Long term trust

I am in the process of writing a big report for a new client. 

One element of our advice is to place £325k into a discretionary trust. The beneficiaries of the trust will not be named but it is intended to be for the benefit of the client's young daughter.

As the trust is likely to be in place for a very long time (20+ years) we are keen to avoid the 10 year periodic charge as much as we can. Therefore we are considering taking withdrawals from the trust to fund a Junior ISA and a pension in the daughter's name.

The trust will be set up with a trust bank account and an investment bond. The bank account will hold minimal cash and will be used purely for transactions. The bond will pay regular withdrawals to the bank account to fund the ISA and pension.

We would also like to withdraw the unused 5% allowances prior to the 10th anniversary. The proceeds of this withdrawal would not be paid out of the trust to the daughter as she would still be too young to receive such a sum. Where could we pay this withdrawal to in order to minimise the periodic charge? A new trust perhaps?

Can anyone see any problems that these ideas might cause? I think the ISA & pension thing is fine but I am uneasy about paying from one trust into another in order to avoid the periodic charge; it strikes me that HMRC would be wise to such a ruse.

Feel free to ask for more info if I've not given you enough to be able to help.




  • Hi Andy

    Trusts aren't my area of expertise by a long shot but if you want to avoid the 10 year charge you could always consider a BPR product within the trust.  Octopus have a good guide on how it works.


  • Is the bond structure definately worth it?  If segments are not assigned out of the Trust then those 5%s become income when eventually paid out of the Trust and suffer tax at Trust rates.  Tax pool and clients circumstances notwithstanding.
  • Bond: Maximising segments is a key part for this. You may want to consider investing in 3 separate bonds as this gives you more 'smaller' segments which may come in useful in the future.

    A concern I have with what is being proposed is a clear 'funding strategy' for the benefit of the child. There is a risk, I feel, that this could be interpreted as essentially giving the child an interest in possession or that the trust is merely a Bare Trust, despite the range of beneficiaries stated in the Trust Deed. Either outcome would have unfortunate consequences compared to the intended discretionary trust set up.

    A withdrawal of 'unused 5%'s' from one trust to another where the trusts are to all intents and purposes the same will not help; they will be joined up I think through 'anti-Rysaffe' strategy from HMRC. There is nothing to stop the parents opening a bank account in child's name and running this for the child until they are 18. Your trust can pay into the child's bank account; the parent can then sign payment authority from child's bank account into Junior ISA / Pension.

    Making use of the BPR idea suggested by PeterM, in conjunction with multiple bond investments for future flexibility, along with payments to Junior ISA and pension would probably be the best all round '10 year charge avoidance strategy'.

    However, given the low level of the periodic charge compared to the 40% IHT you would eventually be saving I'm not sure I wold actually worry too much about it - after all, the charge will only arise if the investment has done well, the Nil Rate Band is due to rise in coming years and most clients won't complain about a good investment return.
Sign In or Register to comment.