Discounted Gift Trust - and Inheritance Tax Avoidance

Sometimes referred to as "Discounted Gift Trusts" or "Discounted Gift Bonds" or even "Discounted Gift Plans" - it is a method of avoiding Inheritance Tax which:-

• Immediately reduces the value of your estate for IHT purposes, even if you die within seven years
• When you survive for seven years it reduces your estate even further for Inheritance Tax purposes
• Provides a method of taking  regular withdrawals from the plan, but keeping them held in trust and outside of your estate
• Allows any remaining fund in the event of your death to be passed to your loved ones
• It is suitable for single people and couples

A worked example:-

Mr Smith aged 60, invests £100,000 in a Discounted Gift Trust. He is in good health and has used his annual allowances. He wants to take withdrawals from the plan of £5,000 per year.

Subject to agreement from the HMRC, the £100,000 investment could get an immediate discount of £66,530. This is based on Mr Smith's age, health and level of withdrawals from the plan. The £66,530 is immediately not liable to Inheritance Tax.

£33,470 becomes a Chargeable Lifetime Transfer (CLT). So,  if Mr Smith survives for seven years, then the £33,470 will also become exempt from Inheritance Tax! 

The Chargeable Lifetime Transfer (CLT) stops being part of your estate after seven years, but the discount part immediately ceases to be part of your estate. 

What is more if the growth of the plan is greater that the level of withdrawals, then the plan will grow in value, and this growth will not form part of your estate.

The discount will depend upon your circumstances. If you want to know more, and how much discount you could claim, then contact us now without obligation to discuss how a discounted trust could benefit you.

Gift and Loan Schemes - and Inheritance Tax Avoidance

Gift and Loan Schemes, which are also known as Loan Schemes, are a popular way of reducing your Inheritance Tax liability without losing access to the capital. How it works:-

• You establish a trust, and loan the trust money
• The trustees invest this money
• You reserve the right to have the loan paid back in full, or have partial repayments
• Any growth on the loan falls outside of the value of the estate on death
• The amount of loan not repaid on death forms part of the deceased's estate
• The main advantage is that it puts further growth on money outside of the estate

Below shows how the scheme would work, one based on taking repayments to use as income, and one with no repayments of the loan.  It assumes that the £100,000 grows over five years to £150,000. Please note this should not be taken to imply this level of growth would be achieved. It is purely to illustrate the potential benefits of this type of scheme. 

¹Please note the amount of growth after five years is only £120,000 as this assumes £5,000 of the fund has been taken out and used as income each year.

A Gift and Loan Scheme (or Loan Scheme) is generally suitable for people who want to retain access to their capital, but do not want their estate to increase in value any further.

These are just two of the methods available to reduce your Inheritance Tax liability. There are other strategies that can remove IHT liabilities after only two years, or provide limited but flexible access to capital that has been placed into trust without being considered a gift with reservation. If you want to know more, and how we can help then contact us now.

Trusts and Taxation

Trusts and assets held within trusts are subject to taxation. Therefore if you merely place assets into trust there is no guarantee of tax efficiency.

When using trusts for Inheritance Tax planning you should take care:-

• that you create the right sort of trust
• with the timing with which you create the trust versus other gifts
• with the number of trusts that you create
• with the type of assets to be held within the trust

In general for the purposes of taxation, trusts settled by individuals during their lifetime fall into one of two categories: Absolute or Bare trusts; and Discretionary or Flexible trusts. A Bare Trust is where the beneficiaries are named at outset and cannot subsequently be changed. The beneficiaries of a Bare Trust have an absolute right to access to the assets and/or income from the trust from age eighteen. A Discretionary Trust is where there are a range of potential beneficiaries defined at outset and the trustees are given the discretion to advance income and/or assets (or not) to any of the beneficiaries.

A gift to a Bare trust is a Potentially Exempt Transfer (PET) and is outside the settlor’s estate when the settlor survives for seven years from the date of the gift. If the settlor dies within seven years the PET fails (see Exemptions and Allowances).

A gift to a Discretionary trust is a Chargeable Lifetime Transfer (CLT) and is immediately subject to an Inheritance Tax Charge of 20% on the net value of the gift that is over the balance of the Settlor’s remaining Nil Rate Band after allowing for cumulative chargeable transfers during the previous seven years. The value of the gift is outside the settlor’s estate when the settlor survives for seven years from the date of the gift. If the settlor dies within seven years there is a further Inheritance Tax charge of 20% of the original net value of the gift.

When making PETs and CLTs care must be taken in their timing to maximise tax efficiency.

A discretionary trust is subject to a tax charge every ten years on the value of its assets (including previous distributions) over the nil rate band in effect on the date of the tenth anniversary. Distributions from discretionary trusts can also be subject a tax charge. However, with careful planning and timing these tax charges can often be avoided.

Income received by a trust is subject to income tax and gains within a trust are subject to capital gains tax. These taxes can often be avoided by careful selection of assets within a trust.