In our role as advisers, we see a lot of previous advice that hasn’t worked. It is sometimes a little tricky to work out why the advice was given in the first place but sometimes it is obvious.
We have a client who came to us from one of the biggest UK advice firms. They had multiple discounted gift trusts that had been set-up over two decades. The idea of a discounted gift trust is that you gift a lump sum to a trust. The trust invests in an investment bond and returns you a percentage of your initial gift each month. If you die within seven years the gift will be discounted to reflect the fact that you had retained a right to withdrawals, meaning that less Inheritance tax is due. If you survive the seven years the gift will be fully free from Inheritance tax.
In theory it is a handy way of avoiding Inheritance tax whilst retaining some withdrawals to cover your expenditure. They can work well but there is one major flaw, unlike a straightforward discretionary gift trust, the beneficiaries can’t access the capital until you are dead. This lack of flexibility can be a huge problem over such a long time period, as families’ circumstances can change so much.
If they are set-up for clients in their 60s, they are probably in their Golden Go-Go decade of spending. By their 70s Slow-Go decade and 80s No-Go decade it is likely that they will no longer be spending all of the withdrawals, and the capital will start to accrue back in their estate, subject to Inheritance tax.
HMRC do not treat these bond withdrawals as income, and it therefore cannot be gifted away out of surplus income under those rules. In addition, beneficiaries who were in their 30s may now be in their 50s or 60s and need help with mortgages, the cost of children or retirement, and the discounted gift trust doesn’t allow for withdrawals to them.
The family we work with who are most affected by this past advice have had all of these issues. The clients aren’t spending the withdrawals, and they would dearly love to be able to help out their children and grandchildren. In this case these trusts were undoubtedly sold for the 5% upfront fee and the ongoing 1% per annum locked in for life.
It was a better deal financially for the adviser than it ever was for the client.
With the benefit of hindsight what would have been a better solution?
Well firstly, a detailed assessment of this couple’s retirement expenditure needs would have helped to determine that they had some surplus capital. This could have been gifted to a simple discretionary gift trust and would have been exempt after seven years. A married couple can gift any amount up to £650,000 every seven years so there was plenty of head room. This trust would not have been accessible to them but would have grown and could have been used to lend or gift money to their children and grandchildren as and when needed. The remainder of their capital could have been invested in their own names and spent over the course of their retirement as and when needed. This would have given them flexibility to withdraw as much as they wanted in the Go-Go years and less in the later years.
The aim would have been for them to spend this money on living life to the full. If returns were faster than their spending and they ended up with surplus capital later in life they could have looked at further gifts either direct or to another trust. If they still had surplus in their 80s, they could have used Business Relief for its fast acting IHT exempt benefits.
We could be accused of using the benefit of hindsight here, but the key point is that if the planning isn’t flexible then your circumstances can’t change over time.
If it is, it can.
We have been planning people’s estates for them for decades and work with families all over the UK from our office in Hook, Hampshire.