Trusts shelter investments from inheritance tax

David Hill INLT 45-099-PSB

David Hill INLT 45-099-PSB

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Over the last couple of weeks I have been looking at inheritance tax and how best to deal with it.

Giving assets away is one option, but the donor must live for seven years after making the gift for it to be effective. The second problem with giving an asset away is that the donor can not usually benefit from the asset once it has been gifted.

A useful exception to both of these problems is a type of trust known as a discounted gift trust, which allows the donor to take regular withdrawals, usually around four per cent per annum of the money invested.

This type of trust also provides immediate inheritance tax savings. Based on a married couple who are aged 70 putting £300,000 into a discounted gift trust and taking £1,000 per month withdrawals to supplement their pension income, an immediate reduction of £64,000 off the potential inheritance tax bill is possible.

The tax saving will be less if either person is in poor health. The earlier these trusts are set up, the better. The immediate tax saving can be greater for younger donors and equally the tax saving would be less for older donors.

In the above example, if the married couple died immediately after setting up the trust, the potential inheritance tax bill would be reduced by £64,000 and an even bigger tax saving would occur after seven years, when the tax saving would be approximately £120,000.

A further benefit of these trusts is that the assets can be eventually passed on to children and grandchildren in such a way that they are protected against family members separating or divorcing.

Recent confirmation from the Chancellor allows this type of planning to be carried out every seven years, so the earlier action is taken to reduce inheritance tax, the better.

David Hill is a Chartered Financial Planner and Trust & Estate practitioner at Hills Financial Planning, 15 Agnew Street, Larne. He can be contacted on 028 28276814 or by email: david@hillsfinancialplanning.co.uk