DISCOUNTED GIFT BOND TEMPLATE
Name
Address
Address
Address
Address
Date
Dear Name
Re: Discounted Gift Bond for Inheritance Tax Planning (IHT)
Following our previous conversations and discussions concerning your family’s Inheritance Tax liability on date (and subsequent meeting/s) to complete a Personal Planning Profile, I am writing to detail the recommendation that I feel is appropriate to your circumstances. The recommendation is aimed at reducing your family’s exposure to Inheritance Tax upon your death, with the investment portfolio to help support your income needs during your lifetime and offer the potential to obtain growth over the long term. By wrapping the investment in a Discounted Gift Trust the monies will be held in trust for your Children / Beneficiaries for their benefit after your death.
My recommendation takes into account that you are single/ married/widowed, aged XY. You own your home mortgage free. Your total gross income is £XX,XXX per annum made up from £YY,YYY private and or state pension, and £ZZ,ZZZ income from your investments and deposit accounts. You have X adult children and you wish them to inherit your estate for their benefit and their families. You are currently a basic / higher rate taxpayer and your estate is valued at approximately £abc,def .
You have become concerned with the family’s exposure to Inheritance Tax after your eventual death, and you have discussed this at length with your children. You have not made any Lifetime Transfers or Potentially Exempt Transfers previously from your estate. From your available monies you currently wish to consider placing an amount of £XXX,XXX into an arrangement with a view to potentially mitigating IHT arising on your death.
We discussed that a Discounted Gift Trust will gain an immediate reduction in the amount of fund exposed to Inheritance Tax in the event of your death. Initially this reduction will broadly reflect the amount invested, less the estimated value of the regular withdrawals likely to be paid to you over your lifetime. The whole fund will be exempt from Inheritance Tax after 7 years and 1 day has elapsed from the date of the gift, but before then the gift is treated as a “Potentially Exempt Transfer/Chargeable Lifetime Transfer (delete as appropriate depending on whether a Bare or Discretionary Trust is used)” and this means that the excess of the fund exceeding the Discounted sum will be treated as part of the estate for Inheritance Tax purposes.
We have asked product provider to underwrite you medically for the Discounted sum to be calculated, and having completed their underwriting process they have now stated that the value of your Gift (Potentially Exempt Transfer) would be reduced by £XX,XXX immediately for inheritance tax purposes. This represents a considerable saving in exposure to Inheritance Tax to your Gift during the 7 year period it still forms part of your estate as a “Potentially Exempt Transfer/ Chargeable Lifetime Transfer (delete as appropriate)”.
Now we are certain of the Discount, you wish to proceed in making the Gift to the Trust and the purpose of this letter is to advise you of the suitability of this investment to your circumstances.
I am recommending this plan to you because;
§ you will have a liability to IHT on your estate on death, even if maximum use is made of exemptions, reliefs and the nil rate band.
§ You wish to take advantage of the current regime for lifetime giving with a view to reducing or avoiding an IHT liability on death.
§ You have a lump sum available for investment, which will not leave you short of other adequate capital for your foreseeable requirements.
§ You require an income from your investment, but are willing to forgo all other access to the invested funds.
Product provider Bond
We agreed that you create a Discounted Gift Trust and invest an amount of £XX,XXX into the product provider Bond. The purpose of the Trust is to place the investment outside of your estate after 7 years and 1 day, with the additional benefit of obtaining a Discount to the value of the Gift immediately should you die within the 7 year period. During your lifetime the Trust will provide you with an income stream of xx% per annum for the remainder of your life up, subject to there being sufficient funds in the trust to make such payments. This is “tax deferred” until 100% of the initial investment has been withdrawn, so you may potentially be liable for income tax upon this amount after this time. Please note that for contracts set up since 2013, any ongoing annual fees paid to an adviser to provide ongoing advice is treated as part of the 5% cumulative tax deferred allowance. You will be a trustee of the trust, with your children ABCDY and WXYZA as additional trustees.
We discussed the options of the trust being set up either as a “bare” or a “discretionary” trust. Under the former your actual intended beneficiaries you wish to nominate are made at the time the trust is set up, and once made cannot be changed. Under a discretionary trust, the trustees have the discretion to distribute ultimate funds as they see fit, among the categories of potential beneficiaries the trust specifies. You are able to indicate to the trustees who your current choice of beneficiaries are, but they are not legally obliged to follow any such wish. A “bare” trust clearly does not provide the flexibility of the “discretionary” arrangement, and is most suited in those circumstances where you (the settlor) are certain of your choice of beneficiaries. Although less flexible, the advantage of the “bare” trust over it’s “discretionary” alternative lies in it’s freedom from potential immediate and ongoing IHT charges that might apply to “discretionary” trusts.
Following our discussions you feel that you would prefer the bond to be placed into a into a bare / discretionary trust format.
Your children / grandchildren ABCDY and WXYZA will be the sole and absolute beneficiaries of the trust. (as appropriate, if bare trust. For discretionary trust use…..) The trust will be set up as a discretionary trust whereby the trustees have discretion, within certain categories, as to who the ultimate beneficiaries may be.
There are a number of excellent reasons for investing into this Single Premium Investment Bond, some of which are detailed in the previously provided brochures. It would be inappropriate for me to repeat all of these in this letter but I would like to highlight a few points, which have particular relevance to your circumstances:-
1) Open architecture structure of the bond, which allows access to any unitised fund, including external fund managers & discretionary managers.
