- Retired with sufficient pension income.
- Already started considering inheritance tax planning.
- Only one grandchild, Sarah, aged 3.
- Wants to make provision for Sarah when she is older and responsible.
- Has £125,000 available for this.
The Controlled Access Account
Some years ago Connor set up a discretionary trust to put £325,000 aside for his children, however there is still enough wealth in his estate to mean that inheritance tax would be payable when he dies. He has an amount of £125,000 that he wishes to place in trust for his granddaughter, Sarah, who is only 3. He thinks this money could be helpful for future expenses such as university costs, or a deposit on a house.
Connor is aware that some arrangements allow Sarah to take control of the money when she reaches 18, however as this could be a significant amount of money in 15 years’ time he would prefer that trustees have some control of how and when Sarah will benefit.
He speaks with his professional adviser and invests in a Controlled Access Account from Canada Life International.
This is a specific type of trust that allows the trustees to control when the benefits are paid to the beneficiary, even after age 18. The trustees invested the cash into a series of international life assurance policies, each of which had a maturity date selected at outset. The maturity dates are arranged so that they occur in consecutive years, starting just before Sarah becomes 4 and ending just before her 18th birthday.
Prior to Sarah’s 18th birthday the trustees have the option of deferring these maturity dates if the proceeds of the policies are not required.
As there is no immediate need for the money, the trustees keep deferring the policy maturities until Sarah reaches 11, when they decide to let some policies mature so that the proceeds can be used for Sarah’s benefit. The income tax liability on this maturity is assessed on Sarah, as she made use of her personal allowance and starting rate band, there was no tax to pay.
A similar procedure was adopted at each subsequent anniversary, with some policies maturing and some being deferred.
In the year prior to Sarah’s 18th birthday the trustees plan when Sarah should receive the money as once Sarah reaches 18 they will no longer be able to defer the maturities. They consider Sarah’s character and financial requirements (both of which were much clearer than when she was three years old) and decide to allow some policies to mature just before her 18th birthday. Of the remainder, they defer some to when she is 21, some to 25 and some to 31.
- The arrangement makes use of a bare trust so once Connor survives seven years the gift is outside of his estate for inheritance tax purposes.
- The money in the trust does not automatically revert to Sarah on her 18th birthday as a conventional bare trust would, so the trustees retain control.
- The income tax liability on payments from the trust is accessible on Sarah and given her age and lack of other income, there is no tax liability to be paid.
- The value of investments can fall as well as rise and you should speak to a professional adviser to ensure that any investment is suitable for you.