NOVIA
DISCRETIONARY GIFT TRUST
ADVISER GUIDE
CONTENTS
1. THE BACKGROUND TO USING THE NOVIA DISCRETIONARY GIFT TRUST
2. INHERITANCE TAX PLANNING AND THE NOVIA DISCRETIONARY GIFT TRUST
3. THE SUITABILITY OF THE NOVIA DISCRETIONARY GIFT TRUST
4. THE NOVIA DISCRETIONARY GIFT TRUST PROVISIONS IN DETAIL
5. THE UK TAX IMPLICATIONS OF THE NOVIA DISCRETIONARY GIFT TRUST
The following points should be noted in respect of this document:-
(a) Where the term “spouse” is used, this will apply equally to a case where a person is a registered civil partner of another.
(b) The term “Settlor” should be taken to referring to both Settlors in joint Settlor cases.
(c) The Trust is provided as a draft for the prior approval of the Settlor’s legal advisers.
1. THE BACKGROUND TO USING THE DISCRETIONARY GIFT TRUST
The aim of the Novia Discretionary Gift Trust is to enable a person to undertake effective and flexible lifetime inheritance tax (IHT) planning. The Trust is provided on the basis that it will achieve the objectives and have the tax consequences specified in this Guide. However, it is essential that each client should confirm, with their legal and professional advisers, that the draft Trust is suitable for their purposes.
The types of investor who will be interested in using the Novia Discretionary Gift Trust could be:-
· new investors contemplating a new investment in collective investments (“Collectives”) on the Novia Platform;
· investors who already hold Collectives on the Novia Platform;
· investors who hold Collectives that are not on the Novia Platform but who are happy to transfer them on to the Novia Platform; or
· persons who already hold a Royal London 360 Insurance Company bond on the Novia Platform. It should be noted that only existing Royal London 360 bonds held on the Novia Platform can be placed into this Trust. In this Guide we refer to such a bond as a Novia Offshore Bond.
Investors who hold a Novia Offshore Bond on the Novia Platform could, alternatively, use the trust documentation made available by Royal London 360. However, if they also have Novia Platform Collectives that they wish to place into the Discretionary Gift Trust, it may be more tax efficient from a CGT standpoint (see Part 5(2)) and convenient to use the Novia Discretionary Gift Trust.
An investor using the Discretionary Gift Trust is called the Settlor. By using the Discretionary Gift Trust with new Novia investments, an existing Bond or an existing holding in one of the Novia Collectives, the Settlor(s) will be making a gift of the asset(s) transferred into trust.
When the gift is to be of new investments, the Settlor will first have to buy those investments and have them registered on the Novia Platform. The Settlor will then declare a trust of those new Collectives.
The Trust is “discretionary” which means that there is no need to decide at outset which Beneficiary is entitled to what or when. There are several classes of Beneficiary and the Settlor (and following his/her death the Trustees) has discretion as to which of those should receive what, how much and when. On completing the Trust Deed the Settlor can add a class of beneficiary(ies) to the pre-designated list should that beneficiary not already be included in one of the classes.
When an asset is made subject to a Discretionary Gift Trust the gift will be a chargeable lifetime transfer for inheritance tax purposes to the extent that the market value of the investment exceeds the Settlor's available annual (£3,000) exemption(s). However, provided the value of the gift does not cause the Settlor to exceed his/her available nil rate band (£325,000 in tax year 2016/17), no actual IHT charge will arise when the Trust is made.
To ensure that the Discretionary Gift Trust is effective for IHT purposes, the Settlor cannot benefit
from the trust assets in any circumstances.
The Settlor can choose whether to include his/her spouse as one of the Beneficiaries. Although this would have no adverse IHT implications, the inclusion of a spouse can have important income tax implications. Clearly, where there are joint husband and wife Settlors, neither can be a Beneficiary.
Full details of the UK tax implications of the Novia Discretionary Gift Trust can be found in section 5 of this Guide.
