If you wish to make a gift to a minor or someone you do not believe is sufficiently responsible, you may wish to make the gift but keep control over it, either until the beneficiary reaches a certain age or until you decide that the recipient is sufficiently mature. This can be achieved by using a suitable trust. Further reasons for using a trust would include:

• Provision of monies for successive generations.

• Preservation of monies which may be diluted due to divorce, dissolution or bankruptcy.

• Income Tax and/or Capital Gains Tax (CGT) mitigation.

• Mitigation of IHT.

• Avoidance of delays in obtaining a Grant of Representation.

Trusts cannot be ignored as they are a fundamental part of IHT planning. They can help not only in the process of reducing or avoiding the incidence of IHT but are also commonly used in helping provide for any liability. The IHT treatment of trusts at inception, during the term of the trust period and upon distribution of any trust funds, depends on the type of trust used.

Relevant Property Regime

Most trusts, excluding bare trusts, which have been created, or added to since 22 March 2006, fall within the relevant property regime. This means that, in addition to a potential tax charge when gifting into the trust, the trust may also be subject to IHT on ten year anniversaries and on exit. The excess of the trust fund above the nil rate band on a ten year anniversary will be taxed at 6%. If the trust is below the nil rate band there will be no charge. The exit charge is a proportion of the ten year charge. It is based on the number of quarter years which have elapsed since the ten year charge and will be no more than 6%. If there is no periodic charge, there can be no exit charge. Earlier trusts which have been amended since 22 March 2006 may also fall within the relevant property regime.
Lifetime gifts

There are three important issues that must not be overlooked when considering making lifetime gifts; the ‘gift with reservation of benefit rules, CGT and pre-owned assets tax.

Gift with Reservation of Benefit

The gift with reservation of benefit rules apply where an individual makes a gift but continues to enjoy a benefit from that gift, for example, continuing to take an income from an investment or continuing to live in a property. The rules also apply if you make a gift into trust and do not exclude yourself from the beneficiaries. Where there is a gift with reservation, there will be no IHT savings as the asset will remain in your estate for IHT purposes.

For a complete guide visit our Inheritance tax adivce centre

Capital Gains Tax

A gift is a disposal for CGT purposes. When gifts are made between ‘connected persons’, such as parents and their children/grandchildren,the donor is treated as having received full market value. Therefore (unless the assets are exempt from CGT), if the asset has increased in value since it was acquired, a CGT liability may arise for the donor(s).

Not all assets are chargeable to CGT, for example cash, gilts and, under most circumstances, life assurance plans. In other cases, it may be possible to claim ‘holdover relief’, effectively deferring any CGT until a subsequent disposal by the donee. This may be beneficial where the trustees or beneficiary(ies) pay tax at a lower rate than the donor.

Hold over relief applies to transfers of:

• Business assets;

• Agricultural property; and

• Any gifts which give rise to a CLT – predominantly, gifts into trusts excluding bare trusts, unless the trust is a settlor interested trust, and this includes trusts created for the settlor’s minor children.

The age of the donor should be taken into account prior to making the gift due to the interaction that exists between CGT and IHT.

Where an individual dies holding assets that stand at a gain, although those assets will form part of the estate for IHT purposes, they will not be subject to CGT. They benefit from a ‘tax-free uplift’ to the value which applied at the date of death – often referred to as ‘rebasing’.

Clearly, if an individual had given the asset away shortly before death,they would have crystallised the CGT liability and the asset may still be in their estate for IHT purposes. The loss of potential rebasing should be considered carefully against a potential IHT saving before making a gift. It is therefore imperative to seek advice before making the gift.

Pre-owned Assets Tax

The Finance Act 2004 introduced a new income tax charge, called pre-owned assets tax (POAT) which broadly applies to the continued use of previously owned assets. This means that, where an individual disposes of an asset and continues to benefit from it, it may be subject to POAT. The charge effective from 6 April 2005, where applicable, is based on the value of the asset or, in the case of property, on its market rental value.

For a complete guide visit our Inheritance tax adivce centre

Transfers Between a Husband and Wife or Civil Partners

Transfers between spouses or civil partners, during lifetime or on death, are exempt from IHT. For the exemption to apply a couple must be legally married or in a registered civil partnership. It does not apply to ‘common law’ partners, although there is no requirement for a married couple to be living together.

Where a transfer is being made by a UK domiciled individual to a spouse or civil partner who is non UK domiciled the exemption is limited to £55,000.

Annual Exemption and Small Gifts

Gifts of up to £3,000 per tax year are exempt. This exemption is per donor and, if not used in any tax year, can be carried forward for use in one subsequent year only. An unlimited number of smaller gifts – worth £250 or less – can also be made to any number of people, however, not to the same person who has benefited from the annual exemption.

Normal Expenditure Out of Income

Regular gifts by an individual that are made out of income are exempt. Gifts that are to fall within this exemption should not affect the donor’s standard of living and should be part of a regular pattern of spending. For example, using income to fund the contributions to a life policy held in trust.

Gifts for Maintenance of a Dependant

A lifetime gift of capital designed to maintain a dependant is exempt, provided payment is for:

• The maintenance of a spouse or former spouse.

• The maintenance or education of a dependent child or stepchild under the age of 18 (or over 18 if in full-time education).

• Reasonable provision for the care or maintenance of a dependent relative who is unable to maintain him or herself due to disability or infirmity.

Gifts in consideration of marriage or registration of civil partnership

Parents can each give up to £5,000 to both parties of the marriage/civil partnership. In addition, the grandparents may each give a sum of up to £2,500. Anyone else may give £1,000.

