Lifetime Giving – A follow up

Published on 19th March 2019

Grandchildren’s Trust
We now consider the trust IHT implications for the Grandchildren’s Trust set up in the ‘Lifetime Giving’ case study in our Spring/Summer 2018 edition. Mr and Mrs White gifted a let residential property, worth £250,000, into a newly created trust for the benefit of their 5 and 8-year-old grandchildren.

Decennial charge
Most lifetime trusts are subject to an inheritance tax charge every 10 years (‘decennial anniversary’) based on the value of the trust fund at that point. The maximum rate of tax on each 10 year anniversary is 6%. The actual effective rate is usually less than 6% because it is calculated after deducting the trust’s nil rate band.

The Grandchildren’s Trust was settled by both Mr and Mrs White jointly and is therefore treated as two separate trusts for inheritance tax; each with its own nil rate band. Neither Mr nor Mrs White had previously made any gifts into trusts, so each of their trusts has a full nil rate band, currently £325,000. No IHT will be payable on a decennial anniversary unless
the value of the Grandchildren’s Trust exceeds £650,000.

Exit charge
On the distribution of capital to beneficiaries from a trust, there is an ‘exit charge’. This is effectively a part of a decennial charge calculated according to the number of complete calendars from the last 10 year charge (or, if before the first decennial charge, from commencement of the trust).

The value of Mr and Mrs White’s gift of a residential property to the Grandchildren’s Trust was £250,000 (i.e. well within the available nil rate bands) and neither Agricultural Property Relief and Business Property Relief applied. Therefore, the effective inheritance tax rate on any exit charge before the first 10 year anniversary
would be 0%.

18 to 25 trusts
There are different rules for some trusts known as ‘18 to 25 trusts’. The Grandchildren’s Trust cannot qualify because these can only apply for new trusts where the trust
is established on death for an orphaned child.

Tax planning is essential to ensure you are mitigating your exposure to inheritance tax liabilities and preserving your wealth for your family, therefore please contact
us for advice on 01392 211 233.