Advisers should be aware trusts can be used to minimise the effects of IHT through a ‘dripfeed' approach as well as large one-off gifts, Standard Life says.
Earlier this year, HM Revenue & Customs published a research report outlining the motivating factors behind the use of trusts, which revealed very few people used trusts solely as tax-avoidance tools.
Julie Hutchison, estate planning specialist at Standard Life, says there are many reasons why people don’t want to gift assets directly to other family members, which makes a trust appropriate.
However, she argues a trust can be an ideal vehicle for estate planning for all sorts of reasons, as highlighted by HMRC, but she says until now people have been focusing on areas such as Discounted Gift Trusts (DGTs) and taking advantage of Potentially Exempt Transfers (PETs) as a way of minimising their IHT Bill.
Hutchison suggests another possibility is to use a trust to receive IHT exempt gifts which qualify as “normal expenditure from income”.
She says this exemption applies when gifts are made from income, where there is a pattern of gifting and where the level of gift does not undermine the individual’s standard of living.
Hutchison says this solution particularly benefits people in retirement as, providing they don’t fall back on state benefits, they could effectively strip out their income and gift it to their beneficiaries while they are still alive and without risking an IHT bill.
She says: “People should not forget they can dripfeed income gifts to a trust as well as make one-off capital gifts. Over time, smaller gifts build up and can establish a pot for children or grandchildren in the future.”
To be on the safe side, Hutchison recommends carefully documenting each gift to prove it is “normal expenditure from income” using a form provided by HMRC.
She adds: “It is always a good idea to record income gifts and I would highlight HMRC’s own form D3A for this purpose. Although it is generally used to record gifts by an estate after a person’s death, I see no reason why it can’t be used while they are alive.”
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