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PENSIONS INVESTMENTS

enablin¯ intelli¯ent investment choice

your ¯uide to a

Royal Skandia

Excluded Property

Trust

for non-UK domiciles movin¯ permanently

to or currently livin¯ in the UK

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contents

the trust 4

how the Royal Skandia Excluded

Property Trust works 8 how the trust works in practice 10 benefits and considerations 11

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The aim of this document is to explain the benefits of an excluded property

trust and why a Royal Skandia Excluded Property Trust may be a suitable tax

planning option to meet your needs.

domicile

Domicile is a concept of UK law and is distinct from nationality and residence. Generally speaking, but not always, domicile will be the country in which an individual has their permanent home. In the UK, your domicile is the country in which your father was born. However, if your parents were not married or your father had died before your birth, then your domicile would be the country in which your mother was born.

domicile

In most countries, domicile has no impact on a person’s potential liability to tax. However, in the UK it is possible for someone to remain domiciled elsewhere but still be ‘deemed domiciled’ in the UK for IHT purposes.

A person who is not UK domiciled will be deemed UK domiciled when they have been resident in the UK for at least 17 of the previous 20 tax years.

You may also be treated as domiciled in the UK at the time of a transfer if you subsequently become domiciled in the UK within the three years immediately following the transfer.

Throughout this document we have used the term ‘UK domicile’ to describe an individual who is a UK domicile or deemed UK domicile.

UK inheritance tax

If you are a UK domiciled individual, UK IHT will normally be payable when you die, on all your worldwide assets that exceed the nil-rate band (NRB), unless the assets or the transfer of those assets qualify for an exemption from IHT as described in the UK IHT legislation.

property

For the purposes of the excluded property trust, property is any asset you own that is covered by the Inheritance Taxes Act 1984 (IHTA84). More details are provided on page 5.

Before we explain how the trust works, it is important to define UK domicile, UK inheritance tax (IHT) and

property as these terms are mentioned throughout this document. An excluded property trust may be used by

someone who is not currently domiciled in the UK, to protect their assets from any future liability to UK IHT.

Throughout this brochure, wherever we want to explain particular terms, we have highlighted them in boxes like this on the page where the term is first used.

nil-rate band (NRB)

The nil-rate band is not fixed and has historically increased year-on-year. Currently the first £325,000 (for the tax year 2008/09) in your estate is taxed at 0% for UK IHT purposes. Any assets above the NRB are liable to 40% tax.

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what is a trust?

Simply put, a trust allows you (the settlor) to entrust your assets (the trust fund) to the trustees for the benefit of your beneficiaries. It is the responsibility of the trustees to take control of, manage and ultimately distribute the trust fund to your beneficiaries.

A trust is one way to move money out of your estate and perhaps reduce your potential liability to UK IHT. It can also avoid the potentially lengthy delays often associated with administering estates so that, in the event of your death, the people you want to benefit from your estate do so as quickly as possible. You can put all kinds of assets in a trust, including investments and life assurance policies.

who is involved?

There are normally three parties involved in a trust:

•you, the settlor;

•the trustees; and

•the beneficiaries.

There may also be a fourth party involved:

•the protector.

The protector monitors the trustees and ensures that their actions are in the best interests of the beneficiaries.

You can be a trustee yourself as well as being the settlor. Under the Royal Skandia Excluded Property Trust you are also a potential beneficiary.

independent

professional trustee

service

You and your financial adviser may consider it appropriate for you to appoint an experienced and professional trustee to manage your excluded property trust. Royal Skandia Trust Company is part of the Skandia UK Group and provides an independent trustee service from the Isle of Man. You can read more about Royal Skandia Trust Company in a guide to trusts by royal skandia trust company

which is available on request from your financial adviser.

To help explain how the Royal Skandia Excluded Property Trust works it is important to understand the

basic principles of trusts.

the trust

settlor

The settlor is the person who sets up the initial investment. The settlor transfers the ownership of the assets to their chosen trustees.

trustees

The trustees are the legal owner(s) of the assets once they are transferred to the trust. They manage the assets for the benefit of the beneficiaries and are also responsible for dealing with the distribution of the assets on the settlor’s death.

beneficiaries

The beneficiaries are the individuals or groups of people named under the trust. estate

All the assets that a person owns (or, in some cases, is treated as owning) at the time of their death, less their liabilities (debts). Your estate will also include the value of any property you have given away if either the gift you have made is subject to conditions or restrictions, or you keep back some benefit yourself.

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what is excluded

property?

The term ‘excluded property’ is described in the UK IHT legislation known as the Inheritance Taxes Act 1984 (IHTA84). This defines excluded property as assets which are exempt from UK IHT if they meet defined criteria.

