IHT Planning Briefcase
IHT Planning Briefcase
The challenge
- To minimise the future IHT liability
- To maximise the potential to sustain withdrawals longer term
- To provide investment choice and flexibility
- To maintain flexibility over who inherits and how much
The offshore bond solution
Based on a male client aged 66 next birthday and in good health
- Client invests £500,000 in Portfolio Account within a discretionary Discounted Gift Trust.
- Opts for annual withdrawals of £25,000 (5% of the investment).
- With the discount, the gift into the trust is valued at £242,300 - within the nil rate band, so no immediate IHT charge.
- At the first 10-year anniversary, the discounted value of the trust fund is £362,711 (1% a year net growth after withdrawals)
- Nil rate band at this time is £436,773 (3% annual growth from 2011/2012 level), so there is no periodic charge.
- After 20 years, the discounted fund value is £480,645 and the nil rate band is £586,986, so again there is no periodic charge.
- Client dies after 20 years; no exit charge; the trust fund, now worth £610,095, can pass to the beneficiaries free of IHT.
- Beneficiaries and shares are at the trustees' discretion; client is a trustee while alive.
- Trust includes a statement of wishes, allowing the client to record who he wants to benefit after his death.
What are the advantages?
- No tax except withholding tax paid within funds - more potential to sustain regular withdrawals without significant capital erosion - see the difference
- Open architecture - huge fund choice
- Option to change the bond at any time
- Preferential terms and annual management charge rebates on majority of funds
- 5% withdrawals are tax-deferred over 20 years - no income tax issue for trust
- Investment strategy not constrained by tax considerations; UK collective would incur tax on income - see the difference
- No capital gains tax on switches between funds
- Assignment facility may increase tax-efficiency when benefits are distributed
Long-term income and capital erosion
The "gross roll-up" available on offshore bonds means they are better able to sustain regular withdrawals over a period of time without significant capital erosion. Onshore bonds, which are taxed at source, will deplete more quickly.
Example
Investment: £100,000
Annual gross growth rate: 6%
Annual management charge: 1%
Annual withdrawals: £5,000
| Year | Value in fund at year-end/Cash-in value for non-taxpayer | Cash-in value - basic rate taxpayer | Cash-in value - 40% taxpayer | |||
| Onshore | Offshore | Onshore | Offshore | Onshore | Offshore | |
| 10 | £86,860 | £99,247 | £86,860 | £89,398 | £79,488 | £79,548 |
| 15 | £78,146 | £98,711 | £78,146 | £83,969 | £67,517 | £69,227 |
| 20 | £67,595 | £98,029 | £67,595 | £78,423 | £54,076 | £58,817 |
Use our calculator to input your client's details.
Offshore bonds v collectives: the effect of ongoing tax
Many UK collective funds are likely to have an element of interest or dividends within the overall return, even where they primarily target capital growth. Interest arising will be taxed at 20% within the fund and higher rate taxpayers will be liable for a further 20%. Income from dividends will be taxed at an effective rate of 25% in the hands of a higher rate taxpayer.
Because the tax is payable year on year, it acts as a curb on growth, compared with the gross roll-up applying on an offshore bond. The table below shows the effect.
Example
Investment: £200,000
Total net growth rate: 5% p.a.
Higher rate taxpayer
Ongoing values after 5 years
| With interest/dividend element of*: | |||
| 2% | 2.5% | 3% | |
| Collective - income from interest | £245,679 | £243,331 | £241,000 |
| Collective - income from dividends | £249,236 | £247,749 | £246,269 |
| Offshore bond | £255,256 | £255,256 | £255,256 |
*For the collectives, figures assume the interest or dividends are reinvested and money is withdrawn to pay the higher rate tax due. For the bond, it is assumed no withdrawals are made. All figures ignore any product charges.
Use our calculator to input your client's details.
Tools & calculators
- Get an illustration
- Product Guide
Related links
- See this in action - use our calculator to input your client's details
- See this explained in a presentation
- Find out more about Portfolio Account
- Request an appointment with your regional specialist
- Talk to our Technical Helpline on 08457 11 12 13
