Gift Trusts Guide for Advisers
Gift Trust
Use the links below, to navigate through the page.
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- Click to view page: How to set up a Gift Trust?
- Click to view page: How should the trust fund be invested?
- Click to view page: Who should be a trustee?
- Click to view page: What are absolute and discretionary beneficiaries?
- Click to view page: What happens if someone dies?
- Click to view page: What income tax is payable when using a Gift Trust?
What is a Gift Trust?
A Gift Trust allows a sum of money to be invested in an onshore investment bond, which is written in trust in order to:
- give away a lump sum;
- achieve a reduction in estate value for Inheritance Tax purposes, if the client survives seven years from the gift date;
- prevent any growth in the lump sum creating a potential inheritance tax liability.
Why consider a Gift Trust?
A Gift Trust enables the client to select trustees who will administer the trust and distribute the trust fund to the beneficiaries.
Increasing numbers of people are finding that their estates may be subject to Inheritance Tax. Everyone is allowed to leave an amount up to £325,000 (current ‘nil rate band’ fixed until the end of the 2027/28 tax year) to their beneficiaries without incurring any Inheritance Tax. Above this limit, it is usually charged at 40%. Tailored advice on Inheritance Tax planning and mitigation is important.
A Gift Trust will have the effect of reducing potential tax liability if your client is able to consider giving away a substantial sum.
Generally, an investor for whom this trust arrangement would be appropriate will:
- have a net estate exceeding £325,000;
- wish and be able to give assets away;
- have surplus capital to which they need no access in the future; and
- be at least 18 years of age.
What are the benefits at a glance?
Clients can use a Gift Trust with the HSBC Life Onshore Investment Bond (the Bond) to help them reduce their potential liability to Inheritance Tax as part of their estate planning.Some of the main benefits are listed below:
- Direct investment into the fund – the Bond invests directly into collective investments such as open-ended investment companies (OEICS) and unit trusts, not ‘mirror funds’.
- Flexibility – the Bond can be split into a maximum of 1,200 segments to allow tax planning flexibility.
- Transparent charging structure – all transactions are undertaken through a cash account showing charges for investment, administration and advice.
- Individual tax calculations – we calculate the tax liability individually for each Bond, according to funds held.
- Value for money – by linking to the actual funds offered by fund managers (rather than replicating those funds ourselves), we can offer a competitively priced proposition with minimal administration costs.
How does a Gift Trust work?
Although there are two ways of creating a Gift Trust, the arrangement simply requires clients to make a gift to their trustees to be held on the terms of a trust of their choosing.
Clients can choose between an absolute and a discretionary trust depending on their requirements. Further down this page, there are more details about the differences between these two types of trust.
The trust will be administered by the chosen trustees who are also responsible for distributing the trust fund to the beneficiaries either during your client’s lifetime or after their death. The trust settlor will automatically be a trustee, but at least one other trustee must be appointed who can deal with the trust in the event of the settlor’s death.
How does a Gift Trust benefit an individual?
Yes, HSBC Life Gift Trusts are set up using the HSBC Life Onshore Investment Bond to benefit nominated individuals, who are also known as beneficiaries. The trustees decide on these individuals when creating an absolute or discretionary trust.
What are the different types of Gift Trust?
A Gift Trust can be set up as an absolute or discretionary trust. When deciding on which type of trust, your client will need to consider:
- how much flexibility they wish to have in changing the beneficiaries at a later date;
- how much control they wish the trustees to have over the trust fund and how their chosen beneficiaries may benefit from it;
- and how the trust is treated for Inheritance Tax purposes.
Absolute trust
Discretionary trust
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This trust can be used if the client knows exactly who should benefit from the trust fund after their death. When creating the trust, the Settlor must specify both the beneficiary(ies) and, if more than one, the share of the trust fund to which they are each entitled. They cannot change their mind at a later date so this needs to be factored into their estate planning.
An advantage of an absolute trust is that the gift will be treated as a potentially exempt transfer for Inheritance Tax purposes. This means that there will be no immediate Inheritance Tax charge and, provided that your client survives for at least seven years after making the gift, the whole of the trust fund will be free from Inheritance Tax on their death.
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This trust may be chosen if your client wants to retain some flexibility over who will benefit. No beneficiary will have a fixed right to anything; instead, it will be up to the trustees to decide who will benefit, in what proportion and when the trust fund will be distributed. The trust deed sets out the classes of beneficiaries who can benefit, and your client can add named individuals to this list.
It is normal for trustees to be provided with a letter outlining your client’s wishes about who should benefit, but although they can take these wishes into account, they are not bound to act in accordance with them.
The HSBC Life Trust Decision Tree may be helpful to chat through with your clients.
How to set up a Gift Trust
1. Complete the appropriate trust deed, either for an absolute or discretionary trust
2. Appoint additional trustees, if you are a sole settlor
3. The HSBC Life Onshore Bond application is then completed, or if already set up, it is transferred into the names of the Trustees by completing the Gift Trust Deed
How should the trust fund be invested?
Who should be a trustee?
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A Gift Trust is a long-term arrangement, so it is essential that the widest investment choice is available. With the HSBC Life Onshore Investment Bond, your client and their co-trustees can access the expertise of investment managers across a range of fund management groups.
