help make it easier for you to manage your
wealth, and we achieve this through the provision of personal, face-to-face
advice that is designed to suit your individual long term requirements. We
can help address straightforward issues as well as resolve more complex
multifaceted ones. Basing our service on this principle, our Partners have
built exceptionally strong and trusted relationships with our clients.
We do not believe in off-the-shelf solutions, and our Partners know that
every single client has their own unique personal concerns, responsibilities
and ambitions. The solutions that work for one may not necessarily work
for another. This is why all our advice is face-to-face and focused on the
personal needs of each individual client. Your St. James’s Place Partner will
work closely with you to offer solutions that are specifically tailored to you.
Our guarantee
St. James’s Place Wealth Management guarantees the advice given by
its representatives when recommending any of the products or services
provided by companies within the Group.
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The St. James’s Place approach to
trust and estate planning
The creation and the retention of wealth are goals many of us aspire
to. However, when our objectives change and it comes to providing for
successive generations, it is the protection of accumulated wealth which
becomes important, including the incidence of Inheritance Tax (IHT).
Wealth also needs to be protected from a plethora of outside ‘events’, many
of which may lead to your chosen beneficiaries being unable, unwilling
or insufficiently responsible to look after funds themselves. This includes
generations not yet born, those who may be at risk of divorce or bankruptcy
and those liable to the expense of long term care provision/costs.
To create wealth takes enterprise, vision and usually a mixture of hard work
and good fortune. To retain and protect wealth also requires vision along
with well thought out trust and estate planning.
What is trust and estate planning?
There are three practical courses of action that may be taken to preserve
and enhance your wealth for your heirs:
• Make sure your financial affairs and your Will are arranged to
ensure the efficient transfer of your assets on death, while saving the
maximum amount of tax.
• Transfer assets before your death through the prudent use of
lifetime gifts.
• Create a tax efficient fund to provide a legacy or to enable the
beneficiaries of your estate to meet any IHT liability.
This brochure explores the various methods which can be used. However,
no one method can, or should, be considered a ‘complete solution’ as each
individual will have different circumstances and requirements.
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Trust and estate planning is about
passing the proceeds of an estate
to chosen beneficiaries rather than
Her Majesty’s Revenue & Customs
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Trust and estate planning and
your priorities
Before any planning is undertaken, there are some fundamental considerations
that should be incorporated into your strategy.
Be realistic
This cannot be overemphasised. Do not put tax savings as your prime
motivation. Trust and estate planning is about passing the proceeds of
an estate to chosen beneficiaries rather than to Her Majesty’s Revenue
& Customs (HMRC). However, this should never be at the expense of
maintaining an acceptable lifestyle.
Flexibility
Make sure your arrangements are flexible as you may need to alter them
in the future due to changes:
• In your personal or financial circumstances.
• To, or the addition of, beneficiaries.
• In legislation or HMRC practice.
Keep things simple
With the complexities involved in trust and estate planning, if a simple
solution can be found, it will usually be the best one.
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Forward planning is essential
Everyone should make a Will, as the effect of dying intestate (dying
without a valid Will) can be devastating on your loved ones. Under the
rules of intestacy, assets are distributed according to a prescribed set of
rules that are unlikely to reflect your intentions. Furthermore, dying
intestate is likely to result in significant Probate/Confirmation delays
as well as paying unnecessary amounts of tax. However, a well drafted
Will can not only enable planning to take place that ensures tax liabilities are
minimised but also ensures your estate reaches your intended beneficiaries.
It is also essential that Wills are reviewed and updated regularly to reflect
changes in circumstances or legislation.
Ensure the nil rate band is not wasted
Although transfers between a UK domiciled husband and wife and between
registered civil partners are exempt for IHT purposes, each spouse or civil
partner is taxed separately and each is entitled to their own nil rate band
(presently £325,000), that is the proportion of their estate that is subject to
IHT at 0%. Since 9 October 2007, the unused nil rate band of a deceased
individual can be transferred to their spouse/civil partner. This means that
if, on death, the first partner transferred all of their assets to their spouse/
civil partner, the surviving partner can make use of double the nil rate band
on their own subsequent death.