2) Minimal administration.
3) Tax deferral until year of encashment.
4) The ability to withdraw income up to 5% per annum without tax, for up to 20 years or until 100% of the initial investment has been withdrawn. Higher amounts of income can be obtained if required, but would be subject to tax. However you felt that 5% per annum income would be sufficient. (IF SERVICED CLIENT: Please note, that the annual service fee payable would be counted towards the overall figure as a withdrawal and therefore may reduce the 5% per annum allowance to X%)
5) Gross roll up of funds held within the bond wrapper, achieved because the provider is based offshore in the Isle of Man – (or jurisdiction as appropriate if offshore)
In determining the suitability of Bonds in general we would normally compare other options available, such as :-
1) Bank / Building Society accounts are dependent on interest rates and are unlikely to outperform the Bond.
2) Share portfolios / Unit Trusts / Investment Trusts. These may not match your risk profile although more particularly in the case of Unit Trusts, a very broad selection of funds are available.
3) ISA’s. You already own various ISA’s and will utilise your allowance for this tax year.
4) Onshore Insurance Bonds. These do not have the tax-deferral advantages of offshore bonds. (if being written offshore)
However, of the above alternatives, 1, 2 & 3 cannot be wrapped up within a “Discounted Gift Trust”, or are not as tax efficient within a trust as the recommended product and therefore could not or were not considered.
I recommend that a total of £XXX,XXX should be invested in the product provider Bond, and you are confident that this amount is realistic and will not leave you short of other capital.
In selecting the company with whom this bond should be effected I have considered a number of factors. Of these, the most important were to ensure that the contract contained the right features for your requirements. In this respect, and in your view of the current circumstances, I have looked for companies which can provide a contract that offers the following features:-
1) Strong track record regarding unit linked bonds.
2) Strong financial strength and size of company.
3) Multiple policy segments.
4) Competitive charging structure
5) A good Discounted Gift Trust - Absolute version which enables the investment to offer your family significant Inheritance Tax savings.
Financial strength and administration support have also been taken into account in deciding to recommend product provider who manages more than £XYZm and is one of the world’s leading insurance groups.
To fully benefit from the product terms, you should view this as a five-year plus investment. Unit-Linked bonds are not short-term alternatives to cash deposits and are best viewed as five year plus investments. Should you surrender the Bond within in the first five years you will incur a surrender penalty, which reduces each year on a sliding scale to nil after five years. After five years you may surrender the Bond without incurring a surrender penalty.
However, in the terms of the trust that owns the investment you will not be able to access the capital sum as this is held for the beneficiaries absolutely, but you have the right for income of 5% per annum from the fund during your lifetime. This is “tax deferred” for up to 20 years or until 100% of the initial investment has been withdrawn so that you would not be liable to income tax on these payments during this period.
You felt that this income stream was important to you, as it enables you to help your grandchildren financially, as well as provide you with additional income to maintain your standard of living.
Withdrawals have been set to commence on DATE at a rate of 5% per annum with payments on a MONTHLY basis. This can be amended to suit your changing circumstances. Although the Bond is designed primarily to provide capital growth, the structure of this investment is such that it can provide you with regular payments. Under current legislation you will be able to withdraw up to 5% of your initial investment each year with no immediate liability to tax. You can, of course, take higher levels of ‘income’ from the Bond. If you are, or become, a higher rate taxpayer when such an ‘excess’ withdrawal is made there will be a tax charge at a maximum of 20% (basic rate tax treated as paid within the fund) based on current tax rates.
The balance between risk and return is at the heart of all financial decisions and needs to be clearly understood prior to implementing any investment strategy. Chasing high returns and past performance is may not the best option as this can typically involve taking on more risk. Therefore finding the risk-return balance for each individual is the first step towards a successful investment strategy. There are a few key factors that need to be taken into consideration. Our approach is to ensure that the management of your assets is based on the creation of an optimal asset allocation that fits with your attitudes toward risk and meets the financial objectives you have established.
Based on our discussions and our initial analysis, we recommend that your bond is invested in the following funds;-
State funds with a brief description of each and why selected.
The Investment or With Profit fund within this single premium bond, will match your investment risk profile which you stated was cautious / balanced / speculative. Any headline bonus rate is not guaranteed beyond the initial offer period and any future bonuses are expected to be of a lower amount. Future bonuses are not guaranteed as they are dependent on profits still to be earned. When the UK stock market is depressed it is common practice for product providers to apply a Market Value Adjuster (MVA) upon a full or partial encashment, or switch out, of a with profits fund and/or bond. This MVA represents a penalty against the value of the bond and could result in investors receiving back an encashment value less than the amount invested.
(If appropriate to funds recommended include following paragraphs)
We discussed your wishes to have potential for modest growth compared to the low returns from Cash currently. However, as discussed, you should be aware that the future returns of Gilt and Bond funds will be sensitive to increases in both UK interest rates & inflation. If prevailing interest rates increase this is likely to have a negative effect on returns from Gilt & Fixed Interest funds, and may well cause reduction in capital values.
(If Corporate Bonds include following paragraph)
Additionally as regards Corporate Bond funds, although the fund manager will seek to spread risk, the value of the fund will be affected in the event of the failure or downgrading of any underlying companies issuing the bonds.