| Insurance Policies Written in Trust | |
| Discretionary Lump Sum Payments | |
| Property Increasing in Value | Making the gift before the value increases ensures the growth occurs in the estate of the done ‘Freezes the value’ of the property at the value at the time of the gift, which will be relevant should death occur within 7 years A ‘disposal’ for CGT will occur, but the disposal consideration will be the market value at the date of the gift |
| Excluded Property | |
| How should property be given away? |
| Outright Gift | Straightforward but inflexible inexpensive If circumstances change, property given away cannot be recovered |
| Trust | |
| Transfer into joint names | |
| When are discretionary trusts useful? Most flexible for of trust for providing for dependents – letting clients establish a trust for a group of beneficiaries Trust deed allows the income and capital to be distributed at trustee’s discretion Create flexibility for tax planning purposes Lifetime NRB can be settled on trust without a lifetime inheritance tax charge – 20% lifetime rate to the extent that the amount paid into the trust exceeds the nil rate band (PET) A few trusts will now have to pay an IHT charge when they are set up, at 10 yearly intervals (anniversary charge) and even when assets are distributed (exit charge) |
| RESERVATION OF BENEFIT RULES Apply where an individual disposes of any property by way of gift and either: Full possession and enjoyment of the property is not bona fide assumed by the donee at or before the beginning of the relevant period – s.102(1)(a) At any time in the relevant period the property is not enjoyed to the entire exclusion, or virtually to the entire exclusion, of the donor by contract or otherwise – s.102(1)(b) Relevant period = the period ending on the date of the donor’s death and beginning seven years before that date, or if it is later, on the date of the gift -
Consequences: A gift that is not fully given away because the donor keeps back some benefit for himself is charged to IHT as though they remained in the donor’s estate e.g. a donor gives his home to his adult children (who live elsewhere) and continues to live there tax-free |
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| IHT Exemptions |
| Annual | 3,000 per annum Can be carried forward for one year if not used in any year but must use up current year’s exemption first Cannot be set against tax liability on death but can be used against lifetime gifts brought into account on death |
| Small Gifts | |
| Gifts in Consideration of Marriage | 5,000 from a parent to a child 2,500 to a relative apart from a child |
| Normal Expenditure Out of Income | A pattern of payments by a donor, not just a one-off lump sum -
Normal expenditure = normal for the transferor not necessarily regular or annual no time span to establish a pattern – although three to four years would normally be reasonable gifts may relate to specific costs – e.g. school fees Allows people to habitually give away their surplus income without IHT charge Must leave the donor with sufficient income to maintain their usual standard of living – can cover substantial amounts if donor has substantial income Very commonly used in connection with payment of premiums for life policies written in trust |
| Gifts made out of income? Common sources of income = employment, pensions, rent from property, etc. Gifts out of income will not qualify for exemption if transferor had to resort to capital to meet normal living expenses |
| Example Granny Smith is a widow aged 68. She lives in a house worth 1,200,000; she has a buy-to-let property worth 250,000 which she bought for 80,000. Her husband left her his estate and she receives a generous pension from his former employer. She has her own work-related pension plus the rental from the commercial property. Granny Smith lives very frugally. She would like to help her grandson financially. |
| Survivor of Joint Lives Policy | |
| Example Mr and Mrs Peters are comfortably off and both have a decent pension. They are happy don’t really want to make substantial lifetime gifts as they believe it is important their children/grandchildren make their own way rather than having handouts from them. However, they are aware that there will be a substantial IHT bill of about 300,000 and don’t want the children to be forced to sell the family home where everyone enjoys holidays. They have heard about life insurance. How might this help? Passes outside of estate no IHT (if written in trust) Life insurance payable on death lump sum payable on death passes to beneficiaries without IHT Premiums are usually covered by normal expenditure out of income |
| Downside to whole of life insurance Doesn’t save IHT just provides funds with which to pay it Lives insured pay year-on-year to produce lump sum benefit Premiums can get expensive the older people get, especially if income levels decline in real terms “chargeable event” on death usually causes higher rate income tax to be paid by the estate of the last to die |
| Scenario | Advice |
| CGT & IHT Annual Exemption Mr and Mrs Ahmed want to begin to make lifetime gifts to their children/ grandchildren (all over 18). Their combined estates are worth about 2m but at this point they don’t want to do anything drastic. Mr Ahmed has some quoted company shares on which there is a gain of 40,000 and Mrs Ahmed has shares in the same company which show gains of 4,000. They believe these shares are going to rise substantially and would like to give them away. | Transfers between spouses = no gain/loss 11,700 CGT annual exemption 3,000 IHT annual exemption unused can be carried forward 1 year |
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