Established with the aim of receiving pension death benefits from personal or occupational schemes, bypass trusts can be invaluable in procuring inheritance tax savings on a second death for prudent trustees who wish to invest pension death benefits following the death of the settlor/scheme member.

Where the settlor has cash available for investment, there will be some additional merit in establishing the trust with a small onshore bond investment from outset. This will generally provide the opportunity for growth on the investment amount. However, there may additional benefits: where the pension death benefits are used to increment the bond following death of the settlor, it will also provide additional scope for tax mitigation on the ultimate distribution of the trust fund.

Benefits of Bonds

The benefits of bonds as trust investments are widely accepted. The bond’s non-income producing nature means that the trustees’ administrative burden is simplified, tax is deferred and income does not need to be distributed where this would otherwise be necessary but undesirable.

The advantages of bonds are also unmistakeable when it comes to distributing the trust fund. The combination of segmentation and the fact that assignment is not a tax point means that the trustees can take advantage of the tax positions of basic rate tax-paying beneficiaries upon distribution and, thus, can avoid tax at the trust’s, or the settlor’s, rate and can ultimately maximise the overall return for the beneficiaries.

Assignment of segments to basic rate tax-paying beneficiaries before encashment also ensures that top-slicing relief, which is not available to trustees, is not wasted. This additional feature can prove invaluable in maximising the net gain despite rarely receiving a mention. Further, it can be particularly effective where a small bond is later incremented with a larger sum, such as the death benefit payable from a pension scheme.

Income Tax Savings Possible

The inheritance tax benefits of establishing a bypass trust to receive pension death benefits are obvious. However, when the trust is established with a small onshore bond investment which is incremented by the trustees following the settlor’s death, substantial income tax savings can also be achieved.

For further information on trusts or any of the topics considered above contact Warde Graham's expert financial advisers & advisors, based in Glasgow in Scotland, today. Free initial enquiries for expert independent financial advice are available by phoning 0141 331 0660.