IHT receipts to His Majesties Revenue & Customs (HMRC) have been on the rise for over a decade, with Government statistics suggesting further increases. Yet at the same time, the number of trusts being created is reducing.
To give an idea of HMRC’s IHT receipts, the latest figures released show £2.4bn received in the period between April 2022 and July 2022. £300mn higher than in the previous period. This has been largely influenced by rising property prices.
What is IHT? – IHT is a tax payable on money, savings and any other assets an individual or couple passes on when they die, and potentially some gifts made during one’s lifetime. The amount payable is calculated net of relevant allowances, debts and funeral expenses. IHT is currently payable at 40% and is the responsibility of the estate’s executor.
What are the main allowances? – Currently, each-individual has a Nil-Rate Band Allowance (NRB) available to them of £325,000, with married couples or civil partners having £650,000. There is a further Residential Nil-Rate Band (RNRB) available of £175,000 per individual (the RNRB is qualification based, and some individuals may not benefit). This can in effect mean that a married couple or civil partners could leave £1mn of their estate to beneficiaries tax-free. Anything over this amount will be subject to 40% tax.
Further gifting allowances are available but are not covered in this article. It is also worth noting that IHT must be paid to HMRC within 6-months of death. If this is not possible, HMRC offer repayment schemes with interest.
What is a Trust? – In the simplest form, a Trust is a way of managing assets (money, investments, land or buildings) for people. There are different types of Trusts and they are taxed differently. Trusts involve the ‘Settlor’, person(s) who put assets into Trust, ‘Trustees’ who manage the Trust, and the ‘Beneficiaries’ who ultimately receive the benefits of the Trust.
Trusts can be a great way for individuals and couples to reduce an IHT liability while retaining an element of control over gifts, and in some cases, even retain access themselves.
Why use an Investment Bond within a Trust – unlike some other investment solutions, investment bonds are non-income producing, with income and gains rolling up within the plans. This means that there is no income or capital gains that the Trustees have to report and pay tax on via the Trust.
Income tax may only be due when the policy ends or withdrawals of more than the 5% cumulative allowance are taken. Also, unlike other investments, chargeable gains remain accessible upon the settlor during their lifetime. Therefore the Trustee rate of tax is only payable if the settlor is no longer alive. When trustees are ready to make an appointment to the beneficiary they can assign the bond (or segments) to them without creating a chargeable event. The beneficiary then takes ownership of the bond and can surrender at an appropriate time, with any gains assessed upon them benefitting from their own allowances and tax rates.
The two ways of structuring a Trust – Bare/Absolute vs Discretionary – in the very simplest form, a Bare (sometimes called ‘Absolute’) Trust, must specify and name who the beneficiaries of the Trust are at the outset, they then cannot be changed. Gifting assets via a Bare Trust is a form of ‘Potentially Exempt Transfer’ or ‘PET’ for short. There is no limit to the amount that can be gifted via a PET.
Alternatively, a Discretionary Trust names ‘potential’ beneficiaries at the outset, who can then be changed throughout the Trusts lifetime – this is subject to the Trustees agreement and via a Letter of Wishes. The trade-off for this flexibility, is a limit of how much can be gifted via a Discretionary Trust. This type of gifting in Trust is known as a ‘Chargeable Lifetime Transfer’ or ‘CLT’ for short. In short, an individual can only gift up to a maximum of their £325,000 NRB every 7-years, without incurring a Lifetime Tax Charge of 20%. Calculations in this area are incredibly complex, and professional advice and guidance should always be sought from a Tax Professional.
Any gifting to beneficiaries is subject to the 7-year rule and no IHT is due after surpassing the 7-years. If you were to die during the 7-years, IHT works on a sliding scale known as ‘Taper Relief. This relief only applies if the total value of gifts made in the 7-years before dying is over the £325,000 NRB threshold.
|Years between gift and death||Rate of tax on the gift|
|3 to 4 years||32%|
|4 to 5 years||24%|
|5 to 6 years||16%|
|6 to 7 years||8%|
|7 years or more||0%|
Which Trust to use?
Once you have decided how much you want to gift (you may not want to make outright gift to someone, maybe due to that person not being mature enough to use the gift wisely or because you would prefer the gift to be used by a group of people, such as grandchildren, whenever born) the next thing to consider will be which Trust could be most appropriate to use.
Different types of Trusts allow you to do different things. But suffice to say, the more control, flexibility and discretion over who gets what and when, the more complex the tax position could become.
Typically, the most common and suitable Trust plans for clients will include:
- Gift Trusts
- Discounted Gift Trusts
- Loan Trusts
The value of working with a Kingswood Wealth Planner for your Trust Planning
It is vital to seek advice and guidance from a professional to ensure the most appropriate Trust option is used. Here at Kingswood we have a number of specialists who can assess your current estate and IHT position, listen to your needs, goals and objectives about who you want to benefit from your estate, all whilst working to ensure this is all completed in the most tax-efficient way as possible.
Kingswood also works with external specialists such as Solicitors and Accountants, whose involvement can be vital in this area.
All taxation figures have been directly from the Gov.uk website. This article has been written on our current understanding and interpretation of the current rules. Taxation legislation is subject to change, and it is crucial to seek professional advice and guidance.
Written by Max Sullivan, Kingswood Wealth Planner. If you would like to know more on how Kingswood can help you with your financial goals please get in touch.
Prevailing tax rates and relief are dependent on your individual circumstances and are subject to change. Whilst we do provide tax planning, we cannot provide tax advice and where you require tax advice we will refer you to a tax specialist.
Kingswood, Kingswood Group and Kingswood Institutional are trading names of KW Wealth Planning Limited (Companies House Number: 01265376) regulated by the Financial Conduct Authority (Firm Reference Number: 114694) and KW Investment Management Limited (Companies House Number: 06931664) regulated by the Financial Conduct Authority (Firm Reference Number: 506600) with a registered office at 13 Austin Friars London EC2N 2HE. KW Investment Management Limited is also regulated in South Africa by the Financial Sector Conduct Authority (Firm Reference Number: 46775). Both companies are wholly owned subsidiaries of Kingswood Holdings Limited which is incorporated in Guernsey (registered number: 42316) and has its registered office at Mont Crevelt House, Bulwer Avenue, St. Sampson, Guernsey, GY2 4LH. Approved in February 2023