In this article Julia Peake – Technical Manager at Nucleus, shares some of the topical technical questions the team has recently received. From tax-free cash, to loan trusts and WOL policies, all areas that could help you in your day-to-day work or if you might have exams on the horizon.
Q. A client with number of pension contracts may have taken more tax-free cash than they were entitled to under their fixed protection. If this is the case, what would be required from the client to rectify this? Would he need to contact HMRC directly to pay tax on the excess?
A. We would suggest speaking directly to the pension scheme involved to see if it is possible for them to partially unwind the tax-free cash and then levy income tax on the amount above the permitted tax-free cash. This would be the simplest solution if they are willing and able to do so. If the provider is unwilling to assist, then the client would need to go direct to HMRC.
Q. If a client who set up a Loan Trust 10 years ago wished to now write off the outstanding loan due to them, could you let us know how to go about this please?
A. Firstly, we would recommend the client speak to both their tax adviser and their legal adviser to get advice on this. The ability to waive the outstanding loan should apply but the deed/loan agreement should be checked by their legal team as to how to waive an outstanding loan and what the implications of doing so either during lifetime or if this is done via a Will on death.
If after they have sought advice and understood the implications and wished to proceed, then usually a deed of waiver is required to waive the deed in favour of another person or to the trustees.
This would make the outstanding loan into a gift, which would be classified as a potentially exempt transfer (PET) or a chargeable lifetime transfer (CLT) depending on the type of trust used.
Q. With the changes to agricultural and business relief coming in from April, and the proposed changes bringing most unused pension funds into the estate for inheritance tax purposes from 2027, we are looking more and more at whole of life (WOL) policies to cover the potential liability and putting these policies in trust for the estate beneficiaries. Could you help with some key considerations we should be looking at when making this recommendation please?
A. While we cannot give advice on this, and you’ll need to consider the usual factors such as affordability, suitability and the clients seeking legal and tax advice on the implications if using trusts, we would make the following comments:
Regarding the WOL policy and holding this in a discretionary trust, with regard to joint settlors:
Where joint settlors create the trust, each settlor’s portion of the fund is treated as a separate trust, or ‘settlement’ for IHT with its own nil rate band. The rate of IHT payable on the principal charge dates or exits is calculated independently.
As long as the two settlors have paid the same amount to the trust and have made no chargeable transfers in the seven years prior to its creation, the charges will be the same in respect of each settlement.
However, if there are differences in the amounts gifted, investments made, or the seven-year history of chargeable transfers, the IHT charges may differ for each settlement.
If multiple trusts are being considered under the Rysaffe planning principle, you’ll need to consider the cumulative values of these as well as any same day additions rules for trusts. See links below:
IHTM42253 – The settlor: more than one settlor – HMRC internal manual – GOV.UK
When looking at premiums and funding this, they would be deemed gifts, however, the gifts out of normal expenditure from income exemption can be used if the client meets the qualifying criteria.
Please see IHTM14241 – Lifetime transfers: conditions for normal out of income exemption: normal expenditure – HMRC internal manual – GOV.UK. The £3,000 annual exemption could be used in conjunction with this exemption.
If the client’s income is insufficient to justify this exemption, the type of trust will determine if each premium the settlor(s) pay is a potentially exempt transfer (PET) if absolute/bare trust or chargeable lifetime transfer (CLT) if discretionary trust.
For relevant property and considering the principal and exit charges, the ‘trust fund’ value to set against the Nil Rate Band (NRB) is the higher of:
1. the sum of premiums paid (the normal expenditure exemption doesn’t apply at the 10-year point, so even if premiums going in were covered by this, it doesn’t matter, the sum of premiums paid could still be used at the 10-year point).
or
2. the ‘Market Value’ which could be the surrender value or, if the client is in poor health, it would usually be the sum assured or possibly an amount higher than this, if anyone is willing to pay more on the open market.
So, if the client is in good health and there’s no, or little surrender value attached to the policy, then the minimum value to use would be the sum of premiums paid.
If the policy has been in force for a long time and the premiums are high, then it is possible that the total premiums paid could exceed the NRB.
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