What to Consider when it comes to Inheritance Planning

When passing wealth to future generations it is essential to consider the order in which gifts are made, as gifting in the wrong order can have some serious tax consequences.

There are two key points to pick out that will impact on the order of gifting.

First, chargeable lifetime transfers (CLTs). CLTs are commonly gifts to relevant property trusts, such as discretionary trusts, flexible trusts since March 2006 and so on.

‘Personal circumstances may dictate how and when gifts are made but gifting in the wrong order can result in an increased IHT bill’

When making a CLT, any other CLTs made in the seven years before will reduce the available nil-rate band and have a direct impact on the 10-year periodic charge and exit charge calculations.

The second key point centres around potentially exempt transfers (PETs). If a person dies within seven years of making a PET, the PET fails and is treated as a chargeable transfer.

This means that if a PET is made before a CLT and it subsequently fails, it will be brought into account for the purposes of the 10-year periodic charge on the CLT.

The suggested order (with at least one day between each structure), where a number of solutions are being considered to solve a specific IHT situation is as follows:

1. Gift and loan trusts

The loan to the trustees is not a transfer of value (and so does not impact on subsequent arrangements), but if the trust is discretionary there may be potential periodic and exit charges if the growth in the trust is sufficient.

For large loans it may be beneficial to spread the amount over multiple gift and loan trusts.

As there is no transfer of value, on each 10th anniversary a discretionary trust version will have a full nil-rate band available to it, providing that there were no additional arrangements set up on the same day.

Having two gift and loan trusts set up on consecutive days could allow the trustees a full nil-rate band for each trust, thereby reducing the possibility of a periodic charge.

2. Exemptions

Next, think about making fully exempt gifts, such as transfers to spouses or civil partners, the £3,000 annual gift, marriage gifts and small gifts. Although limited in value, these are outside of the estate immediately.

Next, think about making fully exempt gifts, such as transfers to spouses or civil partners, the £3,000 annual gift, marriage gifts and small gifts. Although limited in value, these are outside of the estate immediately.

One of the most valuable exemptions is the gifting of surplus income. IHT is a tax on capital transfers, so transferring surplus income is not subject to IHT providing that the intention of the gifting is regular and that the donor retains sufficient income to maintain their standard of living.

Regular premiums payable under a whole of life policy written in trust may be covered by either the annual or the normal expenditure out of income exemption.

3. Chargeable lifetime transfers

Gifts to relevant property trusts should be made next. This includes discretionary trusts, accumulation and maintenance trusts, flexible trusts settled since March 2006 and so on.

4. Potentially exempt transfers

These are absolute gifts, made to individuals or to bare/absolute trusts, for example.

Getting the order wrong could result in higher IHT bills on every 10th anniversary of a trust and when money is distributed to beneficiaries, but getting the order right could save the trustees time and money.

For example, a gift of £325,000 to a discretionary trust (treated as a CLT), followed by the same amount to a bare trust (treated as a PET), could reduce the estate by £650,000 without any IHT consequences (subject to the seven-year survival period).

However, if a PET is made before a CLT, and subsequently fails, then it will reduce the nil-rate band for the purposes of the periodic or exit charges.

As can be seen, careful consideration should be given to the order of gifting. Personal circumstances may dictate how and when gifts are made but gifting in the wrong order can result in an increased IHT bill.

What is the Next Step?

We are able to assist and we will be able to answer any questions you have and advise you on the best way to proceed, in what can be a hugely complex planning area.

Contact us today and one of our experienced advisors will be happy to assist.

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