Initially, the investment will be allocated to the cash account in the Bond pending the purchase of fund holdings. This cash account, apportioned equally across the policies in the Bond, forms part of the investment portfolio and is used to debit the cost of fund purchases and credit the proceeds from fund sales.
Once the investment is allocated to the Bond, your client can then build a portfolio from a choice of collective investments such as open-ended collective investments (OEICs) and unit trusts.
Other than the minimum investment levels which apply to each asset held in the portfolio, there are no restrictions on how the investment can be spread.
The cash account can also be used to hold monies awaiting investment or as a cash shelter in times of market volatility.
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The settlor of the trust will automatically be a trustee, but they will need to appoint at least one other trustee to act with them. Joint settlors will also need to appoint at least one additional trustee to act with them.
A trustee must be someone your client can rely on to act according to their wishes, so they should choose with care.
Your client can appoint anyone to be a trustee, provided they are over the age of 18 years and have full mental capacity. There must be at least two trustees to administer the trust. If they wish, your client can appoint a beneficiary under the trust as trustee.
Your client may prefer to appoint a professional trustee, such as their solicitor, but please bear in mind professional trustees are permitted to charge for their services.
The role of the trustees is to manage the trust assets in accordance with the terms of the trust deed.
Whilst the only asset held in your client’s trust is the HSBC Life Onshore Investment Bond, their trustees will have little to do to administer the trust fund. In particular, they will not need to complete trustee tax returns as part of their trustee investment duties.
What are absolute and discretionary beneficiaries?
The choice of who should benefit from the trust during your client’s life or in the event of their death rests with your client and their trustees.
Anyone other than a settlor of the trust can be a beneficiary. Whether or not the beneficiaries are fixed at the outset and how a beneficiary is treated for tax and other purposes will depend on whether an absolute or discretionary trust has been created.
- Absolute beneficiaries
Under an absolute trust, your client will name those they wish to benefit and the shares they should take. Once they have made this choice, they cannot change their mind.
The trustees will usually have to retain the trust fund where there are minor beneficiaries until each beneficiary reaches age 18 (16 in Scotland).
- Discretionary beneficiaries
Under a discretionary trust, the beneficiaries are described as a class of individuals such as your client’s children, grandchildren, nieces, nephew, spouse or surviving spouse (unless your client created the trust as joint settlors or deliberately excluded their spouse) and the spouse or surviving spouse of any of their beneficiaries.
A discretionary beneficiary does not have an automatic right to receive anything under the trust – they only have the right to be considered by the trustees. The trustees can exclude a beneficiary, and your client can add to the class of beneficiaries during their lifetime.
What happens if someone dies?
If someone associated with the trust dies, the trustees should notify us as soon as possible. We need to know if:
- a trustee dies; or
- a life insured dies.
What happens if a trustee dies?
If a trustee dies, the remaining trustees must advise us of this and provide evidence in the form of a copy of the Death Certificate.
If, following the death of a trustee, only one trustee remains, the settlor or the surviving trustee should appoint a new trustee to act with them. We can provide a suitable deed for this purpose.
What happens if a life insured dies?
What happens if a beneficiary dies?
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If one of the lives insured dies but is survived by other lives insured, there will be no effect on the trust, and the Bond will continue.
The trustees must claim the proceeds if the last surviving life insured dies. Whether they distribute these or retain and reinvest them will depend on whether the trust is absolute or discretionary and the beneficiaries' circumstances. In these circumstances, the trustees may need to open a trustee bank account.
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If a beneficiary of an absolute trust dies, the value of the trust fund will be included in the beneficiary’s estate for Inheritance Tax purposes.
If a beneficiary of a discretionary trust dies, there will be no Inheritance Tax implications insofar as your client’s Gift Trust is concerned.
What income tax is payable when using a Gift Trust?
With an absolute trust, any gain is assessed on the beneficiary, regardless of age. The only exception is where the beneficiary is the minor (unmarried) child of the person who created the trust, in which case any gain in excess of £100 will be assessed on the parent.
With discretionary trusts, the person liable for the tax will depend upon the circumstances at the time.
The taxation of discretionary trusts
The rate for taxation of trusts will depend upon whom the liability falls.
– The settlor will be charged at their highest marginal rate
– If the settlor cannot be taxed (because they are either deceased or a non-UK resident), then the UK resident trustees will be taxed at 45%, but will also receive a credit for basic rate tax of 20%
– Where a beneficiary is liable, the tax paid will depend on their personal income tax position
Suppose trustees wish to take regular payments from the Bond to make payments to a beneficiary. In that case, they can do so without causing any immediate income tax charge, provided these do not exceed 5% (in any policy year) of the total investment made.
Any unused part of this allowance can be carried forward, so trustees can potentially defer any income tax liability for which they or their beneficiaries may be liable until 100% of their investment has been withdrawn, or the Bond ends.
Any amount over the 5% yearly allowance may be subject to income tax. If your client is liable for this, it could reduce any age-related income tax allowances they receive. Personal allowances on income exceeding £100,000 may also be affected.