How to cheat death duties

Published on Friday 5 September 2008 22:53

THE current UK inheritance tax (IHT) system encourages the lifetime giving of assets. At the time of death, the total value of the deceased's estate over £312,000 (the "nil-rate band") is typically taxed at 40 per cent before being paid to the beneficiaries. However, if you give your assets away before you die, they do not form part of your estate and are not taxable – the beneficiary of your gift receives the full value without the deduction of IHT. If death occurs w

If you are confident you have enough to live on for the rest of your life and would like your beneficiaries to avoid IHT on the excess, tax planners will say "give it away". However, the idea of giving significant wealth to our children or grandchildren now, without conditions, can be problematic. Assets may be squandered through frivolous spending; mismanagement or naivety. Few of us are ready to handle the acquisition of substantial wealth at, say, 18.

The accumulation and maintenance trust emerged as a leading tool to give while still imposing some conditions over the use of the gift. However, from March 2006, the transfer of assets into this type of trust became taxable, making the use of traditional trusts in IHT planning less attractive.

A potentially new solution to this problem – to give but also to limit beneficiary control without suffering a tax penalty – is now available. In the EU, investing in a life insurance bond with built-in restrictions has become common practice.

Luxembourg insurer Lombard now offers UK investors a plan that does not use a trust. Instead, it builds in trust-type planning to a customised offshore life-assurance bond, thus achieving both the estate-planning and tax-planning advantages previously available under the old trust regime.

This solution allows families to minimise IHT without the worry of "spoiling" younger generations with uncontrolled access to wealth too soon.

Investments can enjoy virtually tax-free roll-up growth similar to an ISA or pension. There is no upper limit to how much capital you can shelter. The investor can benefit from the unique Luxembourg 100 per cent policyholder protection with no upper limit. Independent financial advisers are seeing increasing interest is this type of innovative structure.