Inheritance Tax & Gifts

Following last week’s column we still have a number of Inheritance Tax questions unanswered.

If I am making gifts or gifts into trusts which order should I do them in?

Take careful advice on this. My article will not do justice to the complexity of this question. The difference relates to gifts into a discretionary trust or indeed a gift straight into a bare trust. A discretionary trust is normally used where you want the flexibility to change beneficiaries at a later stage. A bare trust won’t give you that flexibility.

Let’s assume all gifts into the trusts are within the current nil rate band. In the first example the gift is made into the bare trust of £285,000 in 2006. A gift is subsequently made into a discretionary trust of £285,000. Eighteen months later the client dies. A complicated assessment for tax occurs at the tenth anniversary of the trust to calculate any periodic charges which of course in turn will affect any exit charges.

By writing the bare trust first the client may disadvantage themselves from a tax point of view. It boils down to the fact that if the failed PET is made after the chargeable lifetime transfer no value is added in for it in the calculations for the ten year periodic charge.

In the example I was using, assuming fair growth rates in the trust, the ten year tax charge can be cut by 90%. Take it from me, it’s complicated so ensure you receive good advice.

If I have an existing trust, do I need to do anything about it post the Finance act 2006?

Yes you do. You have until 6th April 2008 to make a decision on any existing trusts. Accumulation and maintenance trusts are affected. If you have such a trust you won’t need to make any changes as long as the beneficiaries become absolutely entitled to the proceeds of the trust at age eighteen. If they aren’t, you are allowed to vary the trust pre 6th April 2008 to ensure this happens. If you don’t, the trust will fall into the new regime and all the periodic and exit charges that go with it. There is also an option to simply wind the trust up now.

There are a few exceptions to this where the new proposals to trusts will not apply. Trusts for bereaved minors, trusts created on death which give an immediate interest in possession and trusts created for the benefit of a disabled person.

The revenue have also pointed to a change in the current reporting thresholds. Currently when you make a chargeable lifetime transfer you have to complete an IHT100 form. This is applicable where a gift is in excess of £10,000 or total gifts in the ten years are in excess of £40,000. This is a ridiculous level and is expected to be increased to £200,000. Although the revenue have said they are happy to do this, they have not taken numerous opportunities to put it in place.

Finally if you want to make any changes to any life insurance policies ensure they are within the ‘allowable variations’. If they are not and a pre 22nd March 2006 policy is varied the whole policy, not just the increased amount, will become relevant property and subject to the new regime. As you can see, it’s a complicated subject to seek advice from your Solicitor and Independent Financial Adviser.

Tags: Gifts, Inheritance tax, life insurance policies, Potentially Exempt Transfer, trusts

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