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»Ê¹ÚÌåÓýappre are two approaches to identifying the amount of the retained portion. It can either be a specified monetary amount or a specified percentage of the fund. »Ê¹ÚÌåÓýapp different approaches affect how the value of the retained fund is calculated after any withdrawals are taken and therefore the value of the retained fund on death. Where a retained percentage is used, the settlor’s fund can increase as the value of the underlying bond increases, whereas with a fixed monetary amount all of the increase in value of the bond accrues to the beneficiariesâ€� fund.

Example of a retained monetary amount

Alicia transfers £250,000 into a split trust arrangement. She sets her retained portion at £100,000 and therefore makes a transfer of value of £150,000 (the difference between the £250,000 invested and the £100,000 retained portion).

Alicia receives a withdrawal payment of £12,500 at the end of the first year. Alicia’s retained fund is now £87,500 (the original £100,000 less the £12,500 received).

Alicia receives two further payments of £12,500 in subsequent years and then dies. On her death Alicia’s retained fund is valued at £62,500 (the original £100,000 less three payments of £12,500). This £62,500 retained fund is part of Alicia’s estate for inheritance tax purposes.

If Alicia does not take any withdrawals in her lifetime her interest will remain at £100,000. This is different if the retained portion is expressed as a percentage of the fund.

Example of a retained percentage

Darius transfers £500,000 into a split trust arrangement. He sets his retained percentage at 50%. He therefore makes a transfer of value of £250,000 at that time.

Each time Darius take a withdrawal from the fund, this reduces his retained interest. »Ê¹ÚÌåÓýapp calculation of this reduction can be quite complicated but this will be done by the insurance company, for example:

Darius takes a withdrawal of £10,000 at a time when the fund has increased from £500,000 to £510,000. Darius’s interest in the fund before he takes the withdrawal is 50% of £510,000, or £255,000. Once Darius withdraws £10,000, the total fund is now worth £500,000. Darius’s interest in the fund is now £245,000 (his interest at the time of withdrawal of £255,000, less the withdrawal of £10,000) out of £500,000, or 49%.

Darius dies 9 years after setting up the arrangement. At that time the bond is valued at £650,000 and Darius’s interest is 32.5%. »Ê¹ÚÌåÓýapp value of Darius’s retained fund at his date of death is £211,250.

If Darius had taken no withdrawals in his lifetime his retained interest would have remained at 50% at his date of death. If the bond was worth £650,000 at the date of death the value of Darius’s retained fund would be £325,000.