Advising individuals in their capacity as trustees is particularly nuanced as opposed to advising them as individuals – there are many different considerations.
What type of trust are they a trustee of? What can it buy? What are their investment duties and responsibilities? And what is the tax treatment of the investments they may potentially hold in their trust?
All these things need considered and naturally lead to the final part of the series.
The sixty-four-thousand-dollar question!
What should they buy?
Trustees can access a wide range of potential investments. Which particular product, or combination of products, is used depends on the specific requirements of each trust. It is clear from the statutory and common law duties that fall on trustees that advising them is fundamentally different to the advice given to individuals.
Unlike individuals, trustees do not have an attitude to risk. They may, as individuals, but that must be set aside when they are acting as trustees. Likewise, an assessment of capacity for loss is standard for individuals but meaningless for trustees. What is clear is that trustees must invest in a way that is suitable for the trusts objectives, bearing in mind beneficiaries individual situations, treating all beneficiaries fairly, and in a way that maximises returns but without taking any undue risks.
One of the key drivers of tax impact is the taxation of income. So in investment terms you can invest in an income producing way through the use of OEICs. Alternatively, a non-income producing way with the use of an investment bond wrapper. With open architecture widely available it is not a case of Bond versus OEICs it is a case of whether you want your OEICs bought directly by the trust or indirectly through an insurance wrapper.
The investment bond may of course be driven by investment choice as some funds just can’t be held unwrapped e.g. smoothed funds or those with guarantees. Trustees may be attracted by the simpler taxation and administration that flows from not having income generating assets. But the trust terms may dictate they have no choice. The assignability of an investment bond to an individual without any tax charges may be attractive.
With larger funds or actively manged funds the absence of CGT within the bond wrapper may be attractive for all trustees.
So what should trustees consider.
The investment is likely to be for an under 18 so the beneficiary is unlikely to have any taxable income. Either wrapped or unwrapped may be suitable. If OEICs are held directly then the various tax allowances are likely to be available in full. However, beware parental settlement rules. Bonds could be suitable, it would make administration easier and offshore would seem attractive given the likely availability of the personal allowance, starting rate for savings and personal savings allowance allowing tax free encashments of up to £18,500 (20/21), as well as a tax-free journey.
Interest in Possession
Probably the most complicated as we have beneficiaries with a right to income and beneficiaries with a right to capital. Bonds alone are unlikely to be suitable – it wouldn’t be fair!
It is likely that income will need to be produced for the income beneficiary, the question is how much. The actual circumstances will dictate the balance required between capital appreciation and income production. A bond could be suitable for some of the fund especially if the trustees have the power to advance capital to the IIP beneficiary. Alternatively, a bond could be suitable where the “interest” is generated from other assets e.g. the right to live in a property rent free.
It’s really down to what the trustees are trying to achieve. Given the heavy taxation, administration and complexity of income generated within a discretionary trust trustees might favour a bond wrapper to “turn off” any income. The 5% tax deferred could be used to provide “income” to beneficiaries. The wrapper could shelter larger or actively managed funds Offshore or onshore will probably be determined on the tax status of who will ultimately be liable for any bond gains e.g. if segments are likely to be assigned to non-earners perhaps to pay for university then offshore would seem sensible. Also, where settlor interested becomes an issue bonds may be favoured. OEICs could work here too, perhaps with the creation of a temporary interest in possession to ease the tax burden.
Advising trustees is straightforward. You just need to make sure their investments are suitable …
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