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Gift Trust Case Study

4 min read 26 Nov 20

This is only an example of advice and isn’t based on specific client’s circumstances.  Your clients individual needs, circumstances and tax situation will vary.

Peggy is a 65 year old widow with a potential Inheritance Tax (IHT) liability.

She has not made any significant gifts in the past but regularly uses her annual IHT exemption. Peggy has earmarked £300,000 to help her grandchildren with future University costs.

She currently has four young grandchildren but wants a tax efficient solution with flexibility to also benefit any future grandchildren.

She requires no access.

The adviser considers the situation and identifies these important facts about Peggy -

  • Any future grandchildren need to be potential beneficiaries meaning that a discretionary trust is required rather than an absolute trust.

  • No lifetime access to the trust fund is required.

  • Estate is in excess of the available Nil Rate Band and Residence Nil Rate Band.

  • No previous Chargeable Lifetime Transfers (CLTs) have been made which means that Peggy can gift up to £325,000 with no lifetime IHT due.

  • A tax efficient solution requires consideration of IHT and any other relevant taxes (in this case income tax).

The adviser recommends she invests into an Offshore Bond and places it into a discretionary Gift Trust. She learns that this type of trust is for those -

  • Whose previous CLTs in the last seven years are below £325,000.

  • Requiring no personal access to the bond whatsoever.

  • Wanting flexibility with regard to those who will potentially benefit in the future.

Peggy applies for a £300,000 Offshore Capital Redemption Bond and then completes a discretionary Gift Trust deed such that that the Bond is issued into the trust from outset. This is achieved simply by inserting into the deed the date she applies for the Bond. She is automatically a trustee and appoints her son and daughter as additional trustees. She can change trustees in the future if necessary. Trustee obligations under the Fourth and Fifth Money Laundering Directive are complied with.

The trust deed includes her children and grandchildren as pre-printed potential beneficiaries. Any future grandchildren will automatically be potential beneficiaries.

For Inheritance Tax (IHT) purposes, the £300,000 gift into trust gives rise to a CLT but no lifetime tax is payable as she is comfortably within the £325,000 limit. The trust fund will be subject to the relevant property regime. There will however be no ‘exit’ charges in the first 10 years for any capital paid out of the trust assuming the Nil Rate Band does not fall below £300,000. Also, for 10th anniversary purposes, Peggy has not made any CLTs in the seven years prior to set up that would effectively reduce the Nil Rate Band available to the trustees.

With regard to the Offshore Bond, Peggy learns that no tax will be due for any income received or gains made on the investments within the offshore bond. There may however be some irrecoverable withholding tax. There will be no income tax due unless a chargeable event arises and a gain is calculated on that event. That simplifies the trustees’ Self-Assessment obligations. The adviser explains that a Capital Redemption Bond has no lives assured and cannot therefore pay out on the death of a (last) life assured but will instead run until maturity after 99 years, although in practice the Bond will almost certainly be surrendered prior to that date. That gives the trustees greater control over the timing of a chargeable event. It is also explained to Peggy that once the grandchildren are over 18 and start attending university, then the trustees can assign segments to them in order that they can subsequently encash with the gain falling on the appropriate beneficiary. For those under 18, the trustees may consider a deed of appointment to irrevocably appoint segments on a bare trust for the absolute benefit of a particular beneficiary. Under current income tax rules gains can be offset against -

  • Unused personal allowance

  • Unused £5,000 0% Starting Rate for Savings

  • Unused Personal Savings ‘Allowance’

The discretionary gift trusts delivers a flexible arrangement which is both IHT and income tax efficient.

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