This issue's Technical Connection article looks at IHT
Q In May 2009, my client, who is still alive, gifted £125,000 directly to her son. Then in June 2013, she settled £150,000 into a discretionary trust (Trust 1) and in August 2014 she settled a further £150,000 into another discretionary trust (Trust 2). Would the initial gift to her son have any effect on the periodic charges on the two discretionary trusts?
A An outright gift to an individual is treated as a potentially exempt transfer (PET) for inheritance tax purposes. The gift generally falls out of account once the donor (your client in this case) survives seven years. This means that where a PET is made before a chargeable lifetime transfer (CLT), as in this case, you would only deduct it from the available nil rate band if the donor dies within seven years. This is because the PET would fail and become chargeable. Although in this case the donor, your client, is still alive so the PET can be ignored.
For the purposes of the 10-year anniversary periodic charges on the discretionary trusts, the available nil rate band applicable to the trust would be reduced by CLTs made in the seven years prior to creation of the trust.
So, for Trust 1, as there had not been any previous CLTs, the available nil rate band applicable to the trust would be £325,000.
Then for Trust 2, the available nil rate band would be £175,000 (£325,000 - £150,000), i.e. the current nil rate band reduced by the CLT (transfer into Trust 1) made in the seven years prior to creation of the trust. (Note: this assumes that the donor had used their annual IHT exemption, so the full £150,000 is a CLT).
Q My client is aged 77 and is thinking of making personal pension contributions as part of their inheritance tax (IHT) planning. Is this possible? If so, what are the pros and cons?
A Your client is no longer eligible for tax relief on personal pension contributions as they have reached the age of 75. In addition, many personal pension providers will not accept non-relievable contributions to their relief-at-source schemes.
Where a scheme will accept contributions, the potential benefit will depend on the income tax position of the likely beneficiary. The pension death benefits will be subject to income tax at the beneficiary’s marginal rates. If they are basic rate taxpayers, they would be taxed at 20% on the death benefits rather than 40% IHT.
However, if the client has surplus income they could instead use the normal expenditure out-of-income exemption and potentially pass on the funds entirely tax-fee. The £3,000 annual IHT exemption may also be available.
Taken from the Technical Connection Techlink Professional question bank.
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