The most traditional vehicle for estate planning is a trust. Used for hundreds of years, these still have their place, but the key thing to note is that if it is a transfer into most forms of trust, the gift is not a potentially exempt transfer but a chargeable lifetime transfer.
The main difference between them is that a chargeable lifetime transfer is subject to an immediate 20 per cent tax charge within six months of the gift being made if the asset does not qualify for any IHT reliefs or exemptions and is over an individual’s IHT nil-rate band, which is currently £325,000.
This places a restriction on the amount of liquid funds someone can pay into a trust unless they are willing to accept an immediate 20 per cent tax charge. If they have assets qualifying for IHT reliefs or exemptions then, with careful tax planning, a trust structure can be a good fit.
For those with more liquid funds or assets that are not qualifying for IHT reliefs, then family investment companies and family investment partnerships are often considered because there is no limit on the amount that can be paid in.
As always though, other taxes have to also be managed, including as a minimum corporation tax, income tax and CGT. Managing the taxes is only one part of the planning; taking time on the overall structuring of the investment vehicle at the outset is also critical.
For example, if I set up a company or partnership and invest £5m into it, my IHT position will remain unchanged because as the sole shareholder, the cash is regarded as part of my estate and is subject to the usual IHT if I die. In terms of estate planning, it has not achieved anything.
If, on the other hand, I set up a company or partnership and as a director or partner lend £5m to that structure, it has £5m in assets but also £5m in debt, creating a balance sheet of nil.
But because the company or partnership owes me that £5m, the debt is still part of my estate if I die.
Now, at this stage, I still have not achieved anything in terms of liability, as on death the debt would remain part of my estate and be subject to IHT.
In order to reduce my IHT charge I could consider gifting some of the debt due to me to a beneficiary, such as my children or grandchildren. Provided I cannot still benefit from the debt gifted, then this is a potentially exempt transfer and will be outside my estate after seven years has passed.