Gifts to recognised UK charities and other bodies

Gifts to charities, political parties or gifts for the public benefit, eg universities, national museums, the National Trust etc are also exempt.

for a complete guide visit: Inheritance tax adivce

All individuals domiciled in the UK are subject to IHT on ‘transfers of value’ of all their worldwide assets with the exception of excluded property – see below. Those who are not UK domiciled are only subject to IHT in respect of their UK assets. The issue of domicile is beyond the scope of this brochure, however, the domicile of an individual is generally the country where he or she permanently resides or intends to remain in the future – often referred to as ‘where your heart is’.

Furthermore, for the purposes of IHT only, there is the concept of ‘deemed domicile’, which applies where:

• The individual has been resident in the UK in 17 out of the last 20 tax years, or

• The individual was domiciled in the UK within the previous 3 tax years.

Excluded Property

Certain assets are excluded from IHT. These include:

• A reversionary interest under a trust.

• Non UK assets, ie assets not situated within the UK. However, the individuals beneficially entitled to these assets must be domiciled outside the UK or the assets must be held in a trust created at a time when the person who created the trust (the settlor) was non UK domiciled.

What is a transfer of value?

A transfer of value for IHT purposes is any action or omission (usually a gift) in relation to your estate,which reduces its value. This can be during your lifetime or on death. It is not necessarily measured by the value of the asset gifted. It is calculated by reference to the loss to your estate, ie by looking at the value of the estate before, and after, the gift is made, in order to calculate the loss and therefore the value transferred.

Transfers of value will be one of three types:

• Exempt Transfers. These are transfers where IHT will never be payable.

• Potentially Exempt Transfers (PETs).These become exempt if the donor survives seven years from the date of the gift.

• Chargeable Lifetime Transfers (CLTs).These may result in an immediate lifetime charge to IHT of 20%.

Get the complete guide Inheritance tax advice – an introduction

This is an interesting article I came accross some time ago. By Richard Dyson, Financial Mail, 27 July 2009

Thought share it with you here:

Greedy children desperate for the death of their parents so they can inherit their wealth have long been the villains of countless novels and films.

But in modern, middle-class Britain the reality is quite different.

A growing body of research shows that far from being grasping, the baby-boomer generation – those born in the Fifties and Sixties – want their parents to spend their wealth on themselves rather than leave it in a will.

Strangely, this can put the children at odds with their parents because the older generation often feel a duty to pass on their money to help their offspring.

A survey by the social research charity the Joseph Rowntree Foundation found that a majority of the public thought older people should put their own comfort and enjoyment above the need to bequeath money and property.

But when the responses of the over-65s were analysed, seven in 10 saw leaving an inheritance, including a mortgage-free property, as the priority.

In similar research, Saga, the travel and financial services company for over-50s, found that although seven in 10 adults believed an inheritance would improve their quality of life, only one in 10 were counting on one.

And three quarters said they wanted their parents to use their wealth, including the capital locked up in their property, to improve the quality of their own lives.

Andrea Rozario, director general of Safe Home Income Plans (Ship), the organisation that promotes high standards in the sale of equity-release schemes where older homeowners dip into the equity in their homes, believes that attitudes to wealth and inheritance change through the generations.

The ’silent generation’ consists of those born before the Second World War and who are now in their seventies and eighties. They are most likely to want to leave their assets untouched, she says.

‘In many cases, these people will endure real hardship rather than spend savings or release equity from their property,’ she says. ‘This generation is especially committed to the concept of bequeathing wealth to the next generation. They are also more reserved about discussing money generally.’ Baby-boomers are far more relaxed about spending their own wealth and about encouraging their parents to part with theirs, says Rozario. It is this trend that is powering the growth of equity release.

Get a free IHT guide from our inheritance tax advice centre

The most popular deals are ‘lifetime’ or ‘roll-up’ mortgages where homeowners borrow fixed sums. As with any mortgage, interest is payable along with the repayment of the original sum borrowed. But with equity-release mortgages, no interest is paid until either the homeowner dies or sells to move elsewhere or into care. Instead, the interest rolls up. The effect of the borrowing, together with the accumulation of interest, is to reduce the value of the property that may be left in a will. The longer the homeowner lives, the greater the cost of the loan and the less of the property’s value is retained to bequeath.

This is the sort of scheme used by Brenda Atkins-Kettlewell, a 61-year-old retired nurse. Twice widowed, Brenda owns her home in Silsden, West Yorkshire, but because she worked abroad for much of her life Brenda has little pension income. With a love of foreign travel and a bungalow that is costly to maintain, Brenda wanted more disposable income. She would rather raise it against her property than sell other investments, such as shares, at today’s depressed values.

Brenda has one son who is a successful and wealthy telecoms executive in Canada. ‘He said, ”It’s your life, your money, you must enjoy it”,’ she says. She is using a flexible equity-release scheme from Prudential and, like all lifetime mortgages, the amount it allows her to borrow is limited by her age. As she is comparatively young, she is drawing a sum equivalent to 15% of her property’s value now with a small annual ‘income’ of £1,500 over the next ten years.

When she is older, she can release further lump sums. By ‘dripping’ the equity out in small sums, she limits the ultimate impact of interest charged to her estate. ‘As they say, 60 is the new 40,’ says Brenda. ‘This process might go on for a long while, so I’d prefer to start small.’

John Barrett, 71, and his wife, Hilary, 63, have gone down the same route. They both have children from previous marriages and their five children have been wholeheartedly in favour of the couple using the money stored in their home to enhance their retirement. John, who served in the police and had a lengthy spell as a claims inspector for a big insurer, and Hilary, who worked in a supermarket, could get by perfectly well on their pensions. But what they did not have was a large lump sum that could pay for a new car, a new kitchen, and a dream trip to Canada, which included a helicopter ride over Niagara Falls.

Get a free IHT guide from our inheritance tax advice centre