Technical Connection offer answers to questions about investment bonds and pensions
Q Can you please tell me, if an existing client set up a loan trust and the trustees invested £200,000 into an investment bond, but the bond is now worth £218,000, how much would still be in their estate? The trustees have withdrawn £35,000 so far and now the client has decided they no longer wish to benefit. What options do they have?
A Based on the information you have provided, if the trustees invested £200,000, which was the original loan amount, and have made loan repayments of £35,000 to the client, the amount that would still be in the client’s estate for inheritance tax (IHT) purposes would be £165,000 (£200,000 less £35,000). Any investment growth is outside of the client’s estate for IHT purposes. Essentially, the original loan amount is what the client can benefit from by way of loan repayments over time.
If the client has decided that they no longer wish to benefit from any loan repayments, they could ‘waive’ their entitlement to the outstanding loan. In this case, they would then be treated as making a gift for IHT purposes. This would either be a potentially exempt transfer where the trust has been established on an absolute basis, or a chargeable lifetime transfer if the trust has been established on a discretionary basis.
In the latter case, you would need to ensure that the value of this gift (£165,000) does not exceed the client’s available nil rate band, taking account of any other chargeable lifetime transfers in the last seven years, because otherwise lifetime IHT would be payable.
Q My client is aged 72. They have already used up 80% of their lifetime allowance (LTA) with their defined benefit schemes. They have fixed protection 2016. They have a defined contribution scheme worth £400,000. They now want to take their 25% tax-free cash (TFC) and want to know how the LTA will apply.
A The client has 20% of their protected LTA remaining, i.e. £250,000. The TFC entitlement is limited to 25% of this amount, so £62,500.
To take the full remaining TFC entitlement, they would need to crystallise £250,000 and move £187,500 into drawdown. If they do this, there is no immediate LTA charge.
If they leave the remaining funds uncrystallised, these will be tested at age 75. As the full LTA will have been used, any uncrystallised funds would be subject to a 25% LTA charge at that point.
The funds in drawdown will also be subject to a second LTA test. Any increase in value on the funds placed into drawdown would also be subject to a 25% LTA charge.
If they crystallise any more than £250,000 now, there would be an immediate LTA charge on the excess. The LTA charge would be 55% if paid as a lump, or 25% if the funds are designated to provide income. If they opt for the latter, then again, any growth on funds placed into drawdown would be subject to a 25% LTA charge at age 75.
Taken from the Technical Connection Techlink Professional question bank.
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