- Aged 45, married with a family
- Income exceeds their modest spending habits
- Accumulating wealth
- The inheritance tax liability payable when he dies is increasing rapidly.
The Offshore Savings Account
As Oscar has significant surplus income he wants to start saving for his children’s future and also wants to reduce the effect of inheritance tax on his estate.
After speaking with his professional adviser, Oscar starts an Offshore Savings Account with Canada Life International, paying in £1,000 each month. The adviser also recommends that the Account is held under a discretionary trust with Oscar’s children and potential grandchildren as the beneficiaries.
Under UK inheritance tax rules, someone can give away surplus income regularly providing that it doesn’t affect their standard of living. As Oscar has surplus income and can afford this investment, the money he pays into the Offshore Savings Account is outside his estate immediately. The investment in the Account can grow free of any UK income tax and capital gains tax, making this a very tax-efficient arrangement.
When his children have left university they are both looking to buy property and settle down in their new jobs. The trustees decide to distribute some money to each child so that it can help towards the deposit on a property.
There is still some money left in the trust and Oscar is continuing to fund it, so the amount available starts to grow again.
As his children grow and have children of their own then the trustees consider using the trust fund to help with education costs for Oscar’s grandchildren.
The trustees have flexibility in how they can raise the money and distribute it. The Account consists of a series of identical international life assurance policies, so the trustees could take withdrawals or cash-in individual policies – whichever is the most tax efficient. If any income tax liability on the growth arises, this is assessed on Oscar, but the trustees can gift individual policies from the trust to a beneficiary. This way any potential income tax liability on any investment gains are assessed on the beneficiary themselves, again, this may be more tax-efficient.
- The regular amounts Oscar invests are outside his estate immediately and no UK inheritance tax will apply to these amounts and any growth on them, when he dies.
- The trustees have flexibility in how and when they distribute money to the beneficiaries.
- As a series of international life assurance policies, the investment can grow free of UK income and capital gains tax.
- Changes to the underlying investments can be made without incurring a UK tax liability.
- The use of a discretionary trust means that the money in the trust is not in the beneficiaries estate either, so will not be subject to inheritance tax should they die, and will not be taken into account should any of the beneficiaries become bankrupt or divorce.
On Oscar’s death
- The money in a discretionary trust does not form part of Oscar’s estate for inheritance tax purposes and neither do the amounts he invested as they were regular and did not affect his standard of living.
- The policies could continue to be held under the trust where the trustees have discretion as to who benefits and when, allowing them flexibility to support Oscar’s children or grandchildren, should they wish.
- 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.