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Financial help/query please


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No I don't want your dosh!


My Mother is in the 3rd year of her 5 year "assessment period" by The Pension Service. Since she was assessed, her capital has grown by approx 50% or approx 16% per annum.


Now I'd like to say that is entirely due to my investment skills but that would only be partly true, it's also due to her spending less money through failing health and sepending more time at home. Sad but true.


Mother wants her capital she was assessed on, to fall back to where it was in 2004 by the time she is re-assessed in 2009 and wants to do it legally of course. The reasons being that certain benefits, i.e. Council Tax benefit would remain in place.


Having looked at Chancellor Darlings offers of £3k per annum in tax free giving, (6K if you didn't use last years allowance), other than the "regular gifts", birthdays etc, are ther any other legal ways to avoid possibly paying IHT should Mother pass away before the 7 year rule?


Also what is reasonable for "regular giving"? The Gov website says that this money must come from income, not capital.


Any guidance would be appreciated and many thanks in advance.






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Hi Martyn


Yes there is a way - With a thing called a capital redemption bond (a type of investment account) coupled to a Discounted Gift Trust.


How it works is that a special type of Investment Bond is set up on a capital redemption basis rather than the more usual Life assurance basis. If it was set up on a Life assurance basis the fund remains your mothers and so no IHT benefit is gained.


But when it is set up on the Capital Redemption Basis the monies become technically owned by the Trustees of the Discounted Gift Trust.


You and your Mum, as well as any other beneficiaries are named as lives assured under the Bond.


The inland revenue then sees the money as no longer being owned by your mum - she has given it away to the trust and the Trust is obliged to give her back 5% (can be less can be more) a year for income.


However technically this income is in fact return of the original capital and so no tax is payable.


Because the money is given to the trust, the Inland Revenue gives an initial discount against IHT. This discount varies with age and usually a medical report is required on elderly people. Obviously the IR is wary of people writing these highly advantageous schemes on their deathbed.


The monies that do not form part of the initial discount then form a gift that falls outside of your mums estate after 7 years.


So in summary you can get some out straight away, all of it if your mum survives 7 years and for the rest of her life she enjoys a regular income.


On her death after 7 years her name is simply removed from the policy and the new owners (those named as subsidiary lives assured) can do what they want with the money. It does not form part of her estate.


If your Mum dies within the 7 years, then the sliding PET scale (Potentially Exempt Transfer – NOTE actually not called this anymore but for simplicity I will use the old terminology)


The plan is written in segments (usually 100, 1000 or 99 or whatever) so if some want to leave the investment as is they can keep their segments whilst those that want to encash to pay of a mortgage, spend it or whatever, all they have to do is to provide written instructions to encash. On the death of your mum full ownership of the segments allocated transfers to them. They can do nothing with it before your Mum dies because under the trust she has a life interest.


Let me know you Mums age and I will tell you what initial discount she would enjoy - but do remember if she is ill this discount could be reduced.


If you want any more info or wish to discuss it in more detail then please PM me. I am an authorised IFA regulated by the FSA.


Hope this helps.




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Hello Clive, firstly let me say a huge thankyou for the fullness of your reply on behalf of myself and my Mother.


Mother is 81 yrs young and in reasonable health, and not a deathbed case as you advise of so no fears there although of course I'm no Doctor!


I will be eager to hear the discount you mention and will of course keep you informed of Mothers' decision regarding this. Is it too premature to ask what sort of costs would be involved to set up the Capital Redemption Bond?


Thankyou again for your reply







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Morning Martyn


I am out for much of the day but will get an initial figure from our techies either later today or tomorrow. The following link to the Revenue’s own website gives a good overview and a useful example calculation of the discount:-




I reproduce HMC&R example here




£ 100,000 investment


Female aged 76 next birthday


“Withdrawals” of 5% per annum, payable monthly, flat rate


The Open Market value of the policy would be calculated as £100,000 (the investment) less the value of the withdrawals (@ 0.05% = £5,000) less the purchase factor (@ 9.428 = £47,140) less costs, say, £1140 giving a value of £46,000.


The value transferred is therefore £54,000 [£100,000 minus £46,000]. This figure should appear on form D3.



So in this case the value transferred (or the Discount) is £54,000. A potential IHT saving of £21,600 (£54,000 @ 40% = £21,600) So in this example if the 76 year old lady dies within the first 7 years of taking out the plan then £54,000 is outside her estate but the remaining £46,000 would be subject to IHT at 40%.


