BR Guide FINAL 20 Feb

55 CASE STUDIES SCENARIO: Mr and Mrs Johnson are married and in their 70s. Both have adult children from previous marriages and would like their respective children to inherit their individual estates. LIFE INTEREST TRUSTS SCENARIO: June is 66 and is keen to put £500,000 cash, from the sale of her business a few months ago, into a discretionary trust for her grandchildren. DISCRETIONARY TRUSTS To prevent the value of assets held in the IPDI trust being aggregated with his wife’s estate on her death, leading to a charge to IHT before the net capital is distributed to his children, the IPDI trust is invested into a BR qualifying investment on Mr Johnson’s death. If Mrs Johnson survives her husband by at least two years and the investment is still held at the time of her death, the trust capital invested would be IHT exempt BR Qualifying ALTERNATIVE ROUTE If Mr Johnson invested in BR qualifying assets during his lifetime and directed the investment to the IPDI trust in his will, his wife would only have to survive for the balance of the two-year qualifying period to ensure the capital achieved IHT exemption. Both strategies enable the full amount of Mr and Mrs Johnson’s nil rate band to be applied against her own estate to protect it for the benefit of her own children. Immediate Post Death Interest trust (IPDI) created by a life interest trust investment to shelter the trust fund from IHT on death of life tenant Business Sale Proceeds and efficiently funding a high value discretionary trust SET UP OF AN IPDI TRUST TO PROVIDE HIS WIFE WITH AN INCOME DIRECT HIS CAPITAL TO HIS CHILDREN ON WIFE’S DEATH MR JOHNSON’S WILL June’s previous business undertook BR activities for ten years JUNE SELLS THE BUSINESS AND WANTS TO PUT THE PROCEEDS INTO A TRUST She has already used her NRB by establishing other trusts and making personal gifts. Consequently, June would be liable for the chargeable lifetime transfer into trust: 20% charge on £500,000 = £100,000 IHT due BR Qualifying *If June’s company did not undertake a BR qualifying activity, she could still avoid the CLT charge by initially investing the £500,000 into a BR qualifying investment and after two years she could settle the BR qualifying investment into the discretionary trust. CASE STUDY 1 CASE STUDY 2 To avoid the charge, June reinvests the money into BR within three years of the sale of the business £500,000 INTO BR Now she can move assets into trust with Chargeable Lifetime Transfer at 0% thanks to BR qualification* The gift to the trust restarts the BR clock £500,000 INTO TRUST POSSIBLE CHARGES If June dies within seven years and if the trustees disposed of the BR qualifying assets within seven years, the transfer into trust would fall back into charge and IHT would become payable on the amount by which the value transferred exceeded the NRB. If the trustees hold the BR qualifying investment for a two-year period and the asset itself continues to qualify for BR, no periodic or exit charges should arise. Trust Interactions