The Generation Game: Looking Beyond the First Seven Years

The Generation Game: Looking Beyond the First Seven Years

Flexible Reversionary Trusts can provide significant benefits to clients, but there is another part of the conversation worth considering.

We have heard a great deal in recent years about the substantial transfer of wealth expected to take place between generations over the next 30 years or so. At the same time, the direction of travel for Inheritance Tax legislation is becoming increasingly clear.

The need for effective, long-term estate planning has never been greater.

For me, we can sometimes place too much focus on what happens at the seven-year mark, when the real value of planning may be many years beyond that.

This is where the choice of tax regime, how that regime operates within a Trust and the functionality it provides can make a significant difference.

A Trust Deed will often give Trustees the power to make loans. However, where a Trust holds an investment bond, making and subsequently repaying loans can be less straightforward in practice. While it can certainly be done, the process can be relatively cumbersome, particularly where repaid funds then need to be reinvested.

I wonder how many advisers reading this have actually arranged a loan from a Trust holding a bond?

With a bond held in Trust, there will often come a point where the bond is assigned to a Beneficiary. In some circumstances, this may be entirely appropriate. However, it is worth considering the wider estate-planning implications.

Once the asset is assigned to the Beneficiary, it becomes part of their estate for Inheritance Tax purposes and may also be exposed to their wider personal circumstances, including events such as divorce or bankruptcy.

An alternative is a Capital Gains Tax-assessable Trust, such as the Flexible Reversionary Trust available through WAY Trustees Limited, where assets can be loaned from the Trust at any time.

The ability to make loans from the Trust can provide an additional layer of flexibility, helping to protect wealth in the hands of Beneficiaries while facilitating genuine intergenerational planning. Where assets can be loaned, rather than distributed outright, there may also be opportunities to assist with future tax planning and the management of Exit Charges.

Loans can be made and repaid, with funds simply returning to the original Trustee investment.

Nice. Clean. Simple.

For me, the important point is not that one tax regime is better than another. Rather, it is about selecting the most appropriate structure for the client’s objectives and considering not only the first seven years, but what happens to that wealth for generations beyond that.

And that is perhaps a conversation worth having.

If you have a case where the ability to loan assets from Trust could add another dimension to the estate planning, we’d be happy to explore it with you.