In the fifth of our Short guide to series, which examines how different trusts can be used in financial planning, Colin Jelley looks at how the liability of making two gifts in a short period can vary depending on the order of events
When considering making two gifts in close succession, you need to consider the order of events to ensure future tax liabilities are minimised.
The relevant property regime, which now treats interest in possession and accumulation and maintenance (A&M) trusts in a similar manner to discretionary trusts for inheritance tax (IHT) purposes, brings with it some added complexities. These can easily be missed but clearly demonstrate the need for advice in this ever changing market.
It is worth remembering that in 2005/06, the IHT yield for the Government was just short of £3.3bn. According to research by an undisclosed mortgage provider, it is expected to grow to more than £5.6bn by 2020.
Despite the recent changes contained in the Finance Act, this market is definitely still an opportunity worth considering.
Creating more than a single insurance policy at once is common practice: regular premium protection alongside single premium lump-sum investments, for example.
Utilising the existing potentially exempt transfer (Pet) and chargeable lifetime transfer (CLT) rules for trusts, also means a combination of the two will enable an individual to gift away assets far in excess of their nil-rate band (NRB) without incurring any immediate tax.
Looking at an example when the CLT was created before the Pet (see table, right), it is easy to see how this structure can be beneficial for clients. In this scenario, only the impact on the 10-yearly periodic charges is considered, but the same principle applies to exit charges in the first and subsequent 10-yearly intervals.
Consider a client who wishes to create a trust of £285,000 for his grandchild; he is concerned about giving them absolute access to these funds, so a discretionary trust provides the required flexibility and caters for any new family members. The trust falls within the available NRB of £285,000 for 2006/2007 and is a CLT, with an entry tax charge of zero.
Additionally, he wishes tomake an outright gift of £285,000 to his adult children. This is a Pet so entry, 10-year periodic and exit charges are not applicable. The result is that he can give away £570,000 without any immediate liability to tax.
The objectives have been addressed. However, suppose the client dies 18 months later. The key question now is the order in which the gifts were made. It is assumed that the residual estate has been passed to his spouse under the spouse exemption and his annual exemptions have been used elsewhere.
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