As well as offering the ability to secure important tax benefits, the investments held in the Discretionary Gift Trust will not be an asset of the Settlor's estate for probate purposes. This means that in the event of the death of the investor (the Settlor), the Trustees can, subject to what is said below, carry on dealing with the investments without waiting for probate to the Settlor’s estate.
However, to ensure that an investment is not part of the Settlor’s estate for probate purposes, in the event of the Settlor's death the legal ownership of the investment must be with a person or persons other than the Settlor on his or her death. This benefit will only be secured if there is at least one Trustee who survives the Settlor. This is explained in more detail below. To satisfy this requirement, because the Settlor is automatically one of the Trustees, under the Novia Discretionary Gift Trust it is necessary for additional Trustees to be appointed in the Trust Deed. If any of the additional Trustees retires or dies before the Settlor, a further Trustee or Trustees should be appointed.
If no additional Trustees have been appointed or they have been appointed and resigned, died or have been removed so that there is no surviving Trustee on the death of the Settlor, the Settlor will be the sole Trustee at the time of his or her death. The Trust will nevertheless continue and the personal representatives of the deceased Settlor will assume the role of Trustee under the Discretionary Gift Trust. This means that although the trust investments will not be part of the Settlor's estate for IHT or probate purposes, securing probate to the Settlor's estate will still be necessary to ensure that the personal representatives can act as Trustee under the Discretionary Gift Trust. In light of this, it is clearly very important that additional Trustees are appointed who are likely to survive the Settlor so as to ensure that any delays in being able to deal with the trust investments are avoided.
The Trust can be used regardless of whether the gift is to be made by one individual or two jointly. A “joint gift” will be made when an existing Novia Offshore Bond or Collective is owned jointly. For IHT purposes, each of the joint Settlors is then treated as a separate Settlor who has created a separate settlement of half the value of the asset gifted.
2. INHERITANCE TAX PLANNING AND THE DISCRETIONARY GIFT TRUST
These days most lifetime gifts into trust are treated as chargeable lifetime transfers. Only outright gifts to individuals and gifts into bare (absolute) trusts or into trusts for the disabled are treated as potentially exempt transfers (PETs).
All other lifetime gifts to a trust are now treated as chargeable lifetime transfers. However, provided the gift, when added to the Settlor’s cumulative total of chargeable lifetime transfers in the previous 7 years, does not exceed the nil rate band (£325,000 in tax year 2016/2017) there will be no tax to pay when the trust is made. Other charges can also arise in respect of discretionary trusts, for example on ten-year anniversaries (see section 5 for full details) but, again, provided the value of the trust fund, when added to the Settlor’s 7 year cumulative total, is below the then nil rate band, there should be no tax to pay.
To ensure that the Settlor makes an effective gift for IHT purposes, the Settlor must not
retain any benefit (actual or prospective) under the trust as otherwise the gift with reservation of benefit rules will apply. The Novia Discretionary Gift Trust is expressed as being irrevocable and the only persons who can benefit are those individuals identified as Beneficiaries in the Trust Deed. As the Settlor is not a Beneficiary the Trust is effective for IHT purposes.
In single Settlor cases, the Settlor’s spouse may be included as a Beneficiary if the Settlor so desires and this, by itself, will not have any adverse IHT implications. However, great care should be exercised if any payments are to be made from the Trust to the Settlor’s spouse during the Settlor’s lifetime. If in these circumstances the Settlor enjoyed a direct or indirect benefit (for example if the funds were used for common family expenses), the Trust could then be caught by the gift with reservation of benefit provisions thus making it ineffective for IHT purposes.
The Novia Discretionary Gift Trust will not be suitable for an investor who requires some beneficial access to his or her investment.
Also, in cases where an investor is happy that his or her choice of Beneficiary is certain and would prefer to secure PET treatment for his/her gift, the Novia Discretionary Gift Trust will not be suitable but a Novia Bare Gift Trust may be. The choice of trust should always be discussed with professional advisers.
