Onshore investment bonds are firmly established, and our research indicates that advisers and their clients are recognising their benefit as a tax-effective wrapper which provides solutions for investment, income, and inheritance planning, says Mark Lambert, head of onshore investment bond distribution at HSBC Life (UK).
Recently the freezing of personal tax allowances, to include the pension lifetime allowance and no changes to annual allowances for ISA and pension contributions, has helped drive ongoing demand for and interest in onshore bonds.
Rising inheritance tax receipts are also gaining market momentum - HMRC data shows they hit a record £6.1bn in the 2021/22 tax year - this increase is driving interest in IHT planning, and further enhancing the case for onshore investment bonds as part of the range of solutions.
The Government has decided to hold the IHT nil rate band at 20/21 levels for five years which provides yet more support for onshore investment bonds held in trust as an IHT solution into the future.
According to our research, advisers are reporting growing interest in the number of onshore bonds being written in trust.
Around one in seven (14%) advisers questioned by HSBC Life (UK) expect the number of onshore bonds they write in trust to increase in the next two years, as clients looking for IHT solutions turn to bonds. In terms of what's driving the rising demand for use of trusts with onshore bonds, the main reason pinpointed by advisers was ‘concern about IHT planning'.
I believe this development highlights the impact of the freezing of the tax allowances. The expansion of the remit of the Trust Registration Service (TRS) is further supporting the market while creating some complexity.
The launch of the Trust Registration Service (TRS)
From 1 September 2022, all UK express trusts must register the details of their beneficial owners - the settlors, trustees, and beneficiaries - with the TRS. Any trusts created after 1 September have 90 days to register.
Discretionary and absolute trusts are subject to the rules, as well as any discounted gift trust, loan trust and gift trust.
Anyone applying now for an onshore bond - to be held within a trust - will have to provide evidence of trust registration as part of the application process; if evidence is not provided an application will be delayed or rejected.
When it was set up in 2017, the TRS initially only required trustees to ‘register' if the trust was liable to pay UK tax (including income tax, capital gains tax, and IHT) but with the advent of the 5th EU Money Laundering Directive rules have now changed.
Trustees now have the legal responsibility for registering their trust and must nominate a lead Trustee who will be the main point of contact with HMRC; and Trustees can be fined if trusts are not registered, or details kept up to date.
How advisers are benefiting
The need to register with TRS is an ideal opportunity for advisers to support their clients' new obligations, while also reviewing clients' overall wealth and tax planning strategies. It also offers scope for advisers to seek permission to work with younger generations who may be future intended beneficiaries of their older clients.
Our research discovered that not all advisers are confident about the use of trusts - around a quarter (25%) told us they didn't ‘fully understand' the use of trusts with onshore bonds. Not all their clients are supportive either, with around 39% of advisers saying their clients worry about ‘complexity' if they put an onshore bond in trust, while almost a quarter (24%) say their clients are worried about their ‘legal responsibilities'.
The additional reporting requirements introduced by the TRS mean advisers need to ensure their clients are fully aware of the obligations, but the role of onshore bonds as a powerful part of IHT planning advice should be highlighted. Above all it is important to focus on the core appeal of onshore bonds as a flexible and IHT effective planning vehicle.
The unique ability to take five per cent of the initial investment premium over the first 20 years of the bond, with no immediate tax liability, allows bonds to provide the fixed level of regular withdrawals that some trust types, such as discounted gift trusts, require to be effective.
They can be assigned to trusts as a gift without giving rise to a tax charge, although there may be IHT considerations, and trustees can assign part or all the bond to a beneficiary without income tax or capital gains tax liability.
Inheritance planning remains as important as ever for clients wanting to pass on their wealth in the most effective way. Whilst the TRS legislation introduces another step to undertake in the planning process, this well-established market remains an important income and investment solution for advisers' clients.
By Mark Lambert, head of onshore investment bond distribution at HSBC Life (UK)