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Dying intestate can also
mean paying unnecessary
amounts of tax
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As an example:
Tom and Jane are married.Tom dies in a year when the nil rate band is
£325,000. He passes everything to Jane on his death.The tax position
would be as follows, assuming Jane also died:
Jane’s estate
£800,000
Less Jane’s nil rate band (£325,000)
Remaining £475,000
Less Tom’s unused nil rate band (£325,000)
Remaining £150,000
Potential IHT @ 40%
£60,000
Without this transferable nil rate band the IHT liability on Jane’s death
would be £190,000.
Discretionary trusts and transferable nil rate bands
A few years later Jane marries again to Harry. Assume she is widowed
again when her second husband Harry passes away and leaves all his assets
entirely to her. On Jane’s death her Personal Representatives (PRs) can
claim an additional nil rate band; but whether they do so in respect of Tom
or Harry is immaterial as only one additional nil rate band is available. In
this case one nil rate band of one of her husbands will be wasted, but this
need not be the case.
If Harry had left £325,000 under his Will into a discretionary trust instead
of directly to Jane, then on Jane’s death her PRs could claim Tom’s nil rate
band and her own with the result that Janes’s estate effectively benefited
from three nil rate bands totalling £975,000.
Will planning using the family home
For the majority of people, the most significant asset they will ever possess
is the family home.
For married couples or civil partners, the family home will usually be
owned jointly. On first death, the survivor will usually inherit the half
owned by the deceased yet instead of passing the house automatically to the
spouse, further IHT savings and asset protection can be achieved by using
alternative solutions. One solution may be to arrange for half the value of
the house to pass to the children or other beneficiaries on first death and,
provided the value of the transfer is within the nil rate band, there will be
no liability to tax. On the death of the survivor, the remaining half share
can pass to the beneficiaries.
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While this will work in theory, on a practical level many couples will not have
sufficient confidence in their beneficiaries to provide the survivor adequate
security of tenure. Other problems that may result are:
• The beneficiaries attempting to sell the house against the survivor’s
wishes.
• The house could become included in divorce settlements or
bankruptcy of the beneficiaries.
• Potential Capital Gains Tax (CGT) problems for the beneficiaries.
However, there are Will structures which provide this security of tenure
and asset protection as well as making full use of the nil rate band on first
death using shares in property.
Although these issues can be overcome, it is vital that you take legal advice before
undertaking any IHT planning involving your home. St. James’s Place has established
links with a number of law firms who can assist you with this.
Pension scheme death benefits
Most members of employer-sponsored pension schemes have some
form of lump sum death benefit, normally based on a multiple of salary.
For example, a lump sum of four times pensionable earnings may be
payable by such a scheme on death. Although payment of this sum may
be free of any liability to IHT initially, it will form part of the deceased’s
beneficiary’s estate, often their spouse, and so be liable to IHT on their
subsequent death. It it also likely to be taken into account in the event of
the beneficiary’s divorce or by creditors.
The Asset Preservation Trust
The Asset Preservation Trust can overcome this problem. By expressing a
wish to your pension scheme trustees to have the death benefits payable
to your Asset Preservation Trust, your beneficiaries can receive an income
or capital payments from it subject to the trustees discretion, without the
trust fund forming part of their estate for IHT purposes. It is also possible
for the trustees of the Asset Preservation Trust to make interest free loans
to the beneficiaries which may help improve their IHT position further.
Setting up an Asset Preservation Trust is a very simple process.
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A Business Trust is very flexible
and can accommodate changes in
the ownership of a business
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Partnership Assurance and Director Share Purchase
For business owners, succession planning is of paramount importance.
Whether a partner in a partnership or a shareholder in a company,
arrangements should be put in place to ensure that your business
colleagues have the funds to buy your interest from your heirs in the
event of your death.
The Business Trust
The Business Trust has been specifically designed to hold life assurance
plans taken out for the purposes of partnership assurance or director share
purchase. The trust is very flexible and can accommodate changes in the
ownership of the business.
Furthermore, should you leave the business, for example on retirement,
the trustees have the power to transfer the plans, established on your life,
to you for your personal use which can then be placed into a trust for
your family.
Post mortem tax planning – it is never too late
A Deed of Variation (also called a Deed of Family Arrangement) is a
document that effectively rewrites a Will after death. Provided it is
completed within two years of death, it is fully effective for IHT and will
be treated as if the deceased’s Will provided for their estate to be distributed
as dictated by the Deed of Variation.
