This valuable relief can provide additional tax benefits such as 30 per cent income tax relief on the investment made and relief from capital gains tax on exit, providing the qualifying criteria is met for a 3 year period.
Making gifts to a trust can also offer significant IHT benefits as part of family wealth planning, as well as offering asset protection.
There are a number of different types of trusts, offering different advantages and arrangements, which should be tailored to support each family’s different circumstances.
In most cases, an individual can gift up to £325,000 over the course of seven years into a trust without any immediate IHT payments.
The value of the gift plus any future growth in the asset, falls outside of the estate in full, after this period ends.
If the gift is more than the £325,000, IHT is payable at 20 per cent on the excess.
As married couples and those in a civil partnership each have their own nil rate band, together they could transfer £650,000 with no immediate IHT charge.
Trusts specifically for grandchildren are typically used to pass assets down the family, skipping a generation.
As well as providing IHT benefits, this process can be an efficient way of funding school and university fees.
While tax efficient gifting is a key factor, asset protection is now more than ever on the minds of parents looking to pass assets on to their children.
The pandemic and prolonged periods of lockdown have resulted in higher rates of divorce and some parents are therefore more concerned about making direct gifts to their children which ultimately could form part of a divorce settlement.
Using a trust, while not always completely watertight, can minimise this risk.
Make outright gifts
Where asset protection is not an issue, making outright gifts is a simple and common way to reduce the value of an estate and therefore IHT charges.
So long as the individual survives the gift by seven years, the gift will not be included in the estate on death.
If an individual survives the gift by three years, rather than the full seven, a reduced amount of IHT will be payable.
Use investment trusts known as discounted gift trusts
Discounted Trust plans have two distinct elements, the first providing an ‘income’ whilst the other is either a chargeable lifetime transfer or a potentially exempt transfer depending on the type of Trust used.
This will provide some immediate relief from IHT and total relief on the value of the investment after a period of seven years.