Prudence Inheritance Bond

The Prudence Inheritance Bond is a well-established plan designed with the aim of meeting key requirements for effective Inheritance Tax (IHT) planning. 

Similar to a standard discounted gift trust, capital is gifted into trust, while the client gets regular payments and the value of the gift may be immediately discounted for IHT purposes.

The plan provides:

• the potential to reduce the prospective IHT liability immediately,

• the facility for the client to take regular payments to help maintain their existing lifestyle, and

• the opportunity for the gifted capital to grow

But Prudence Inheritance Bond has been designed to do more than this. Its exceptional structure means that it offers a number of distinctive features.

• A natural income stream: it pays the income naturally generated by the investment, so this will not eat into the beneficiaries’ inheritance. The natural income is not fixed – the value of the bond may fluctuate and is therefore not guaranteed - but the fund is managed in a way that aims to keep payments steady over time.
• Flexibility to take or save the natural income: any natural income not required can either be redirected into a choice of funds and taken at any time or saved for the future.  Please note that any natural income saved and waiting to be paid will be included in your client's estate for IHT purposes and may incur tax liabilities.
  
• Lump sum withdrawals: it is possible to withdraw lump sums from the Endowment Plan but these can only be taken from the value of any natural income that has been previously redirected into funds held under that plan.  Your clients can take up to 5% of each investment without having to pay immediate income tax. They might have to pay income tax if over this allowance. This is based on our current understanding of current tax legislation and HM Revenue & Customs practice, both of which may change without notice. The impact of taxation depends on individual circumstances.
• Potential Income Tax benefits: the bond is designed to reduce the potential for Income Tax, particularly on the death. This could mean a substantial saving. 

Your client can invest a single payment of at least £15,000 as either an Absolute trust or Discretionary trust (after deduction of any Set-up Adviser Charge if applicable).

Please download the Key Features document (PDF) for more information.

The bond consists of two plans - the Endowment Plan, which provides an income until your client dies or until maturity - whichever comes first, and a Whole of Life Plan, which holds your clients gifted capital plus any growth and provides a capital sum on their death. 

Due to the structure of the bond, neither the Whole of Life Plan nor the Endowment Plan has a surrender value and it is not possible to surrender either of them.

Switching is not permitted on the Prudence Inheritance Bond Capital Fund or Income Fund. However, switching of redirected natural income is permitted. Switching charges do not apply however we might change our charges in the future.

The Prudence Inheritance Bond is suitable for:

• older investors looking to mitigate a potential IHT liability 

• clients looking to invest individually or with another person, who must be a spouse or civil partner

The minimum age at entry is 18 next birthday.
The maximum age at entry is 90 next birthday.

The bond is available on a single life or joint life basis.

The minimum investment is £15,000, after any Set-up Adviser Charge deductions.

If the customer wishes to make any additional investments, they cannot be added to the existing investment.  A new Prudence Inheritance Bond would have to be established.

As your client is entitled to regular payments of natural income, the value of the initial gift may be discounted for Inheritance Tax purposes. As a result, the potential tax liability on the estate may be immediately reduced when the trust is set up.

The discounted value takes into account the value of the regular payments your client could expect to receive during the rest of their lifetime. This will depend primarily on age and state of health.

The actual amount will be decided by HMRC if or when a charge arises, but we will provide an indication which may help in any negotiations. Our Discounted Gift Calculator can provide an estimate of the discount.

The Prudence Inheritance Bond can be written on either an Absolute or Discretionary basis, depending on your client’s needs.

Absolute trust

Your client must select the beneficiaries and their share of the trust fund when setting this up. May be suitable if your client is sure of how they would like trust assets to be distributed.

Discretionary trust

Trustees have the discretion to make distributions to anyone from a wide class of beneficiaries. May be suitable if your client is unsure who they would like trust assets to be distributed to.

The Whole of Life Plan

The amount your client's beneficiaries receive on death is not guaranteed and will depend on:

• how much has been paid in

• how long the money has been invested

• our investment performance over the time the money has been invested, and

• our charges

On your client's death, the Whole of Life Plan under their bond ends (if the bond was taken out on the lives of two people, it will end when both lives assured have died). At this point, we'll pay out the value of the units in the Prudence Inheritance Bond Capital Fund.

Your client's personal illustration shows how much your client and their beneficiaries could receive. Please remember that the amounts shown in the illustration are not guaranteed.

The Endowment Plan

If your client dies before their Endowment Plan matures, we'll pay out a death benefit of £100 plus the balance of any natural income waiting to be paid and the value of any natural income which has been re-directed.

If the Endowment Plan matures, at the policy anniversary after age 105 (based on the younger life for joint policies), we will pay out:

• an amount equal to the value of the Whole of Life Plan; and

• the value of the Endowment Plan, which includes the balance of any natural income waiting to be paid and the value of any natural income which has been re-directed

We will take a charge every year to cover the cost of setting up the plan and managing the investments.

There are also further costs which aren't covered by the Annual Management Charge. These can include, for example, maintenance costs for property investments and costs associated with investing in infrastructure, such as utilities, transport and renewable energy. These can vary over time.

Here are the current levels:

The AMC is reflected in the unit price for the funds listed, and so too are any Further Costs.

Further information on how much we charge for each fund can be found in the Prudence Inheritance Bond Fund Guide (PDF) which you can share with your clients.

The level and shape of Adviser Charging is agree between the individual Adviser and the client. There are two types of Adviser Charge.

• Set-up Adviser Charge: deducted from the client's payment before it is invested in the plan.
• Ongoing Adviser Charge: taken at a plan level out of the natural income generated and treated as a regular withdrawal for Income Tax purposes. Maximum limits apply to the amount of Ongoing Adviser Charges that can be deducted from your client's bond. These charges are paid from the quarterly distributions of natural income.