IHT & Trusts

Afternoon,

Looking for some guidance, please. I have a client who has created 14 Trusts for the benefit of his grandchildren. He is contributing to 7 of them on an annual basis.

The contributions are £5k each.

The total contributions so far are within his nil rate band, so I am comfortable that no IHT due when placing the premiums. However, if he were to pass away, is it the value at the date of death I would use to assess the value of the trust for IHT purposes and what interaction if any, would these regular payments have on the amount of IHT due?

I am considering some protection but not sure what value I would need to use for this. I have tried reading through Pru Adviser etc. but still not sure. Any opinions you can offer would be greatly appreciated.

Some further information;

Total contributions to date £270,951 (additional £35K now being paid in so takes us to £305,951)
Value excluding current premiums £358,577

Comments

  • SA96SA96 Member
    edited May 26

    My understanding is below, if somebody else wishes to correct me, please do so.

    1. Trust property belongs to the beneficiary(ies) (grandchildren), this would not be included in the client's estate. The value of the trust is irrelevant.

    2. The gifts trigger a 7-year clock, if the client was to die within 7 years of any gifts, the gifts may use up some of his nil-rate band, which would increase any IHT liability. Obviously, tapering relief may come into this, so factor this in too.

    3. If he has been contributing £35k per annum, do not forget the client's £3k annual gift allowance, this would make a small difference. It reduces the gifts to £32k per annum + in the first year of gifting, he would have been able to gift £6k (using 1 year backdated). This assumes no other gifts were made obviously.

    4. Protection should be looked at not just for the gifts, but the client's overall estate. What is their present IHT liability? How old are they? What is their investment risk (is Aim an option?) - What are their goals? Are they married? - There are other IHT mitigation products available such as discounted gift trusts, loan trusts or Canada Life's WPA.

    Hope this helps.

  • Are they fixed/bare trusts or flexible trusts?

    Some or all of the 7 x £5,000 annual gifts may be allowed as expenses from natural income. See link below.

    https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14231

  • Type of trust is important to see if the gifts are Chargeable Lifetime Transfers or PETs.

    For assessing your client's estate for IHT purposes you look back at premiums over the past 7 years (it is NOT the trust fund value you use).

    Depending on the type of trust and how long they have been going (as well as any other gifts) then you may get caught by the 14-Year rule for looking back at gifts into trusts.

    Taper relief will apply only if gifts in the 7 years prior to death exceed the Nil Rate Band - the taper applies to the excess, not the amounts covered by the Nil Rate Band.

    If you think your client can make use of the normal expenditure exemption then it is wise to keep a detailed record of income / expenditure for each tax year. Refer to IHT 403 page 8.

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