For example, where a husband dies leaving everything to his wife, she could
sign a Deed of Variation to re write his Will so as to leave an amount equal
to the nil rate band to their children or to a discretionary trust. It is not
necessary for all parties to agree to the variation, only those who are giving
away an entitlement.
Despite the potential benefits of a Deed of Variation, it should not be seen
as an effective substitute for tax efficient lifetime estate planning.
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The transfer of assets through the
prudent use of lifetime gifts
The use of lifetime gifts offers an effective way to transfer some of your
accumulated wealth to your heirs, while reducing the size of your estate.
Certain gifts are immediately exempt from IHT, such as: gifts made within
the annual exemption of £3,000; gifts made out of normal expenditure
from income; and gifts for the maintenance of dependants, or to recognised
charities.
However, such exemptions are of limited use in the passing down of
assets or creating wealth for future generations. To achieve this, it
may be more effective to place investments in trust for your chosen
beneficiary(ies). The advantages include:
• The investment is outside your estate if you survive seven years
or more.
• Any growth in the value of the investment is inside the trust, but
outside your taxable estate.
• When using a discretionary trust, you retain flexibility and control,
enabling you to change the beneficiary(ies), as well as the amount
they receive and when.
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Financial planning solutions involving
the use of lifetime trusts
St. James’s Place offers a range of trust solutions, each designed with a
particular purpose in mind. A full explanation of these is something that
you can discuss with your St. James’s Place Partner, however a summary is
contained here.
The Gift and Loan Scheme
If you wish to gift away the future growth of your investments but retain
access to the original capital, you could consider the Gift and Loan Scheme.
You establish a discretionary trust. You then make an interest free loan of
a larger amount to trustees chosen by yourself who, in turn, invest this
money into a separate investment.
You may structure the repayment of the loan to provide you with an
‘income’ or alternatively, may request that it be repaid in full, on demand,
at any time. If you have no need for repayment of the loan, it may be left
outstanding; however the outstanding loan amount at any time will be
included in your estate for IHT purposes, remembering of course that any
growth is not.
This scheme is more flexible than the Discounted Gift Plan, as you have
access to your capital and you can vary the amounts received each year.
However, it takes longer to achieve the same level of IHT saving when
compared to a Discounted Gift Plan and therefore, typically, it is more
suited to younger clients.
The Discounted Gift Plan
If you wish to give away capital, to reduce the potential incidence of IHT
on your estate, yet still benefit personally from the ‘income’ your capital
generates, you could consider the Discounted Gift Plan.
The Discounted Gift Plan is designed to provide an income and in so
doing provide an immediate reduction (a discount) in your estate which is
calculated based upon the amount of ‘income’ selected, prevailing interest
rates and your life expectancy.
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You will be provided with a fixed ‘income’ from the date the investment
is gifted into the trust for the remainder of your life, or until the fund is
exhausted, if earlier. Upon death, the proceeds of the trust can either be
distributed to your selected beneficiaries by your trustees, or retained within
the trust with your beneficiaries, receiving an ‘income’/capital as required.
The Discounted Gift Plan is not generally recommended for clients under
the age of 60, and is never recommended to those over the age of 90.
The Gift Plan
If you have substantial capital that you wish to gift during your lifetime,
you could consider the Gift Plan.
The Gift Plan is designed to mitigate IHT in the event of your death and
enables you to accumulate funds for your selected beneficiary(ies). You will
not be able to benefit personally from the Gift Plan, but family members,
including your widow/er may do so. In addition:
• Any growth in the Gift Plan is free of IHT on your death.
• Provided the gift is below the available nil rate band(s), there will
be no immediate tax charge on making the gift.
• Provided you survive for seven years, the value of the original gift
will cease to form part of your estate for IHT purposes, assuming
care is taken where any future gifts are made.
• If you do not survive the gift by seven years but do survive it by
at least three years, taper relief may reduce the level of IHT
payable on death.
• Payments of up to 5% (per annum) of the original capital invested
(and/or subsequent investments added) can be made to the
beneficiary(ies) of the trust free from any immediate liability to Income
Tax (subject to a maximum of 100% of the original investment).
