Section 3

Bare trusts

Beneficiary entitled to capital/income and trustees have essentially no discretion over who gets what

• Once 18 can demand assets

A gift into this trust is a PET

• put £300k into this and die in 7 yrs = becomes chargeable

If someone dies in 2002 and has used 60% of NRB which in total was £250k. How much does the wife have now

£325k x 40% = £130k

£130k + £325k (wife’s NRB) = £455k

Apply the % they had left but to the new NRB

Interest in possession trust

Sits between disc and bare

• Someone has current right to income but they don’t necessarily have the right to the underlying capital

Example:

• Dad leaves investments in trust

• Mum received all investment income for life

• When mum dies investments pass to kids

• Mum might receive the income but she can’t demand the original capital

A gift into this is a PET or CLT depending on when it was set up

• Most modern IIP fall into relevant property regime = would usually be a CLT

Discretionary trusts

Trustees control everything

• There are some beneficiaries but none has an automatic right to income/capital

A gift into this is a CLT

• if gift is above NRB = 20% charge

Relevant property regime

Discretionary trusts fall into this

Means there’s a 10 yr periodic charge and exit charge when property leaves this trust

Strategy for lifetime gifts

Top slicing

Parental settlement rule

If you place an investment in your child’s name you can allocate the income to the parents name

• If the capital derived from the parent and income exceeds £100 per annum

If it’s below £100 it’s all taxable on the child

Somones wife died in 2002 leaving 50k to daughter and 50k to husband

NRB at the time was £250k

What’s his NRB now

£50k / £250k x 100 = 20% used

Can add what is left from there to what you have now

£325k (own NRB) + (£325k x 80%) = £585k

Married couple want to gift max to son who’s getting married with no IHT charge and never made lifetime gift

£3k to son from each parent and can use unused £3k allowance from previous year

Marriage gift which is £5k from each parent to couple

Max = £22k

Assigning a bond to someone as a gift is what

Not a chargeable event so there’s no tax liability

Gifting a bond to someone is not for moneys worth

Someone transfers £10k to a discretionary trust and gets charged IHT. Why?

They had previously made chargeable lifetime gifts totalling at least £325k

CLT’s are cumulated with other chargeable lifetime transfers made in previous 7 yrs

• If that amount exceeds NRB = IHT

(CLT is only a gift into trust)

Asset A worth £300k bought 2 years ago

Asset B worth £290k originally now worth £350k bought 1 year ago

What is the IHT if giving this away

Asset A meets BR so no tax (100% BR)

Asset B doesn’t meet BR

• £350k - £325k (NRB) = £25k x 40% (IHT charge) = £10k

Leaving this to their spouse would have made it IHT free

Be careful of the lifetime limit (£2.5mil) that can qualify for BR