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Discretionary Trust investments?

Investment | Life Helpful? 8

Asked by johndavid, submitted 22 February 2010.

Open Quote I am a trustee to a discretionary trust containing £150,000 in cash. Any income will shortly be taxed at 50%, therefore Growth is the necessary requisite.

Could you please offer your opinion as to:

1. In these current troubled times should one be even considering investing in the stock market. Should one be waiting to at least the general election?

2. Would you seek advice from an IFA? (I note your comments regarding Bestinvest but they require a minimum of £250,000 ) or could you make recommendations as to how I should invest this sum?

3. What are your thoughts with regard to an investment in Insurance Investment Bonds?

I am not adverse to average risk and a period of 5 to 10 years would be acceptable.
End Quote

Answered by Justin on 01 March 2010

Successfully predicting stockmarkets is difficult at the best of times. And in the current climate it’s nigh on impossible. Nevertheless, my gut feeling (for what it's worth) is that UK markets will do well just to stand still over the next year, as tax rises and spending cuts will undoubtedly bite regardless of which party wins the general election.

There might be a small bounce if there’s a change of Government, based on sentiment that fresh blood is required to help pull Britain out of its debt-laden economic hole, but I think this would be short lived as there's no miracle cure.

However, it’s not quite that simple as a good proportion of revenues generated by companies listed on the London Stock exchange generate earnings from overseas, so the UK is definitely no island when it comes to the stockmarket. What happens overseas is very important too.

The types of UK stocks that make most sense in these troubled times are well established cash rich companies that pay healthy dividends, but as you point out these won’t be very tax efficient within a discretionary trust (unless held in an investment bond – more on that in a moment).

I wouldn’t be in a rush to invest, but I think a mix of global stockmarket, commodity, commercial property and, to a lesser extent, corporate bond investments should stand you in good stead over the next 10 years.

Unless you’re comfortable picking investments yourself then I would suggest taking advice from a fee-based IFA, but be wary that they don’t try and charge upfront fees that end up being as expensive as commission (i.e. 3-5% initially). An hourly rate of £100-200 would probably suit you better than percentage based fees.

Alternatively, Bestinvest may still be able to help. While its discretionary investment service has a £250,000 minimum, its regular discount broking service does give advice on portfolios of £50,000 and above. The advice is funded by the trail commission received on underlying funds, typically 0.5% a year, which is a good deal as you’ll still benefit from full initial commission rebates (saving 3% +) when you purchase funds. As far as I’m aware, they’re the only discount broker that currently offers advice on this basis – if anyone knows of another please let me know.

I’m not normally that keen on investment bonds as they’re not particularly tax efficient for most people. However, they can work well in discretionary trusts because they’re not treated as income producing (provided you don’t withdraw more than 5% of the original capital each year – cumulative if not taken). This means you could hold dividend/interest producing investments within an investment bond without fear of being clobbered by the extortionate discretionary trust tax rates coming into force on 6 April this year (42.5% on grossed up dividends and 50% on other income).

Both income and gains are taxed internally at basic rate tax within the investment bond, but the trust shouldn’t have any further tax to pay until the bond is sold (subject to the 5% withdrawal limit). And when the bond is sold the trust may be able to first assign it to one or more of the beneficiaries, who can then potentially benefit personally from the ‘top-slicing’ method used to calculate tax owed on gains and income generated from investment bonds (not possible while the bond is in the trust). You can read more on top-slicing on our life investments page.

Just beware that investment bonds tend to pay high commissions to advisers (often 4-6% of the amount invested), so an adviser who works on either a fees or commission basis might be especially keen on the latter (whereas an adviser working on an hourly rate should refund all commissions to you). Also, if you opt for this route make sure the bond allows you to hold investments from across the marketplace, not just those offered by the insurer issuing the bond.

If you’re happy holding pure growth investments and capital gains tax remains at just 18% (unlikely) then an investment bond would offer little benefit. Otherwise it could be helpful.

Finally, remember that if income is paid out of the trust then the beneficiary may be able to reclaim tax paid by the trust provided they’re not a top rate taxpayer. See my earlier answer for more details . But this doesn’t apply to distributions from investment bonds.


Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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