• In the case of joint applications, however, neither applicant can
enjoy any benefit from the trust assets at any time.
Where you wish to make a gift during your lifetime but are concerned about
any future care costs, and how these will be funded, you should consider
the benefits offered by the Later Life Planning Scheme (see page 16).
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The Discounted Gift Plan
is designed to provide an income
and in so doing provide an
immediate reduction in your estate
when calculating the IHT liability
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The Gift Plan with life cover
Whilst regular gifting can help reduce or avoid any IHT payable, this could
still leave you with some of your estate exposed to IHT. In order to increase
the impact and efficiency of your gift, you could arrange a life assurance
plan to be set up under trust to meet any remaining IHT liability. The Gift
Plan with life cover allows an investment in trust to automatically fund the
contributions under the life assurance plan. Such an arrangement will not
only have the same advantages as the Gift Plan described above, but also:
• All contributions are met by monies from the investment.
• The contribution payments themselves will not be treated as transfers
of value for IHT purposes.
• On death, the residual value of the investment and proceeds of the
life assurance plan should be available for use as your trustees and
beneficiaries see fit.Your St. James’s Place Partner can explain this
in more detail.
The Later Life Planning Scheme
For many people, the desire to mitigate IHT is often mixed with concern
over their future and specifically how they would manage financially
should they require care, especially having gifted assets away.
Planning for the mitigation of IHT, in most cases, involves the gifting
of assets in one form or another; yet planning for any future care needs
requires you to retain assets for them to be used to meet such costs.
The Later Life Planning Scheme has been designed to meet both needs,
enabling you to make a gift in order to aid IHT planning whilst retaining
access to a predetermined income in the event of you requiring care.
Additionally, such income is provided without any negative IHT effect
normally associated with retaining any interest in gifted capital.
The scheme involves you making a gift of capital that will fall outside of
your estate for IHT purposes, provided you survive seven years from the
date of making the gift. At outset, you select the amount of income that
you would like to receive, and the rate of any increase to be applied to
that income, in the event of requiring care.
In addition, the scheme provides the same benefits offered by the Gift Plan as
noted on page 14 with the exception that this scheme can only be created
on the basis of a single application (although two people can each apply
individually).
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The creation of a fund to meet any
tax liability or to provide a legacy
There may be circumstances that will result in you having concerns about
making gifts. Your reluctance may be well founded as the future may hold
unknown changes of fortune, requiring you to call upon gifted capital to
provide an income or to meet unforeseen expenditure. This is not generally
possible if it has been gifted.
In reality, the most frequently used form of IHT planning is to provide
a fund for the anticipated liability, by arranging life assurance in trust.
The plan can be arranged on a single or joint life second death basis. It is
ideally suited for those who would rather not, or cannot, gift capital, but
nevertheless want to cater for any potential IHT liability. For example:
A widower has an estate valued at £1.5 million (whose late wife’s
nil rate band was utilised on her death), made up of property valued at
£1 million and investments of £500,000. He wishes to retain his
investments and wishes to continue living in the property. He is not
prepared to consider any kind of gifts at this time.
He could, however, purchase a life assurance plan which will pay out on
his death, with a sum assured equal to the likely IHT liability of
£470,000.The plan is written into trust to ensure the proceeds are out
of his estate for IHT purposes.
Additional trustees should be appointed to ensure the plan proceeds are
available without having to wait for Probate/Confirmation to be issued
and the beneficiary(ies) under the trust should be the person(s) liable to
bear the tax under the terms of his Will.
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Inheritance Creation is a life assurance
plan taken out by you, and may be
transferred to your selected beneficiaries
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Estate Creation Plan
If you would like to use some of your surplus income on a regular basis to
negate or meet your IHT liability, or to enhance the wealth of your heirs by
creating a fund for a specific purpose such as university education or future
house purchase for grandchildren, you should consider the Estate Creation
Plan. This is a combination of a life assurance plan and a discretionary trust,
designed to provide a lump sum for your selected beneficiary(ies) on your
death. Under this plan:
• The capital sum should be free of all UK taxes, when initially paid to
your chosen trustees.
• There is unlikely to be any liability to IHT provided the contributions
to the plan fall within the current IHT exemptions.
• The beneficiary(ies) and the amount or timing of their interest can
be changed.