Among the types of excluded property which qualify are:

• Any asset situated outside the UK which is owned by an individual who is not UK domiciled.

• Any asset subject to an excluded property trust.

In respect of a Royal Skandia Excluded Property Trust, which we will describe in more detail further

on in this document, excluded property means a single premium investment bond offered by Royal Skandia. As Royal Skandia is situated in the Isle of Man, the Royal Skandia Bond is a non-UK asset.

what is a discretionary

trust?

This is a trust created by means of a gift where the beneficiaries are not defined by name but in general terms, for example ‘my children’, and where the trustees use their discretion to decide who may benefit from the trust and when. The beneficiaries cannot demand their rights from the trustees.

Because this is a trust that you (the settlor) can benefit from it is known as a ‘discretionary trust (settlor included)’.

what is an excluded

property trust?

An excluded property trust is generally a discretionary trust which includes the settlor within the class of discretionary beneficiaries. Put simply, it is the domicile of the settlor when the trust is established and the place where the assets are situated, ie outside the UK, which when held within the trust make it an ‘excluded property trust.’ Providing certain criteria are met then an excluded property trust may never be subject to any UK IHT charges.

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In order to fulfil the requirements for an excluded property trust:

(i) the settlor must not be UK domiciled or deemed UK domiciled at the time the trust is created; and

(ii)the assets that will form and be held within the trust must not be situated in the UK.

If you are a non-UK domicile and you are moving permanently to or currently living in the UK, you can protect your assets from UK IHT but still retain full access to these assets.

Because the assets are held by the trustees (of which you can be one), it also ensures that your executors avoid potentially lengthy delays in obtaining probate in respect of these assets. The trustees retain control over who benefits from assets when they are distributed.

two steps to an

excluded property

trust

why use an excluded

property trust?

executor

The persons appointed in the deceased’s will to supervise the administration and distribution of the deceased’s estate in accordance with their last will and testament.

probate

When someone dies, the executors or administrators of the deceased (collectively known as the legal personal representatives) apply to the court for authority to deal with the deceased’s estate. For the purpose of this document, this authority shall be referred to as probate.

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how the Royal Skandia

Excluded Property Trust works

choosin¯ the bond

You can choose to invest in one of Royal Skandia’s bonds, which all provide access to an extensive range of funds from a wide selection of fund managers. Royal Skandia is based in the Isle of Man and therefore is not considered part of the UK.

Royal Skandia offers a range of bonds which may be used with the excluded property trust.

the bond

The main differences between the bonds are the types of investments you can hold, the minimum premiums, whether they have a life assurance element, and how they are taxed in the UK.

Depending upon your own individual circumstances, not all of the Royal Skandia bonds may be available or appropriate. Your financial adviser will be able to give you more information about the bonds and recommend the best choice for you.

If your financial adviser recommends that you invest in a Royal Skandia Excluded Property

Trust, these are the steps which you must take. Please note that you must take these before

you become deemed a UK domicile.

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You may create a Royal Skandia discretionary trust (settlor included) by completing the draft trust deed provided by your financial adviser. This trust allows you, the settlor, to be included as a discretionary beneficiary of the trust.

trust

Once the bond you have applied for has been set up and your premium invested, Royal Skandia will date the trust deed to initiate the trust.

the trust

You (as the settlor) must appoint trustees. These can either be family members, including yourself, or a professional trustee. You must also confirm, within the trust deed, that your bond is the asset creating the trust. The trustees will then hold the bond for the benefit of the listed beneficiaries, which include you.

The trustees are able to distribute some or all of the trust fund at any time. However, you should always consult your financial adviser to discuss the tax consequences prior

to taking withdrawals from the bond.

the trust

For example, if you, as the settlor of the trust, are a UK tax resident, then any gains made on amounts taken from the bond by the trustees to make payment to you or another beneficiary of the trust, would be assessable for UK income tax, which you would be liable to pay. The bond will not form part of your estate for UK IHT. No UK IHT will be payable for creating or maintaining the trust, nor for making payments to beneficiaries.

establishin¯ the excluded

property trust

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how the trust works in practice

Richard and Sharon are now looking to start a family. Sharon is keen for them both to move to the UK so they can be closer to her family.

Having decided that they will move permanently to the UK, Richard and Sharon seek financial advice prior to coming to the UK. Their financial adviser suggests Richard sets up a Royal Skandia Excluded Property Trust.