For a detailed consideration of the inheritance tax implications of the Discretionary Gift Trust see section 5.
3. THE SUITABILITY OF THE DISCRETIONARY GIFT TRUST
(a) Suitability
The Discretionary Gift Trust may be suitable for an investor who:
· would like to make a gift of either:-
- an existing Collective or Novia Offshore Bond held on the Novia Platform,
- new investments that are being effected and will be held on the Novia Platform or
- existing other investments that will first be transferred on to the Novia Platform;
· would like to retain control and flexibility over who should benefit from the investment;
· understands that they will not be able to benefit from the investment under any circumstances (in order for the Trust to be effective for IHT purposes); and
· would like the benefits of the investment to be outside their estate for IHT and probate purposes when they die.
The Discretionary Gift Trust enables an investor to:-
- declare a trust of recently acquired investments on the Novia Platform
and/or
- transfer existing Novia General Cash Account or Investment Account funds that are held on the Novia Platform to trustees for them to hold those Accounts subject to the terms of the Trust for the Beneficiaries
and/or
- transfer an existing Novia Offshore Bond that is held on the Novia Platform to the Trustees of the Discretionary Gift Trust
and/or
- transfer other non-Novia investments to the Trustees, provided those investments are first transferred on to the Novia Platform.
(b) Matters to consider before establishing the Trust
· A Discretionary Gift Trust is suitable for investments owned by one person or by two persons jointly who, after discussion with their legal and/or other professional advisers, are happy that the legal and tax implications of the Trust are suitable for them and that the Trust will help them to achieve their objectives in relation to tax and financial planning. In particular, the Settlor should understand that when a gift is made into a discretionary trust, to the extent the gift exceeds the available annual exemption(s), it will be a chargeable lifetime transfer (CLT) for inheritance tax (IHT).
· There will be no immediate IHT liability if the value of the gift:
- less any exemptions
- plus the value of all CLTs made by the same Settlor in the previous seven years
does not cause the Settlor to exceed his/her IHT nil rate band.
Before recommending the Novia Discretionary Gift Trust, it would be appropriate to confirm:
· the potential IHT liability on the investor’s estate (including the history of previous gifts) if no action is taken;
· the practical objectives of the investor. These would include:-
- the degree of flexibility required
- the identity of the potential Beneficiaries and
- consideration as to whether the Settlor’s spouse (in other than joint Settlor cases) should be included amongst the Beneficiaries;
· whether the Settlor is happy to give up all future access to the investment; and
· the size of the intended gift.
If the gift will cause the Settlor to exceed his/her nil rate band for IHT there will be an immediate 20% liability on the excess. In general, a Settlor should not make gifts that are CLTs and that would cause the available nil rate band to be exceeded and so result in an immediate tax liability.
Full details of the tax implications of the Discretionary Gift Trust are set out in section 5 of this Guide.
4. THE DISCRETIONARY GIFT TRUST PROVISIONS IN DETAIL
For tax purposes the Discretionary Gift Trust is a discretionary settlement. The Trust gives the Trustees power to appoint benefits under the Trust among a wide class of Beneficiaries. No Beneficiary is entitled to any benefit until the Trustees so decide – the ultimate Default Beneficiaries named in the Trust will benefit only if no other appointment has been made by the end of the trust period which is 125 years.
The following is a summary of the key provisions as they appear in the draft Discretionary Gift Trust.
Part 1 - Execution of the Trust Deed
The Deed, if thought to be suitable, would be executed by the Settlor and the named additional Trustees.
Alternative provisions are applied depending on whether all or only part of an existing investment is being transferred to the Trustees (only the whole of a Novia Offshore Bond can be transferred). The details of the asset being transferred to the Trust are specified in the Schedule to the Trust. It is important to note that where a Settlor contemplates making a new investment and transferring that investment into trust, he/she must first make the investment and have it registered on the Novia Platform. That investment can then be transferred into trust.