This allowance is cumulative, so a policyholder can take 5% for 20 years, 4% for 25 years and so on, but if this is exceeded then a chargeable gain will arise.
If the regular payments are kept within this 5% allowance, then there should be no immediate liability on the settlor or the trustees. In some instance an ongoing adviser charge may form part of the 5% allowance so this would have to be factored in.
An investment bond can therefore be a very efficient way of generating regular payments and as any growth or income achieved by the fund remains in the bond it is a simple solution for trustees. In the normal course of events, there should be no need for the client or trustees to complete annual tax returns.
If a chargeable gain arises, then depending on the timing and type of trust used a tax charge could arise on the settlor, the trustees or the beneficiaries, so it is important to work with the settlor to make sure any potential tax liability is minimised.
Conclusion
Many clients will want, or need, regular payments to supplement their income, for example in retirement, and receiving a fixed amount every month, quarter, six months or year could be attractive. In such circumstances a discounted gift trust can appear inflexible, as the payments to the settlor cannot be varied or money paid out to a beneficiary during the settlor’s lifetime, but this may not be a concern.
The arrangement allows a client to budget easily for known expenditure and could form part of an overall strategy in later life. The deferral of income tax provided by the investment bond can provide tax-efficiency and could reduce the amount of taxable pension income required, preserving a larger amount in a pension wrapper.
Canada Life offers a range of wealth management solutions, including retirement income planning, estate planning and investment solutions from a choice of jurisdictions, including the UK, Isle of Man and Republic of Ireland.
