18
Gifts are relatively simple to implement,
but specialist knowledge is required
to ensure that the tax consequences
are understood; that the donor can
afford to make the gift and that the
record keeping is accurate in case of a
challenge from HMRC when the estate
is assessed. The process of making the
gift should not be expensive, although
of course the advice has to be paid for.
The biggest issue with gifts, apart from
the time it takes to achieve 100% relief,
is the loss of access and control. The
gift becomes the sole property of the
beneficiary (a gift without reservation)
as soon as the gift is made and the
donor has no legal claim on the assets
or income (or any other benefits).
This can be a concern if the donor
anticipates that they might need the
money in the future, or if they feel their
intended beneficiary isn’t capable of
managing the money responsibly.
For the avoidance of doubt, gifting one’s
principle private residence (whilst still
intending to reside there) would be a
gift WITH reservation, and so would
not qualify as a PET unless the donor
were to pay rent to the donee in which
case it is not a gift with reservation.
TRUSTS
Trusts are usually used in conjunction
with gifts - a gift can be placed in trust.
This places the assets in a legal wrapper
that is controlled by the trustees.
Trusts have all the IHT benefits of a
gift, but give the donor (settlor) more
control and mean they can potentially
retain some of the benefits.
The settlor can specify when the assets
are distributed to the beneficiary
(usually upon their death where IHT is
concerned, but this feature can also be
used to delay distribution, perhaps to
prevent youngsters spending money
unwisely for example) and how those
assets are invested prior to that. IHT
is often immediately chargeable on
transferring the assets into the trust and
there may be a 20% upfront tax charge
as well (chargeable lifetime transfer).
If the settlor wants to receive some
benefit from the assets placed in the
trust, then a discounted gift trust or
loan trust must be used. These more
complex legal structures allow the donor
to receive income from the assets, but
usually mean that something less than
100% IHT mitigation is achieved. And as
they are based around gifts, the same
timeframes apply - seven years until full
IHT relief on the portion of the gift that
is not reserved for the settlor’s benefit.
There are a wide variety of trusts and
trust law is complex, so specialist
knowledge is required here, and of
course this complexity comes at a high
price: setting up and running trusts can
be expensive and may not be worth
considering for amounts under £100,000.
As with gifts, the biggest issue with
trusts is the loss of control. Although
the settlor can exercise some control
and take some benefit from the trust,
the assets are owned and managed by
the trustees - if the settlor exercises
control then it is likely that the
arrangement will be deemed a sham
trust and the full IHT liability will apply.
Discounted gift trusts are currently
the most popular IHT mitigation
strategy, favoured by over 70% of
advisers according to FT research.
Source: OBR
SLIDING SCALE OF TAPER
RELIEF ON PET
s
N⁰ of years
from gift
% of IHT
(reduction in tax charged)
1-3
100%
3
80%
4
60%
5
40%
6
20%
7
0%
BPR
EIS
Trusts
Gifts / PETs
(
Potentially
Exempt Transfers)
Life
Assurance
Timeframe
2 years
from
share
ownership
2 years
from share
ownership
7 years
Tapers - but 7
years for full
relief
As soon as
the policy is in
place
Implementation
and ongoing
administration
Simple
Simple
Requires
relatively
complex
legal
structures
Specialist
advice is higly
recommended
Depends on
age and health
status - can be
restrictive
Costs
Varies,
around
2.5% initial
and 1-3%
p.a. after
beating a
hurdle
Varies,
around
2.5% initial
and 1.5%
ongoing
AMC
High
Low, but there
will be a charge
for the advice
Monthly
premium or
lump sum
- will vary
depending on
sum assured,
age and health
Investment
Risk
Medium
to high
Medium to
high
Depends
on how the
assets are
invested
None
None
Flexibility
Yes,
can exit at
any time
Yes,
subject to
liquidity
and
implication
to the other
reliefs
No access,
but some
control
depending
on the
legal
structure.
Lose access
and control
Can cancel the
policy, subject
to costs
Mitigation
100% 100% Can be
100%,
depending
upon the
structure
(after 7
years)
100%
(after 7 years)
No mitigation
- just pays the
bill with sum
assured
IHT SOLUTIONS COMPARISON
“Discounted gift trusts are currently the most popular IHT mitigation strategy, favoured by over
70% of advisers”