The financial adviser explains that Richard could invest into a Collective Investment Bond whilst he remains a non-UK domicile. Richard completes

an application for a Collective Investment Bond and the Royal Skandia discretionary trust (settlor included) and sends these to Royal Skandia. On receipt of all appropriate information Royal Skandia accepts Richard’s application form and dates the trust. Richard has appointed himself and Sharon as trustees. As Richard is amongst the list of potential beneficiaries of the trust, the trustees may at any time request withdrawals from the Collective Investment Bond, which they can pay to Richard.

In future years, the trust could be used to fund their children’s education, complement their savings plans or even to pass some of Richard’s estate on to their children (and/or

grandchildren).

case study

Richard was born in Jersey, and has a Jersey domicile. He has worked for an international organisation based outside the UK for many years. He is married to Sharon, a UK domiciled individual.

Please note that withdrawals may be liable to tax. You should discuss the best way of taking withdrawals from the bond with your financial adviser before proceeding.

For example, making a withdrawal in excess of 5% of the original investment could be liable to UK income tax. If Richard was UK tax resident at the time withdrawals were taken (not necessarily payable to him) then he would be liable to pay the income tax because he is the settlor of the trust.

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benefits and considerations

Tax benefit during life and on your death – protects the

assets held in the trust against UK IHT.

Accessibility – allows you full access to these assets in

your lifetime.

Ease of administration on your death – avoids the need for

probate in respect of these assets.

International location – your assets remain situated

outside the UK and qualify as excluded property.

Extensive investment choice – you can benefit from Royal

Skandia’s extensive range of MultiManager funds, which grow free from local taxes, enabling you to choose a portfolio of funds that match your attitude

to risk. The funds in which you invest are not currently liable to taxes in the Isle of Man, where Royal Skandia is based. However, investment income accumulating in any fund may be subject to a tax deduction in the country

where the income was produced.

Flexibility – allows you to complete effective UK IHT

planning before you become deemed a UK domicile, with greater UK IHT savings and flexibility than are available to a UK domiciled individual.

Potential loss of the tax benefit – UK IHT legislation may

change in the future.

Less control – you cannot name a specific beneficiary to

receive the benefits, as the trustees have complete discretion to benefit any person or body within the prescribed list. You may submit a letter of wishes to the trustees but they are not legally obliged to act upon it. You may also appoint yourself as a trustee so that you can continue to have some control over the assets during your lifetime.

other taxes

An excluded property trust is only designed to protect your assets against UK IHT. You may be liable to other taxes in the country in which you reside, and on becoming a UK tax resident (resident for at least 183 nights in the current tax year) you may have to pay UK income tax on any withdrawals made from the bond.

We recommend that you speak to your financial adviser about your individual tax position and possible consequences, before you take any action.

independent professional trustee service

You and your financial adviser may consider it appropriate for you to appoint a professional trustee to manage your excluded property trust. Royal Skandia Trust Company (RSTC) is part of the Skandia Group and provides an independent trustee service from the Isle of Man. You can read more about RSTC in a guide to trusts by royal skandia trust companywhich is available on request from your financial adviser.

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00000

Royal Skandia Skandia House King Edward Road Onchan

Isle of Man IM99 1NU

T +44 (0)1624 655 555 F +44 (0)1624 611 715

Skandia International is the divisional name for the international companies within the Skandia Group. www.royalskandia.com

Calls may be monitored and recorded for training purposes and to avoid misunderstandings.

Royal Skandia Life Assurance Limited is registered in the Isle of Man under number 24916C. Registered and Head Office: Skandia House, King Edward Road, Onchan, Isle of Man, IM99 1NU, British Isles. Phone: +44 (0)1624 655 555 Fax: +44 (0)1624 611 715.

Authorised by the Isle of Man Insurance & Pensions Authority. Authorised and regulated by the Financial Services Authority for business conducted in the UK. Some of the FSA’s rules do not apply to non-UK based insurers. FSA Register number 142309. www.fsa.gov.uk/pages/register.

Royal Skandia Trust Company is registered in the Isle of Man under number 095926C. Registered and Head Office: PO Box 142, Skandia House, King Edward Road, Onchan, Isle of Man, IM99 3DJ, British Isles. Tel: +44 (0) 1624 655 456, Fax: +44 (0) 1624 655 930. Licensed by the Financial Supervision Commission of the Isle of Man to provide trust services.

When printed by Skandia this item is produced on a mixed grade material, which uses a combination of recycled wood or paper fibre from controlled sources and virgin fibre sourced from well managed, sustainable forests.

The information contained in this document is purely factual and is not intended to offer any advice. This is Royal Skandia’s interpretation of UK tax law and practice and while we believe this information to be correct as at 1 May 2010, we cannot guarantee it.

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