Techzone

It’s just over 10 years since the IHT treatment of trusts was radically overhauled. During the last seven of these government receipts of IHT have gone up by 64%. There are many factors contributing to this, including the rise in value of property, but effective estate planning as part of a holistic approach to your clients’ wealth management can maximise the amounts cascading down the generations. 

Trustee clients also need reminding that they may need to complete a tax return if 10 years has elapsed since they set up their plan. This includes ‘packaged’ type plans such as those offered by life companies using onshore or offshore investment bonds (e.g. discounted gift plan, gift plan, loan plan etc.). At the same time, this provides an ideal opportunity to review the trust investments and make further gifts to maximise refreshed allowances and nil rate bands - saving even more IHT on top of that already achieved.

The Past.....

2006 brought a much wider range of trusts (including those offered by many life companies) into what is known as the ‘relevant property regime’. This was the regime that broadly only applied to discretionary trusts at the time, and meant there could be an immediate 20% charge to IHT when the trust was set up, together with potential charges up to 6% when money was taken out of the trust and at each tenth anniversary. Prior to this, the well known ‘flexible trust’ could have escaped IHT altogether if the settlor survived seven years.

The Present.....

But because of the changes introduced on the 22 March 2006, the IHT benefits of a flexible trust over a discretionary trust have been negated. Most new plans created since this date have been for amounts up to the settlor’s available IHT nil rate band. Provided this is done, no immediate IHT at 20% is due and the settlor can augment their gifting every seven years as the nil rate band is refreshed.

The ten year anniversary may also result in some tax, but broadly speaking, only if the net trust fund exceeds the current nil rate band available to the trust (so a maximum of £325,000). If so, the excess will be taxed at 6%. Where there is tax to pay at a 10 year anniversary, trustees will have to complete the forms IHT100, IHT100d. Supplementary form D34 may also be required. In some circumstances, these forms will also need to be completed even if no tax is due. 

For those clients with much higher amounts to gift, it could be split between a discretionary trust and absolute trust. Transfers up to the nil rate band could be put into the discretionary trust, with the balance into absolute trust. The benefits of the latter are that gifts in are still potentially exempt transfers with no immediate charge on entry, and there are no periodic or exit charges. But absolute trusts remove the flexibility and discretion trustees have over who benefits and when - if this is too big a price to pay, the alternative is simply to pay the lifetime tax.

The current nil rate band is £325,000, having risen by £40,000 in the last decade. For a couple, this presents the opportunity to make chargeable transfers of up to £650,000 every seven years with no initial charge due. So it's worth keeping an eye on your clients’ nil rate bands and making the most of them when they are refreshed. 

The Future.....

Even though the IHT nil rate band has been frozen at £325,000 since April 2009 (more than half of the 10 year period!) the IHT savings made can still be significant and any IHT that is due from ten years anniversary charges may be less than imagined. This might be a small price to pay for the additional control, flexibility and asset protection that a flexible or discretionary trust offers. 

The example below shows how successful gift plan and discounted gift plan can be, compared with making no gifts at all. It assumes that the trust (discretionary) invests in an offshore bond.

* See notes and assumptions in box below

This demonstrates that limiting the values transferred to the available nil rate band can produce significant IHT savings.

And with government receipts of IHT trending upwards, there is clearly plenty of potential for advisers to help clients preserve their estates for future generations. Regular reviews and rolling gifts every seven years can maximise the IHT savings without incurring the pain of 20% charge on creation.