Contrast this with an AIM (Business Relief) qualifying investment, which may qualify for IHT exemption, but which cannot be encashed and distributed until the IHT liability on the remaining estate and probate is resolved (unless the AIM/Business Relief-qualifying investment were held in a trust).
Myth 3: Trusts are the slowest way to mitigate IHT
When assets are gifted, it can take a full seven years for them to become completely exempt from IHT, at which point there will be certainty of planning.
But if gifts were made from surplus taxable income, did not affect the settlor’s standard of living and were intended to be made regularly, they will be immediately exempt from IHT under the normal expenditure from income exemption.
This exemption also works with trusts. Gifting surplus income into a flexible reversionary trust might be a useful consideration where it is not appropriate to gift that money directly to a beneficiary at that time, or if the settlor wishes to retain potential access to that money at some point in the future.
Should the settlor die within seven years of a chargeable lifetime transfer, with no prior gifts in account, the trust will use up the available nil-rate band, and no IHT will be payable (on gifts up to the available NRB).
The NRB that has been used will not be available for use by the rest of the estate. For chargeable gifts made in excess of the NRB, taper relief may be available.
Bear in mind even where it takes the full seven years for a gift to be outside of the estate for IHT purposes, there is no negative tax consequence compared to if the gifts were not made into trust.
The seven-year (‘inter-vivos’) rule is often compared with the rules that apply to Business Relief (BR) and Agricultural Relief (AR) investments.
This comparison can be misleading, as BR and AR do not have an equivalent two-year rule; such assets only qualify for the exemption once the assets have been held continuously for two years meaning there is no certainty of planning at this point.
The inter-vivos rule for gifts into trust has a legal standing. Once the inter-vivos period has elapsed, gifts are outside the estate for IHT purposes.
In contrast, BPR-qualifying holdings that are not held in trust are not outside of the estate for IHT purposes at any time, but they may qualify for exemption from IHT, provided they are still held at death and remain in qualifying investments.
It is also worth reiterating such investments remain subject to probate. A man aged 60 today can expect to live for another 25 years, and a woman another 27 years.
