In this article, Julia Peake, Technical Manager at Nucleus shares some technical queries they’ve received as a team, which could assist you when reviewing client queries and recommendations.
Question 1
If a client inherits a pension via beneficiary drawdown and the previous scheme member had capped drawdown, rather than flexi-access drawdown, can this continue or does this need to change to flexi access drawdown?
Answer:
As always, it’s worth checking with the scheme involved as there may be restrictions, but from a technical perspective, the client can stay in capped drawdown and their income flexibility ranges from 0% up to 150% of maximum GAD.
This for many is sufficient and helps manage income sustainability. However the client should consider the impact of GAD reviews depending on their age. Some points below for your consideration if you are thinking which might be more suitable for this client, capped or flexi-access drawdown:
Capped Drawdown
Pension Funding: Annual allowance is £60,000 plus carry forward.
Income limits and GAD reviews: The maximum income has to be reviewed every three years before age 75 and every year from age 75.
The maximum is based on the member’s age at the time of the review unless they are over age 85 when the GAD rate used will be that applicable for an 85-year-old. Work out a basis amount using drawdown pension tables – GOV.UK
Control and timing: If you take more than the max GAD, then the Capped Drawdown will automatically convert to a Flexi Access Drawdown and the MPAA will be triggered.
Pensions and IHT: Restrictions for IHT planning given GAD limits.
Flexi Access Drawdown
Pension Funding: Payments from a beneficiary’s flexi-access drawdown doesn’t trigger the MPAA.
Simplicity: No more GAD reviews, which will get more frequent over age 75.
Legacy Planning: Ensure there is a completed Expression of Wish form and that it is up to date.
Pensions and IHT: From 6 April 2027. Therefore, being able to take taxable (or tax-free) lump sums to spend or gift which are larger than a max GAD withdrawal will permit, could assist the client’s estate planning.
Question 2
I’m currently working with a client who has told me that they have set up a Will and one of the provisions is that the Will has been placed into a ‘Full Discretionary Trust of Revenue.’
The client believes this Will shield all their assets from IHT, is this correct? Could you please explain?
Answer:
Without seeing any documents or deeds, a “Full Discretionary Trust of Revenue,” suggests, that the trustees have full discretion over the income the trust property in the Will trust only.
It is common that most Will trusts have a provision stating that after taxes are paid and special bequests have been made, that the “residue” of the estate is left to the discretionary trustees .
The adviser should check with the client and their legal advisers as to what the terms of the Will trust actually are and also the taxation implications.
In most cases, unless a nil rate band trust is set up or lifetime planning with trusts is done, the estate will be assessed for IHT and dealt with by the personal representatives once the estate has been concluded the estate residue can then be put into trust.
Once the three certainties are present, (intention, beneficiaries, and trust property, which the trustees have legal ownership of), there should be a valid trust.
Please note this general information is not specific to this case. You and your client should liaise with the client’s legal and tax advisers to understand the provisions of the Will trust, the taxation position and if there is a requirement for lifetime trust planning.
Question 3
Could you please explain how to calculate the value of the trust at the 10-year point, where the only trust asset is a whole of life (WOL) policy, I believe you have to consider the higher of:
- Premiums paid to date; or
- Market value, which is related to the health of the life assured.
Answer
When looking at WOL and trusts premiums would be deemed as gifts, and chargeable lifetime transfers (CLTs) if these exceed available exemptions. Normal expenditure out of income exemption might cover the premiums if the client has enough income and still maintain their standard of living without using capital. The £3,000 annual exemption could be used in conjunction with the normal expenditure exemption.
When looking at the principal charge at the 10 year point, the trust fund value 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). IHTM20082 – Life Policies: definitions: ‘premium’ – HMRC internal manual – GOV.UK
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. See IHTM20083 – Life Policies: definitions: ‘surrender value’ and ‘open market value’ – HMRC internal manual – GOV.UK
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.
We would always recommend that if the client is approaching the tenth anniversary of any trust that the trustees seek tax advice and get the principal charge calculations done by a regulated tax adviser, especially if there are multiple trusts the settlor has created as this can impact the Nil Rate Band available.
Main image: Q&A, question, wesley-tingey-FIq7K_wD4jM-unsplash
