MTTM Podcast Episode 519 – A guide to long-term asset funds & Trusts explained

Listen to Episode 519

In this week's podcast, I take a look at Long-Term Asset Funds (LTAFs). With the news that Hargreaves Lansdown will allow retail investors to access these types of funds from next week, I explain how they work and why investors should remain cautious. Next, I provide an overview of trusts, explaining how they can be used effectively before highlighting the potential pitfalls.

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Episode 519 Podcast Summary

What are Long Term Asset Funds (LTAFs) and are they right for you?

Summary

In this section, I explore the new Long Term Asset Fund (LTAF) structure, prompted by a recent communication from Hargreaves Lansdown. I explain that LTAFs are designed to hold illiquid assets (like infrastructure and private equity) and were created to solve the liquidity mismatch that plagued funds like Woodford. However, this comes with significant trade-offs for retail investors, including a minimum 90-day redemption period, high fees, and potential valuation issues. We compare LTAFs to the existing investment trust structure and question whether this new "policy tool" is truly in the best interest of the average investor.

Key insights

• A solution to a problem: LTAFs were designed to allow investment in illiquid assets without the daily dealing mismatch that led to funds like Woodford being gated.
• Your money is locked in: Unlike typical funds, LTAFs have a minimum redemption notice period of at least 90 days, making them unsuitable if you need quick access to your capital.
• Watch out for high fees: The ongoing charges for the new LTAFs can be as high as 2.62%, far more expensive than most mainstream funds and trackers.
• An alternative already exists: The Association of Investment Companies argues that investment trusts (which are close-ended) already provide a robust and more liquid way to invest in illiquid assets.
• A "Restricted" investment: LTAFs are classed as 'Restricted Mass Market Investments', meaning most people should invest no more than 10% of their net investable assets into these and similar high-risk products.

Trusts Explained

Summary

I explain the two main types of trust (bare and discretionary) and why they are commonly used for inheritance tax (IHT) planning and asset control. Using the recent stamp duty issue faced by the former Deputy Prime Minister as a cautionary tale, I explain some of the complex and costly pitfalls. These include the 'gift with reservation' rule, unexpected 20% upfront IHT charges, periodic fees, and obscure rules that can have knock-on effects for future financial gifts. I finish by highlighting one key exception where trusts are simple and highly effective: writing your life insurance policy in trust.

Key insights

• Not a simple tax dodge: Trusts are complex legal structures with significant risks. Gifting your home into a trust while still living there rent-free will likely negate any IHT benefit due to the 'gift with reservation' rule.
• Trusts can trigger immediate tax: Gifting assets into a discretionary trust can trigger an immediate 20% IHT charge on amounts above the nil-rate band, with further charges of up to 6% every 10 years.
• Beware the 14-year trap: An obscure rule means that making a gift into a trust can impact the IHT treatment of separate, outright gifts you make years later, effectively allowing HMRC to look back up to 14 years.
• Real-world consequences: Misunderstanding trust rules can lead to huge, unexpected tax bills, as demonstrated by the high-profile case of the Deputy Prime Minister, where the stamp duty payment on a second property was mis-calculated.
• The life insurance exception: The simplest and most beneficial use of a trust for most people is for a life insurance policy. This ensures the payout is not part of your estate for IHT purposes and allows beneficiaries to receive the money quickly, avoiding probate.

Episode quiz 

1. What is the minimum redemption notice period for an LTAF?
a) 7 days
b) 30 days
c) 60 days
d) 90 days

2. LTAFs are categorised as 'Restricted Mass Market Investments'. What does this mean for most retail investors?
a) They are completely banned from investing in them
b) They can only invest via a sophisticated financial adviser
c) They are confirming they will invest no more than 10% of their net investable assets into such high-risk products per year
d) They must have a net worth of over £1 million to be eligible

3. Why might the valuation of assets within an LTAF be an issue?
a) The illiquid assets don't have a live market price and are valued periodically, which could lag behind reality
b) The assets are valued daily, causing high administrative costs
c) The valuations are provided by the government and can be politically influenced
d) The fund's value is purely based on the manager's opinion

4. What is a key benefit of putting a life insurance policy in trust?
a) It increases the final payout amount by 20%
b) It means the payout falls outside of your estate for IHT and avoids probate
c) It makes the life insurance premiums tax-deductible
d) It is the only way to legally name a beneficiary for a life insurance policy

5. What is the term for the original owner of the assets who sets up the trust?
a) The Beneficiary
b) The Trustee
c) The Settlor
d) The Executor

Answers

1. d) 90 days
2. c) They are confirming they will invest no more than 10% of their net investable assets into such high-risk products per year
3. a) The illiquid assets don't have a live market price and are valued periodically, which could lag behind reality
4. b) It means the payout falls outside of your estate for IHT and avoids probate
5. c) The Settlor

Resources

Links referred to in the podcast:

• Get qualified advice from Unbiased*
• Get qualified advice from Vouchedfor*
• Inheritance tax (IHT) on taper relief explained
• Avoid the 14 year IHT trap
• Try our AI guidance tool 'DaMoney' - Ask it any money question
• Sign Up To The MTTM Weekly Newsletter

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