Transfers on Lifetime and on Death

Question 1

What needs to be considered when making gifts?

Answer 1

• Are you willing / able to make gifts during lifetime or do you need to wait ‘til death
• Former more effective for IHT
o But no point saving tax at expense of survivor’s
standard of living
• Former less effective for CGT
o Because gifts are disposals for CGT
o Although hold over relief may defer gain
o Where as no CGT due on death
• Could choose to hold on to assets that benefit from BR / AR
o But, may not be assets they’d normally invest in (too
risky) or maybe worthless on death (shares in family
firm run by deceased)
o Also, rules may change and reliefs withdrawn

Question 2

Lifetime transfers (PETs) - what are they?

Answer 2

• Gifts to individuals / bare / absolute trusts are more IHT efficient than to discretionary trust (because they are PETs, not relevant property trusts therefore no periodic / exit charges)
o But less flexible and immediate loss of control
o Discretionary trusts can counter this but less tax efficient (CLT,
periodic & exit charges if exceed NRB)
• Take out 7 year term to cover potential tax on estate as a result
of PET eating up NRB
o If PET exceeds NRB, 7 year decreasing term assurance to cover
potential tax on gift
􏰐 Write both in trust to be outside estate

• When making outright gift consider
o Can donor manage without any income the asset
produces?
o Does it qualify for any reliefs (and would gifting it mean
these reliefs would no longer apply?)
o Is CGT hold over relief an option?
o Is maximising pension contributions a better option?

Question 3

Lifetime transfers (CLT) - what are they?

Answer 3

Lifetime transfers - CLTs

• Gift into discretionary trust is a CLT
• Either trustees or settlor can pay the tax
o If settlor pays this is a further gift
• Useful where tax benefits evident and ultimate
beneficiary not yet chosen
o Also, for assets likely to appreciate in value
􏰐 Growth will be outside the estate
􏰐 But – need to watch for periodic/exit charge if
exceed NRB
o Holdover relief available

Question 4

In what order should gifts be?

Answer 4

• Annual exemptions used in date order
• Make CLT before PET
o Minimise 10 year charge as if PET fails and it had been made first it will be taken into account in assessing available NRB

• Make PET before CLT
o Otherwise IHT paid on failed PET will be higher as will
have to take into account CLT

• Best just to leave 7 years between gifts to avoid issue!

Question 5

IHT - what rate is it paid at?

Answer 5

• IHT paid at 40% on net estate over NRB and RNRB (where available, including transferable bands)
o 36% where 10% of net estate left to charity
o LPRs must claim any transferable bands
• BR and AR may give 100% relief on death
o But, AIM listed/unquoted companies maybe outside
appetite for risk

Question 6

What is a pilot trust?

Answer 6

• Pilot discretionary trust can reduce / eliminate periodic and exit charges
• Settlor establishes a number of pilot trusts on consecutive days with nominal amount
in each
o Then add larger amount in excess of NRB across all trusts on same day
􏰐 Either during lifetime or on death
o Each pilot trust has its own NRB at 10 year anniversary
􏰐 Rysaffe principal
o But-Anti-avoidance rules apply from 6 April 2015
• Must not make same day additions or will not work
• Trusts made before 10 Dec 2014 protected

Question 7

Choosing an investment wrapper for trusts - whats best?

Answer 7

• Investment bonds favoured for IHT planning
• Choice depends on
o Entitlements of settlor and their beneficiaries
o Type of trust
o Expenses of trust
o Need for income/capital

Tax considerations
o CGT
􏰐 – 1⁄2 annual exempt amount, 20% (28% if non-exempt
residential property)
􏰐 CGT regime less onerous tax than income due to annual
exempt amount and lower rates
o Income – dividends 38.1 (7.5% standard rate band/IiP Trust), savings 45% (20% standard rate band / IiP Trust)
􏰐 Now paid dividends and savings income usually paid
gross trustees will have to report such income to HMRC
􏰐 Dividend allowance / personal savings allowance not
available to trustees

o May therefore prefer collectives to bonds…

􏰐 But bonds don’t produce an annual taxable income which keeps admin costs down
􏰐 Bonds can be assigned into and out of trusts without triggering income tax liability
• Can also transfer segments rather than whole bond for beneficiary to subsequently encash at their own rates (if these are likely to be less than trustee rate)
􏰐 Transfer of a collective into a trust may benefit from CGT holdover relief, so no tax payable at time of transfer
• Beneficiary may be able to use their own CGT annual
exempt amount when collective transferred to them out
of trust at later date
􏰐 5% withdrawal facility on bond is used in a number of packaged IHT plans
• Adviser fees could be taken from this (need to take
care not to exceed 5%)
• Could make capital withdrawals from collective too
but may lead to CGT liability