Stand-out Q – bypass trust…

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MON, 05 FEB 2018

Our Technical Hub provides access to a wide range of pension tax and trust technical resources. Every now and then we post tweets covering stand out questions from our technical content and our answers in case others might also find them helpful. As Twitter’s character restrictions only allow for the bare bones of the Q&A we link to the details here, too.

Question

What impact do the pension freedom changes have on the appeal of the bypass trust?

Answer

From a tax perspective, the bypass trust has lost its appeal.

This is because a payment of a lump sum death benefit (LSDB) where the member died after attaining age 75 (or died before attaining 75 but the LSDB was paid out after two years from the members death) will suffer a special lump sum benefit charge at the rate of 45% when paid to a trust. That said where an LSDB has been paid into a trust since 6 April 2016 there is tax relief available. If the net funds are paid out to a beneficiary they will receive a 45% tax credit. The 45% tax credit can be offset against the beneficiary’s tax liability in the tax year the net funds are received and HMRC have confirmed that if the beneficiary’s total tax liability is lower than the 45% tax credit then they can claim a tax refund for the difference. So the main drawback is the loss of future growth on the 45% tax charge at outset.

The other issue to remember is the harsh taxation regime of discretionary trusts compared to the low taxed environment of a pension fund.

Whilst the pension changes diminish the tax appeal of the bypass trust, there are still other reasons for having one and these include:

• To safeguard capital for children/grandchildren from a previous marriage
• The value of the trust fund not being assessable for state benefit purposes including long term care
• Potentially greater protection in terms of safeguarding capital for the member’s intended beneficiaries in the event of the death, divorce or bankruptcy of the beneficiary
• Loans can be made to trust beneficiaries to create a debt on their IHT estate

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