Discretionary trusts: cautious optimism [Members]

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  Mogul

  1 Markabey July 17, 2025, 11:59 am

  Thanks for this. We are having similar discussions. Instead of a discretionary trust, we are likely going for gifts to the middle generation to hold until the children are old enough to manage it (eg age 25). As the middle gen are in peak earning years, this puts income/dividends tax into the same high earner income bands as a trust. Which isn’t ideal either.
  What has been suggested by an advisor is a single premium offshore insurance bond to wrap the assets until they are received by the children, upon which the proceeds are taxed as income. This means there is no income to be taxed by the middle generation (except capital gains?). And then when received by the children and the offshore bond is opened, the tax is paid at the children’s rate of income tax age 25 which may or may not be lower than the higher rates now.

  This offshore bond method of deferring tax seems similar to the FIC method you mentioned, but perhaps more accessible to people without an FIC already.

  Has anyone had any experience with single premium offshore insurance bonds?
• 

  Mogul

  2 ermine July 17, 2025, 12:28 pm

  I am tickled by the inherent oxymoron of the term discretionary trust

  Also nobody will insure against the “will they blow the money on something inappropriate” problem.

  engendered because you specifically don’t trust the discretion of the recipients 😉
• 

  Mogul

  3 SkinnyJames July 17, 2025, 12:35 pm

  This is one of my areas so here we go!

  – You can currently contribute more than >£325,000 to a discretionary trust with no immediate inheritance tax charge by contributing assets that qualify for business relief. I know people who have got >£10m into discretionary trust this way with no immediate tax charge. N.b. this is changing next year.

  – The 10 year periodic charge can currently be avoided by switching into assets that qualify for business relief at 7.9 years – allowing you to hold for the 2 years required so that at year 10 you qualify for 100% relief from IHT. This is again changing, and trusts will have a £1m allowance for business relief going forwards.

  – Please don’t assume that because you’ve waited 7 years between gifts you’ve not got an inheritance tax issue. Chargeable lifetime transfers (gifts to discretionary trusts) and potentially exempt transfers (straight gifts to people) can interact with each other on death. Please get tax advice before doing anything with trusts – at the very least read about the 14 year rule.

  – A lot of the annual reporting (assuming no distributions from the trust are made) can be avoided by holding trust assets inside an offshore bond – you benefit from gross rollup on the dividends / income / gains – and tax is only paid when segments of the bond are encashed. These can be assigned out of trust to the beneficiaries and income tax can be paid at their marginal rates (which may be beneficial).

  – Especially if you’ve got a big trust, it would be common to loan monies to beneficiaries interest free, rather than distributing it to them. For example, £10m trust, I loan a beneficiary £2m, they use this to buy a house. A loan is not a distribution from a trust is not taxable as they still have to pay it back eventually. This could protect the family assets in the event of say the beneficiary getting divorced (as they have a £2m house, but also a £2m debt to the trust – net position zero), but would also keep the money out of their estate for IHT purposes – so there will be more for future generations.

  – For a similar reason, you may consider setting up a discretionary trust and immediately loaning the money out, rather than making a straight gift – if you were concerned about divorce etc, or if you expect your children to also have an IHT problem in the future.

  There’s a lot more I could say, and happy to elaborate if anyone is interested.
• 4 The Investor July 17, 2025, 12:44 pm

  @all — Cheers for the comments all, and apologies for those that spent time in moderation purgatory. This shouldn’t happen again, it was because you were new commenters. 🙂
• 

  Mogul

  5 SkinnyJames July 17, 2025, 1:02 pm

  @Markabey – there’s no capital gains within an offshore bond. Growth is eventually taxed as income.

  You can’t transfer an offshore bond – make sure you’re 100% happy with whoever you set it up with. Their financial strength is important as the bond provider legally owns the assets and you just have an insurance relationship with them. The best ones are typically ‘open architecture’ which means they provide just the legal wrapper, and you’re not locked in to whoever is currently managing the investments in it and you can use someone else.

  Your only option for unwiding a bond is typically cashing it in and paying the income tax on the gains (whether at your own rates or assigning to a beneficary and paying it as theirs) – just make sure you’re happy and 100% understand everything before going ahead.

  If you’re not careful bonds can be a way for an adviser to lock you into their ecosystem – as you can’t get out without paying the tax.

  They can also be set up on a life assured or capital redemption basis – there’s an important distinction between the two.

  Life assured – the bond is linked to the life / lives of named people – if you get this wrong and just pick someone who’s relatively old the whole bond could get liquidated if they died – and you could end up with a very unexpected income tax bill.

  Capital redemption – typically means the bond runs for a fixed period of 99 years / until cashed in.

  If you’re intending to move abroad the country you’re going to can have an impact on which struture you go for – as certain jurisdictions only recongise certain bond set ups.
• 

  Mogul

  6 Finumus July 17, 2025, 1:18 pm

  @SkinnyJames
  “it would be common to loan monies to beneficiaries interest free ” – Thank you – absolute banger. This titbit alone has made the whole effort or writing the post worth it.
• 

  Mogul

  7 SkinnyJames July 17, 2025, 1:30 pm

  @Finumus – my pleasure, happy to discuss in more detail if you’d be interested.

  Another common example you might find interesting:

  Mr and Mrs Smith are already high net worth individuals – with an inheritance tax problem.

  Mrs Smith’s mother dies leaving her £1m of cash after IHT is paid.

  Mrs Smith enacts a deed of variation. This effectively re-writes her mother’s will, and she re-directs the £1m of cash into a discretionary trust that has been created by the re-written will.

  Mrs Smith and her children are potential beneficiaries of the discretionary trust.

  The £1m is then loaned out to Mrs Smith – who is free to spend / use it pretty much as she likes. (Incidentally as long as the loan doesn’t accrue interest there’s usually not a periodic charge for the trust).

  When Mrs Smith dies, she has a £1m debt to the trust, which is netted off of her assets for inheritance tax purposes, and once the money is paid back it can be used by her children.

  She’s both had the benefit of a) being able to use the inheritance from her mother, and b) keeping it outside of her own estate.
• 

  Mogul

  8 Finumus July 17, 2025, 1:58 pm

  @SkinnyJames
  OK – wow – that’s also an astonishing idea. This has really got the gears grinding on other ways to use this loan structure – How do I get in touch with you? Are you on Twitter? You can DM me @Finumus1
• 

  Mogul

  9 SkinnyJames July 17, 2025, 3:45 pm

  @Finumus – I’ve sent you a DM on Twitter.

  If you’re thinking that you could use the loan to buy more IHT free assets (like Business Relief qualifying) – sadly that is not allowed! 🙂