If the annual exemption isn’t used in one tax year it can be carried over to the next, but the maximum exemption is £6,000. But for those clients likely to leave behind a larger inheritance tax bill, giving away small amounts is likely to have little effect.
Using trusts for estate planning
Trusts have traditionally been a widespread way of putting property outside of an estate, and because the individual has a clear say in the terms of the trust, they can decide what their family spends the money on and who benefits from it.
A client can invest in a discounted gift trust (DGT) and they do not have to ‘gift’ the money to family members or organisations in order to obtain the tax breaks. DGTs also allow clients to continue to receive tax-deferred income from the investment during their lifetime, at a pre-determined level that suits them.
What is more, part of the investment will become exempt from inheritance tax immediately. However, part of the investment does not fall outside of the taxable estate for seven years and, in the meantime, it uses up the investor’s nil rate band.
This means the investor would have to live for at least another seven years for the DGT to be free of IHT, which is too long a timeframe for many elderly people or those people who have health concerns. Finally, some people can be put off by the complicated and expensive legal structures surrounding a DGT.
Discretionary trusts (sometimes referred to as Relevant Property Trusts) are popular. However, the rules relating to property trusts have grown increasingly cumbersome in recent years, making them less effective.
Introduced in 2006, the current tax regime includes a 20 per cent chargeable transfer tax on lifetime transfers above the nil rate band to all but a limited number of trusts (for example, those set up for the benefit of a qualifying disabled person), along with a 6 per cent charge imposed on every tenth anniversary of a trust settlement. These changes have made estate planning with amounts above the nil rate band less attractive.
For people who have accumulated large amounts in Isa wrappers, it seems clear that – in an ideal world – the simplest solution would be to find a way to keep all of the benefits of their existing Isas, but while leaving the Isa free of IHT. You may be surprised to know that such a tax efficient solution has existed for over two years already, and has been helping thousands of investors to reduce or eliminate their inheritance tax liabilities.
Introducing AIM shares to Isas
