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

Take careful advice on this.

Our articles 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 £325,000 in 2010/11. A gift is subsequently made into a discretionary trust of £325,000. 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 Potentially Exempt Transfer (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 we’re using, assuming fair growth rates in the trust, the ten year tax charge can be cut by 90%.

Take it from us, it’s complicated so ensure you receive good advice.

Other Inheritance Tax frequently asked questions:

• Does a Will help my Inheritance Tax Planning?
• How much is my estate worth for Inheritance Tax?
• How soon will Inheritance Tax have to be paid?
• What Inheritance Tax planning exemptions do I have?
• What is a potentially exempt transfer?
• Will all my gifts be effective for UK Inheritance Tax?
• If I am making gifts or gifts into trusts which order should I do them in?
• If I have an existing trust, do I need to do anything about it?
• If I made an outright gift of over the nil rate band, would I pay any immediate inheritance tax?