Inheritance Tax  

Things to know about setting up gifts and trusts

This article is part of
Guide to saving your clients IHT

Discretionary trust - the trustee has absolute power to decide how the assets within the trust are distributed. This option gives trustees the power to make investment decisions on behalf of the trust.

Bare trust - this method is simple, as it gives everything to the beneficiary straight away, as long as they are over the age of 18.

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Interest in possession trust - the beneficiary can take income from the trust straight away, but does not have the right to the assets that generate income. However, the beneficiary will need to pay income tax on the income received. This structure is often used by individuals who have remarried following a divorce, but have children from the first marriage.

Mixed trust - combines elements from different kinds of trusts. For example, a beneficiary could be given a right to the income of half of the trust fund, while the remaining half of the trust could be held in a discretionary trust.


Gifts are often mentioned in the same breath as trusts, but in reality they are completely different, as this denotes a certain sum given to another individual during the lifetime of the client.

Tracyann Kneen, head of product technical for Nucleus, says: “Consider gifting early where it’s practical and possible. The nil rate band is effectively renewed every seven years, enabling a fairly chunky amount of assets to pass IHT-free over a reasonable length of time.”

Clients can gift assets to a spouse or civil partner, which means the giver will not have to pay IHT – although this could just be deferring the problem, as the surviving partner will still need to put a financial plan in place to mitigate IHT when they die.

There is also the possibility of a lifetime gift to friends and relatives.

Ms Beech delineates: “By giving something to a family member or friend, the value of that gift will still be included in your estate for IHT, but only for seven years.

“For instance, if you gift a lump sum to one of your children, but live for a further seven years, the amount will not be taken into account when you die.”

Disadvantages to gifts

Sarah Saunders, personal tax manager for RSM UK, says: “Gifts offer the recipient complete freedom, so clients need to be happy they will handle your money sensibly.”

One obvious disadvantage with gifts is the client has no idea when he or she will actually die – so it pays to be judicious when recommending these to a client in obvious ill health.

Perhaps the biggest worry is that many people giving monetary gifts do not actually realise they are potentially liable, as HMRC’s recent 93-page report – Lifetime Gifting: Reliefs, Exemptions and Behaviours – has highlighted a worrying lack of knowledge about how gifts work.