Inheritance Tax  

Minimising your client's IHT bill

  • Describe some of the rules surrounding IHT
  • Identify some steps to minimise the IHT bill on death
  • Explain how the nil rate bands work

By selecting this type of trust, trustees have complete discretion over how and when the trust is distributed, though it is possible and advisable to leave a letter of wishes so that the trustees have guidance when managing the trust.

Discretionary trusts can provide many benefits. For example, they can protect a potential beneficiary’s interests against divorce and bankruptcy.

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They can also be a good alternative if you are not sure who you want to benefit or want someone to benefit from the will but are concerned about their mental capacity or ability to manage money. They can also be used to allow people who have not yet been born to benefit, for example future grandchildren and great grandchildren.

Discretionary trusts can also be tax efficient. Under current rules, the ability to benefit from a discretionary trust should not impact on entitlement to state benefits.

Trusts have their own IHT regime, which is relatively favourable when compared to that of an individual. This can be particularly useful for sheltering assets that are expected to increase in value, such as land with development potential.

Trusts can be written into wills or set up during a person’s lifetime. Any lifetime gift into a trust that exceeds the NRB will be taxed at 20 per cent and, if the person who established the trust dies within seven years after establishing the trust, a further 20 per cent IHT will become liable.

However, they are a very useful way of removing asset value from your estate while still retaining control over the assets. It is important to note that for IHT purposes you cannot be a beneficiary of a trust that you have established.

Making gifts

Gifts made during a person’s lifetime to another individual are completely exempt from IHT as long as the person making the gift survives for seven years. Such a gift is known as a potentially exempt transfer. If gifts are made of surplus income, as opposed to capital, the seven-year rule may not apply. 

One thing to bear in mind when choosing this option is that the executors of the person who has made such gifts will have quite an onerous task in claiming the exemption.

Where such gifts are made, it is sensible that the donor keeps detailed records not only of the gifts but also of their regular income and expenditure. If a person gifts an asset, there can be capital gains tax to pay, just as if the asset was sold.