Isaac’s goals
Isaac has some spare income and would like to start saving for his children’s future. He wants to put money aside on a monthly basis and save in a tax-efficient way.
Regular saving
After speaking with his financial adviser, Isaac opens an Offshore Savings Account, paying in £1,000 every month.
Isaac’s financial adviser also recommends that he puts the account into a discretionary gift trust, with his children and potential grandchildren as the beneficiaries, and Isaac and his wife as trustees.
Reducing inheritance tax
Gifts of surplus income can be made, and they are exempt from inheritance tax as long as this doesn’t affect your normal standard of living, and you have an established pattern of giving your surplus income away. Isaac has chosen to put his Offshore Savings Account in trust, so each monthly premium of £1,000 will be a gift into the trust. Currently, he has enough income to afford the premiums and maintain his normal standard of living, so the money he pays into the Offshore Savings Account is covered by this exemption. Premiums covered by this exemption, and any growth on the Offshore Savings Account, are immediately outside of his estate. Isaac understands that these premiums are an ongoing commitment, and he might not be able to use this exemption if his own income needs change, so he agrees to have regular reviews with his financial adviser to consider this.
Supporting his children
Years later, Isaac’s children have settled into their careers and are looking to buy their own homes. The trustees, including Isaac, decide the money in the Offshore Savings Account can help towards a deposit on a house. They speak to their financial adviser, who explains there are different ways of taking money from the Offshore Savings Account, and there may be income tax to pay if taking the money out results in a chargeable event gain. After talking about this, they withdraw a lump sum amount within the 5% tax deferred allowance. The financial adviser has confirmed this is the most tax efficient way, as there is no immediate chargeable event gain resulting in an income tax liability for Isaac or the children.
Supporting his grandchildren
Isaac continues to pay money into the account, so the savings start to grow again. As his children grow and have children of their own, Isaac and the other trustees consider using the money to help fund his grandchildren’s education.
Isaac’s grandchildren are beneficiaries of the discretionary gift trust, so the trustees can do this. They remember that there may be income tax to pay depending on how the money is taken out, so they speak to their financial adviser again. The financial adviser sees that there isn’t enough 5% tax deferred allowance available to take the amount they want, so suggests that the trustees surrender individual policies from the Offshore Savings Account instead. As this would cause a chargeable event gain which Isaac would be personally liable to pay income tax on, the financial adviser suggests absolutely appointing the individual policies to the beneficiaries before cashing them in. This means that the chargeable event gain and any income tax is based on the grandchildren’s income tax position, rather than Isaacs’s. As they are non-taxpayers, this is far more tax efficient.
What are the risks?
A chargeable event gain may arise if the last or sole life assured dies, if the whole account or individual policies within it are surrendered, or if the withdrawals taken are more than the tax deferred allowance. Depending on the type of trust used and the circumstances at the time, you, your trustees, or beneficiaries may need to pay income tax when a chargeable event gain arises on your Offshore Savings Account.
The value of your investment can go down as well as up and you may get back less than you invest. The way investments performed in the past is not a guide to how they’ll perform in the future.
Tax rules depend on individual circumstances and may change. Speak to your financial adviser if you need more information on tax.