If she survives 7 years then the £46,000 falls outside of her estate as well. This would obviously mean that the saving would be a full £40,000 of IHT that her beneficiaries do not have to pay.


However the issue with your Mum is her age and her health. At age 81 her Life expectancy is (sadly) not a great deal more than the 7 years. So the discount that HMR&C would allow would be a fair bit less than the 54% allocated to a 76 year old.


But when the option is to-


A) Do nothing and definitely pay 40% IHT or…… - do something!

B) Best option usually is to set up one of the above and get some initial discount and hope that your Mum beats the odds and survives the 7 years.


As regards costs, these plans are normally set up so that over the first five years there is an establishment charge each year so you do not have to pay an up front charge for the setting up of the plan, the actuarial calculation of your mothers discount, or the setting up of the trust.


Some Life Offices also offer a Trustee Service at no extra charge as well and in my professional opinion I believe this to be very good value indeed.


Talking of Life Offices Some life offices have much lower charges, or higher allocation rates than others. Some life offices have a much broader fund choice, which may better suit your attitude to risk – for example the last one of these we did was end of last year for a 79 year old and I advised the trustees to place most of the funds in a Cash Fund (same as money on deposit in a bank/building society account) and now we have a meeting scheduled to re-appraise the investment strategy in the light of interest rate changes and the prospect of a recovery in the property and other markets.


The investment expertise of some life offices leaves can be a bit “iffy” – as can the admin of some. So we would take these things into account.


Perhaps more importantly the wording of the trust is now critical because of the new POAT (Pre Owned Asset Tax) which is another stealth tax Gordon introduced when the revenue failed to win three successive cases in law trying to overturn UK Trust Law so that the tax take could be increased. As I say, they failed, but in a fit of pique, Gordon then simply introduced a new tax – POAT.


Here I would make a STRONG recommendation – I would urge you to use the standard Trust – “off the shelf” as provided as part of the package by the Life Office. The reason for this is that whilst it is possible to use a Solicitor who will write a trust for you, if the law changes as it did with the POAT, then that solicitors wording may well be virtually useless.


However, in contrast, the Life Offices with their huge resources available were able to assess the new rules and produce wordings that made sure this new tax did not apply to their trusts. They then simply provided retrospective updated wording for all the existing plans free of charge.


I know for a fact that most solicitors are not contacting their clients to do this and if they are they will charge for it! So there will be some unlucky souls out there that will have a Discounted gift trust that works well enough for IHT but could well be then subject to the new POAT.


In contrast, I am delighted to say that all of our clients potentially affected by this change (and I expect all clients of IFA’s across the country) have had the new Trust Wording applied re the POAT. And as I say this was done by the Life Offices that supply the plan at no cost to us or the client.


The Life Offices are dealing with these Trust Wordings on a daily basis with the IR simply because they deal with so many cases. They can also afford the very best legal brains in the country. In contrast – however good a local Solicitor may be – the wording they provide will never be tested until the individual to which the Trust applies actually dies. The introduction of POAT has DRAMATICALLY underlined this fact.


Hope this helps






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Good Morning Clive


Thankyou again for your in depth efforts. We already have previous bad experience of using our much trusted and used family solicitor for setting up a deed of trust for property many moons ago, at some serious cost I might add, and which because of changes in wording in the law the trust is now useless. Money down the drain..


I await your figures and will then speak with Mother. If she is in agreement with this, I will contact a Life Office (or three!) for some figures, and ask about the Trustee Service you mention.


Many thanks again





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Hi Karen/Dean


We obviously do charge as (sadly) we do not do what we do for recreational purposes!!!


I am conscious of the terms under which we all use the Forum and I am loath to "offend" the rules - so may i suggest if you have a specific query as to a financial issue that you pm me.






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Hi Martyn


Discount for an 81 year old lady works out at 38.2%.


So using the £100,000 from HMC&R example, this would mean that £38,200 would be removed from your mothers estate from the start and the remaining £61,800 would follow under the 7 year rule.


You can see how setting up such a scheme earlier rather than later provides a far greater discount.


If you pm me I will provide you with some info on the various providers of such schemes. I am sure I cannot do so on the open forum as this could be seen as advertising or possibly recommending them.


It is important that your mums situation is assessed before any recommendation made. All the providers of these schemes require the plans to be signed off by an authorised IFA. They are more complicated and the regulator requires qualified authorised individuals to handle the setting up of these schemes.


Again hope this helps.







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