European bond proves an education

PARENTS and grandparents who are worried how to fund their family's private school education may find they have an alternative in the shape of a plan developed by an insurance company in Luxembourg.

The Scotsman reported earlier this year on how the government's decision effectively to bring all trusts into the Inheritance Tax (IHT) net could spell the end for accumulation and maintenance (A&M) trusts, which were often set up to provide for children's and grandchildren's educational funding.

Such trusts are common - the tax authorities estimate that more than 50,000 exist, valued in excess of the nil rate band of 285,000.

Ross McLeod, a partner at Whyte Sharp Independent, a firm of independent financial advisers, explained why they appealed to adults wanting to help pay for future generations to be educated.

He said: "The A&M trust emerged as the leading tool to give while still imposing some conditions over the use of the gift. Instead of a direct gift to beneficiaries, assets would be placed in a trust where they would 'accumulate', could be used for the 'maintenance' of a beneficiary, but would only pay out the capital at some pre-determined age, such as 25 years old."

Since the 2006 Budget, transfer into this type of trust is taxable, and the use of trusts in IHT planning is over, according to many experts.

But McLeod says a solution to this problem - to give but limit beneficiary control without suffering a tax penalty - is emerging from the life insurance industry, through Lombard International Assurance in Luxembourg. This is a cross-border company, focusing on tax and estate planning for wealthy families, which is now part of UK-based Friends Provident.

He said: "In continental Europe, the concept of the trust is not widely recognised, but parents and children have just the same characteristics as in the UK. Parents still want to give, but limit control, and giving a life insurance bond with built-in restrictions has been a common practice.

"Lombard has successfully applied the continental know-how of building estate planning into a life policy to create a new A&M plan.

"Lombard's new plan does not use a trust. Instead, it builds in trust-type planning to a customised offshore bond, achieving both the estate planning and the tax planning advantages the popular trust structure had before the Chancellor intervened. This innovative solution will allow families to minimise IHT liabilities without the worry of 'spoiling' younger generations with uncontrolled access to wealth too soon.

"By using a policy issued by a Luxembourg life company, the investments will enjoy the tax-free roll up of an offshore bond combined with the backing of possibly Europe's strongest policyholder protection regime."

John Allison, an independent marketing consultant to Lombard International SA, said: " It is unusual in my 30-plus years in financial services to find successful tax mitigation imports from the European Union. But Brown's consistent interference with traditional UK products has led the more sophisticated IFAs to seek new robust ideas from Luxembourg.

"The unique benefit of 100 per cent policy holder protection of the invested assets, which is enshrined in the legal system of Luxembourg and the fact the investment rolls-up tax free until encashment will have enormous appeal to the wealthier investor."

Simon Burton, director of specialist tax at Johnston Carmichael, said: "This plan sounds of interest and, on the face of it, it has some of the same characteristics of A&M trusts before the Chancellor's changes. It could be an alternative but I'd have to take a closer look and find out more about the tax treatment.

"Some clients may be put off because its offshore, but it could be suitable for more sophisticated and high-net worth clients."