Paul Thompson, tax and estate planning consultant at Canada Life, notes that – similar to DGT – a gift and loan trust can be either a discretionary or bare trust, and the money loaned to the trust is usually used by the trustees to take out an investment bond. He adds: “Trustees take partial withdrawals from the investment bond to satisfy any demands from the settlor for partial repayments. The effect of this is that, although the client has access to the capital, future growth within the bond accrues outside of the client’s estate for the benefit of the beneficiaries, free of inheritance tax.”
Ms McKeever adds: “In terms of potential risks, it is very difficult for UK individuals to carry out lifetime IHT planning involving trusts because of the 20 per cent entry charge. The transfer of exempt assets such as shares in a business avoids this charge, but the exemption can, in some circumstances, be clawed back if the donor dies within seven years. This risk can be covered by insurance.
“More creative mitigation techniques may also fall foul of the GAAR which seeks to counter tax savings achieved by contrived arrangements.”
However, with tax avoidance clearly on the agenda of the UK government, the already complex rules could be subject to further change, making IHT planning a more time intensive area than ever before.
DEFINITIONS
Discounted Gift Trust (DGT):
According to HMRC, a discounted gift trust or plan is where the settlor makes a gift into settlement with certain ‘rights’ being retained by them. These rights are effectively income, which are set out when the trust is established and cannot be changed, payable for the remainder of the settlor’s life. A potential chargeable lifetime transfer (CLT) of 20 per cent may be payable at the establishment of the trust, although no further IHT would be payable providing the settler survives for seven years after making the ‘gift’.
Gift and Loan Trust:
This is where the settlor makes a small gift into trust, possibly by way of an insurance policy and settles it for the benefit of others and from which the settlor is entirely excluded. They then make a substantial interest free loan to the trustees, repayable on demand. The trustees use the loan to purchase more policies, and use this to make ‘loan repayments’ to the settler each year. As this is not a gift the value of the outstanding loan remains part of the estate for IHT purposes, and so no CLT would apply.
