Ask a planner answers: off-shore bond and discretionary trust

Tuesday, June 7, 2016

The question, from M.Povey, 66 from Bournemouth

"I've been advised to take out an off-shore bond and discretionary trust in name of grandson to mitigate  some  IHT. My concern is that the costs of such a bond and the complexity of winding it up make it not worthwhile. Any advice welcome."

The answer, from Martin Bamford CFPTM from Informed Choice

An offshore Investment Bond can be more expensive and complicated than the equivalent onshore Investment Bond, so it is important it is being used for genuine Financial Planning reasons. They also tend to offer less protection for investors as they are not covered by the Financial Services Compensation Scheme (FSCS) in the UK, but instead the relevant investor compensation scheme for the country in which they are held.

An important advantage is that offshore Investment Bonds are taxed under the chargeable event legislation, which means any investment gains are assessed to income tax, rather than capital gains tax. No income tax or capital gains tax is suffered within the investment funds themselves, but there may be a withholding tax applied which cannot be reclaimed.

Trustees in the UK will pay income tax at 45% on any chargeable gains, with a form of personal allowance of £1,000 worth of chargeable gains in a tax year charged at 20% income tax.  As non-income producing tax-wrappers, there will be no annual tax returns for the trustees to complete, which helps reduce the complexity.

An advantage of using an offshore Investment Bond within a discretionary trust is that the funds can be assigned out to beneficiaries without this giving rise to an income tax or capital gains tax charge.

The most suitable inheritance tax planning solution for you will depend on striking the right balance between effectiveness and control. The most effective IHT planning means giving up full control of your assets, with investors wanting to retain control over their assets only able to access the least effective solutions.

It is not clear from your email whether you might require future access to capital or income from this investment, or what level of IHT you are hoping to save. Your adviser should explain all of the advantages and disadvantages of the proposed route, along with a detailed breakdown of costs, which I hope will enable you to make the right decision.

Martin Bamford CFPTM
Managing Director
Informed Choice