Following your article on Inheritance Tax Planning I had a number of questions, perhaps you could help?
Indeed, although it may take two weeks of columns to cover your points!
You mentioned that a trust could be split into numerous parts to save future periodic charges and in turn exit charges. Is there anything else to consider here?
In previous years to 22nd March 2006 a gift into trust such as the one you are referring to would have been a straight forward potentially exempt transfer (PET). After seven years it was outside your estate and there was no issue with any further tax. Today such trusts fall inside the regime of the old discretionary trust and have a range of new taxes that apply. It’s not that you can no longer use this type of trust or gain exactly the same outcome you desire, it just involves a detour courtesy of the new rules. I suppose that’s how the financial world works. Hurdles are put in place for you to work out if you go under, over or round but not through – it keeps me in a job which is nice.
On entry to most trusts (other than absolute trusts) there is a charge of 20% of the transfer which is above the nil rate band at the time. Today a gift into trust of £320,000 would attract 20% tax, £4,000 on £20,000. This should be paid by the trustees not the person who set up the trust (settlor) as the figure would be more.
In the above example if the settlor paid the tax it would be grossed up so the transfer of value would be greater. On the tenth anniversary, a periodic charge may apply. The trust value is assessed and if it is more than the nil rate band at that time, a charge of up to 6% could apply to the value over the nil rate band. In my previous article I pointed out that trusts could be split at the outset as on the anniversary each trust is assessed against the nil rate band. So rather than writing one large trust which could be over the nil rate band, better to write numerous which will each be assessed at the tenth anniversary and on exit. In the case of Rysaffe Trustee Co (ci) v IRC (2003) showed exactly that. Numerous trusts were set up on consecutive days. The revenue contended ‘that the making of all the settlements were associated operations and the settlor had made one composite settlement by an extended disposition’ Park J dealing with the associated operations made the valid point that it was not a valid reason to artificially import the associated operations provisions and to impose the false hypothesis there is only one settlement (trust) when in fact and in law there are actually five. 1.
So there you go! Remember another key point – section 62 IHTA 1984 stated that for a trust to be a related settlement, the settlor had to be the same in each case and the trusts had to be commenced on the same day. Therefore trusts created on different days do not fall within this definition.
If I made an outright gift of over the nil rate band, would I pay any immediate inheritance tax?
No. This becomes a PET and the seven year rule applies. Seek advice on which gift to make first i.e a gift into a trust followed by a PET or vice versa. Remember also a gift into an absolute trust is also a PET and does not suffer any of the aforementioned complications.
If you would like advice on Inheritance Tax planning and gifting or if you have a financial query, call 0845 230 986 or email info@wwfp.net
Source:
(1) Skandia Effective use of multiple trusts in trust planning Nov 2006
The value of shares and investments can go down as well as up
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