Inheritance Creation
If your heirs wish to use their own income or capital on a regular basis to
enhance the value of their inheritance from you, then you should consider
taking out a life plan and giving it to your heirs rather than placing it under
trust. This is called Inheritance Creation.
The idea behind Inheritance Creation is that a life assurance plan taken out
by you is transferred to your selected beneficiary(ies). They will then pay
the contributions to the Inheritance Creation Plan in order to create an
inheritance for themselves. Under this plan:
• There is no liability to IHT on the proceeds on your death in your
estate although the value paid to the beneficiary will form part of
their own estate for IHT purposes.
Review of contributions
Both of the above schemes may incorporate regular reviews to ensure that
contributions remain sufficient to support the level of benefit chosen.Where
a shortfall is identified you will have the option to increase contributions to
maintain the level of cover.
Alternatively, should you require the certainty that contributions will
remain fixed, we are able to offer life assurance plans with guaranteed
contributions. Further details are available from your St. James’s Place
Partner.
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Other IHT solutions
We offer access to investments through the Alternative Investment Market
(AIM). The benefit of most AIM shares is that they qualify for business
property relief and are free from IHT after two years while enabling you
to retain full access to, and control over, the capital should you need it in
the future.
Investments in Enterprise Investment Schemes (EIS) also attract business
property relief once the funds have been invested for two years. They also
offer the opportunity to defer Capital Gains Tax and provide maximum
income tax relief of £150,000 depending on the size of the investment and
your actual income tax liability. EISs enable you to retain full access to and
control over your capital. Investments in AIM shares and EISs may be of
particular interest to individuals who are very old or in poor health and
therefore feel less confident about living seven years from the date of any
other gift.
Investments in AIM shares and/or EISs carry additional investment risks
and it is for this reason that St. James’s Place only recommends these types
of investment for those willing to accept a higher investment risk.You may
get back less than you invested.
Trustees
When using any of the trusts available from your St. James’s Place Partner,
it is possible to choose members of your family or friends to act as trustees
(subject to their willingness to accept the role).
There may, however, be occasions where you would prefer to appoint
professional trustees such as where:
• The trust holds a considerable sum of money that could remain in
existence for an extended period and requires efficient management
and administration.
• You do not have friends or family willing to accept the responsibility
of being a trustee, or you do not wish to burden them with the
responsibilty.
• There is a requirement for non UK resident trustees.
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Our trust company specialises in the provision of trustee services from
offices in Jersey and through partners and associates in other jurisdictions.
As trustees, they will take responsibility for the day to day administration
of your trust, including the relevant tax and other legal issues, whilst
remaining sympathetic to your wishes, and accommodating the needs
of your beneficiaries. Your St. James’s Place Partner can provide further
details regarding the trust company.
Further information
If you require further information on any of the solutions detailed in this
brochure, please contact your St. James’s Place Partner.
Investment performance
Many of the solutions contained in this brochure involve making an
investment. It should be remembered that investment bonds and unit
trusts are primarily vehicles for medium to long term investment and
irrespective of their use with any of the arrangements, plans or schemes
referred to within this brochure, the investments need to be appropriate
for your needs and/or those of your beneficiary(ies). Past performance is
not indicative of future performance.
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Taxation
The information in this brochure is based on our interpretation of current
law and HMRC practice.
Taxation legislation may be subject to unforeseen changes and we can give
no guarantee that tax reliefs or the tax treatment of investment funds will
remain the same in the future.
This brochure is designed for clients and prospective clients of the
St. James’s Place Partnership. It is not a technical booklet and therefore
does not attempt to summarise the rules of Inheritance Tax.
Trusts, Wills and some areas of Inheritance Tax planning are not regulated by the
Financial Services Authority.
Will writing is a separate and distinct service to those offered by St. James’s Place.
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UK members of the St. James’s Place Wealth Management Group are authorised and regulated by the Financial Services Authority.
The ‘St. James’s Place Partnership’ and the titles ‘Partner’ and ‘Partner Practice’ are marketing terms used to describe St. James’s Place representatives.
St. James’s Place Wealth Management Group plc Registered Office: St. James’s Place, 1 Tetbury Road, Cirencester, Gloucestershire GL7 1FP, United Kingdom.
Registered in England Number 2627518.
SJP823-VR18 (10/11)