Discounted Gift Schemes
There are many of these types of schemes available in the marketplace today. They simply work by gifting capital into an Inheritance Tax trust. The Inheritance Tax saving can be considerable whilst keeping capital and future growth outside your estate.
As there are many different versions, advice should be taken before acting on the most suitable Inheritance Tax trust.
This type of scheme is particularly useful where you immediately wish to reduce your estate which is potentially subject to Inheritance Tax and also require a regular income from your capital.
How does this Inheritance Tax Trust work?
You place lump sum of say £100,000 in a Discounted Gift. You stipulate what ‘income’ stream you wish to take back from the Inheritance tax trust.
A gift is calculated as the LOSS TO YOUR ESTATE. If you gifted £100,000 outright to your children, the loss would be £100,000 and this would be deemed to be the gift.
In this trust situation the loss to the estate is actuarially calculated, which works in your favour. A calculation will consider what income will come back to you by virtue of your life expectancy and what level of income you have selected. For the sake of simplicity, a person with normal 10 years life expectancy and 5% withdrawals might expect 50% of the gift they are making to come back into the estate. Therefore what has the loss to the estate been? It is the initial gift less the expected payments.
A 60 year couple in decent health for example, would expect an immediate discount of over 50%.
Changes in the Finance Act?
The gift is a chargeable transfer and if it exceeds your available nil rate band (£300,000 for 2007/08), there will be an immediate Inheritance Tax charge of 20% and so gifts that cause the nil rate band to be exceeded should be avoided. Remember it's the discounted element of the gift, rather than the actual gift which is taken into account. Remember also that couples can use two nil rate bands.
In this example a 60 year old couple could therefore reasonably expect to give away £600,000 each without an issue of a lifetime charge.
The taxation of trusts used for Inheritance Tax planning was subject to considerable change in the 2006 Budget. These changes mean that an inheritance tax charge can also arise every 10 years or when capital is transferred out of the trust. However the maximum tax charge will be at 6% and frequently it will be much less or even nil.
Disadvantages:
• Once you have placed the capital in the Inheritance Tax trust you have lost access to it. Think about that carefully
• You can wind up the Inheritance Tax trust but this would be done in favour of the beneficiaries and not you
• There could be a charge for setting up the Inheritance Tax trust
Advantages:
• Immediately reduces the value of your estate for UK Inheritance Tax purposes, even if you die within seven years.
• Although you have given the capital away you are still able to retain an income without falling foul of the anti avoidance legislation.
• The remaining capital can go to your beneficiaries free of UK Inheritance Tax or you can use the trust to skip a generation whilst allowing access to your first line beneficiaries.
• If set up correctly, all gains can roll up free of tax. With careful planning distributions can also be tax-free.
• If you were uncomfortable giving capital away immediately to family, this solution works, as they do not receive the money until you die. It therefore controls how, and when your children receive the money.
Technical points relating to a Discounted Gift Trust (download this as a pdf)
Click on the links below to discover other solutions to Inheritance Tax.
- Life Insurance To Pay the Inheritance Tax
- Nil Rate Band Discretionary Will Trust
- Purchased Life Annuity
- Business Property Relief
- Agricultural Relief
- Realigning of Assets
- Other Inheritance Tax Exempt Gifts
Inheritance Tax Loan Trust
Inheritance Tax Loan Trust solutions are a common method of mitigating tax.
How do they work?
You establish an Inheritance Tax loan trust. You then lend the Inheritance Tax loan trust money. The amount of capital you give the trustees is considered to be the loan. The loan’s value will remain inside your estate. All growth on the money however, will be outside the estate and if invested wisely, will be free of tax as it grows, and distributions can also be free of Inheritance Tax.
On demand you can ask for the loan to be repaid to you. You can also ask for a regular income stream from the Inheritance Tax loan trust. Whatever you take from the Inheritance Tax loan trust will then reduce the taxable element to your estate. If you had taken 20% of your original investment into the Inheritance Tax loan trust as income or withdrawals, this would reduce the loan by 20%.
Example: You establish an Inheritance Tax loan trust for £100,000. Over 6 years you have taken 5% per year withdrawals without any tax liability. The investment after growth for example is worth £110,000. The total amount in your estate however is £70,000 as the original capital placed into the trust was £100,000 less the withdrawals of £30,000 equals £70,000. The original capital invested has grown outside the estate for Inheritance Tax purposes.
Disadvantages:
• When you exhaust your original capital your income stream will stop. You are only allowed access to the original capital you place into the trust
• There will be a charge for setting up the Inheritance tax trust
Advantages:
• All growth can be income tax and Inheritance tax free
• Unlike the discounted gift trust, your original capital is still accessible to you
• Similar to the discounted gift trust, if you were uncomfortable giving capital away immediately to family, this solution works, as they do not receive the money until you die. It therefore, controls how and when your children receive the money
A Gift and Loan Scheme (or Loan Scheme) is generally suitable for people who want to retain access to their original capital, but do not want their estate to increase in value any further.
Call one of our Inheritance Tax Planning advisers on 0845 230 9876 or complete the
enquiry form in confidence to see how we can assist you.
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