How trusts and bonds can help beat the Budget blues

6 minute read

For the second year running chancellor Rachel Reeves significantly raised taxes in her Autumn Budget - this time to the tune of £26bn. While less than last year’s expected cumulative c£40bn tax raid, it still amounts to a substantial sum that will push the projected tax take, as a percentage of GDP, up to 38% by 2029-30 - a record high.

But it’s not just the quantum of the tax rises seen over the last two years that catch the eye. So too, the breadth of tax-raising measures taken - a consequence of Labour’s 2024 General Election manifesto pledge not to raise income tax rates, VAT or National Insurance contributions (NICs) for employees. Aside from breaking the pledge, the chancellor had little option but to raise or tinker with a whole raft of taxes.

The smorgasbord approach to tax-raising

The latest Budget saw threshold freezes for income tax and inheritance tax (IHT), meaning more people will pay more tax. There were also phased changes announced including 2% increases in taxes on savings, property and dividend income, and a £2,000 cap placed on pension contributions through salary sacrifice each year before NICs need to be paid. And those are just the headline grabbers.

These come on top of changes announced in the 2024 Budget. Unused pension funds and pension death benefits not left to spouses, civil partners or charities will be included in a person’s estate for IHT purposes from April 2027 onwards, the main capital gains tax (CGT) rates were increased immediately and VAT is now charged on private school fees.

The last two Budgets have brought considerable change to the UK tax landscape. It’s hard to disagree with the argument that:

Personal finance is getting more complicated

What to do ?

All is not lost. Firstly, many of the changes announced in the last two years are yet to come into force - there is still time to take action and put in place an effective plan tailored to one’s specific circumstances and needs. Secondly, there are plenty of tax reliefs (at the last count over 1,000!) that, provided these are relevant to the individual’s circumstances, can be taken up to lower the tax bill - there are almost 100 reliefs available for IHT alone. And thirdly, tried and tested tax-planning solutions can be used although, once again, subject to the individual’s needs and circumstances. Two of these solutions? Trusts and investment bonds.

What is a trust?

Trusts are financial arrangements used to manage an array of assets from investments and cash to land and property. They are created on behalf of an individual (the settlor) who has often set up a trust for the benefit of others (the beneficiary or beneficiaries).

To create a trust the settlor hands over assets to those he or she trusts (the trustees), who in turn look after the assets on behalf of the beneficiary/beneficiaries. Each trust has its own set of can dos and cannot dos, cost structures and tax regimes. Often wealth held through a trust is treated differently to personally owned wealth from an income tax, CGT and IHT perspective. Hence the key role trusts can play in financial planning.

Trusts are often used by clients to transfer wealth out of their estates while ensuring the desired people benefit from that wealth at the right time. Specific trusts can also be used by settlors for retirement planning and business succession strategies to avoid a larger tax problem in the future as their estates grow, subject to individual circumstances. There’s no such thing as a one-size-fits-all trust solution. Various types of trusts exist to cater for the wide range of reasons behind going down the trust route. Assuming trusts are deemed suitable for a client, a tailored solution can be designed to meet the individual’s needs and objectives.

What is an investment bond?

Investment bonds are single-premium whole-of-life policies that only come to an end when a specific event happens - maturity (redemption bonds), death of the life/lives assured (Life bonds), withdrawals in excess of 5%, or full encashment or assignment for money or monies’ worth.

A bond is set up when a policyholder pays a lump sum to a life insurance company who then invests on the policyholder’s behalf, usually into a range of funds as well as a range of assets in line with the client’s attitude to risk. The lump sum is split proportionately among a number of identical policies, so each policy can be dealt with separately, providing flexibility when it comes to administration and tax planning.

Bonds can be either onshore or offshore:

Offshore bonds are provided by non-UK insurance companies, typically based in a low-tax jurisdiction. For the most part, underlying funds are not taxed, enabling the investment to grow faster, known as gross roll-up.
Onshore bonds are issued by UK-based providers with the underlying funds subject to a special rate of corporation tax which is deemed to meet the liability of a basic rate taxpayer.

Investment bonds are tax efficient in terms of CGT and dividend income. Legal ownership of the bond can also be changed at any time by deed of assignment, often into trust. This means, provided no money changes hands, the transfer is tax free.

The power of two

Individually, trusts and bonds have a lot to offer. But combine the two into a single bond-trust solution and the benefits can be even more significant. When held inside a trust, the value of an investment bond can be taken outside of an estate for IHT purposes— some trusts operate well without bonds but specific ones, such as discounted gift trusts and reversionary interest trusts, need bonds to create an IHT advantage. The bond-trust solution can also enable a gift to be made to loved ones while allowing the donor to retain some control over how and when the funds are accessed. And the use of a bond can help avoid delays in accessing funds during probate.

There’s a ‘but’

Trusts and bonds are not for everyone. Tax-planning in general and inheritance and estate taxes in particular are complex areas, requiring specialist advice based on a comprehensive review of an individual’s circumstances. If a bond-trust solution is deemed appropriate, the right vehicle and structure must be chosen and subsequently monitored on a regular basis to ensure the solution remains suitable.

                            Even though taxes are going up and personal finances are getting more complex, thanks to the various reliefs available and proven solutions, such as trusts and bonds, the tax burden can be eased at the individual level.  Action can be taken to beat the Budget blues. And this starts with booking an appointment with an expert financial planner.
                        

Investments and the income from them can go down as well as up, you may not get back what you invest.

This material is not tax, legal or accounting advice and should not be relied on for tax, legal or accounting purposes. Quilter Cheviot Limited does not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting adviser(s) before engaging in any transaction.

Tax treatment varies according to individual circumstances and is subject to change. Trusts, estate planning, mortgage, tax: Trusts, Estate planning, Buy to Let Mortgage, Taxation and Inheritance Tax Advice are not regulated by the Financial Conduct Authority.

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The smorgasbord approach to tax-raising

What to do ?

What is a trust?

What is an investment bond?

The power of two

There’s a ‘but’

What is the Managed Portfolio Service?

What is discretionary investment management?

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