In the fourth of our Short guide to series, which examines how different trusts can be used in financial planning, John Cowley looks at how the making of various gifts can impact upon each other and looks at the potential pitfalls
Planning post-Finance Act 2006 may well require the use of a number of different products and more frequent gifting from a much younger age.
Gifts of up to the inheritance tax (IHT) nil rate band (currently £285,000) every seven years into trust, for example, should now be considered for clients as young as 40.
When looking at IHT planning, advisers will have to consider the client's overall assets, their history of previous gifts and the order in which they establish any new IHT planning structures.
Bare trusts have emerged as one solution post-Budget because gifts into such trusts are still potentially exempt transfers (Pets) and the trust itself is not taxed to IHT as a discretionary trust would be.
Bare trusts, however, do not achieve the ability to pass the trust assets down through the generations in the way that was previously possible. Therefore, the continued use of discretionary trusts, such as discounted gift trusts and outright gift trusts up to the value of the nil rate band, should still be considered in conjunction with discounted bare trust arrangements or gift and loan arrangements.
Discretionary trusts pay IHT on the trust itself. The tax charge is based on the value of the trust assets at the 10-year point or when property leaves the trust but the trust effectively gets its own IHT nil rate band.
The available nil rate band is based on the nil rate band at the time tax becomes payable (at 10 years or on exit) but is reduced by any Chargeable Lifetime Transfers (CLTs) made by the settlor in the seven years up to (but not including) the day the trust was created.
For this reason, Pets made in the seven years prior to the discretionary trust being created have to also be considered because, if the settlor dies within seven years of making the Pet, this becomes a CLT and could reduce the available nil rate band for the trust going forward.
Trusts should be established on separate days to avoid them being related settlements because the values of related settlements are aggregated when computing charges to IHT. Where a number of arrangements are being considered then the order in which arrangements are entered into is also important.
Structures that do not create large CLTs or Pets at outset, such as gift and loan arrangements or regular premium life assurance policies written into trust, should be considered first because other arrangements that create large CLTs or Pets (which could subsequently become CLTs) could impact on these arrangements.
Similarly gifts into discretionary trusts should be made before gifts into bare trusts because the gift into a bare trust would be a Pet that could subsequently become a CLT and, therefore, impact on the discretionary trust arrangement.key Facts about IHT planningConsider all the client's assets as a whole, do not plan in isolation
Don't forget that Pets made in the last seven years can impact on new discretionary trust arrangements
When considering more than one arrangement make them on separate days and in the correct order
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