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Using Trusts to Minimise Tax :: Example 1

George and Susan, who are in their early sixties and in good health, own a successful business, a substantial family home and they own, equally, two let properties, each valued at £290,000.

George and Susan have three adult children who they wish to benefit from the family's wealth immediately if this ultimately reduces inheritance tax payable on the family's assets overall. However, they are not anxious to make outright gifts to the children because they are worried about the implications thereof in the event of one or more of the children getting divorced.

George and Susan don't need the rental income from the let properties and would not object it being divided and used to benefit their children and grandchildren. There are no plans to sell the let properties.

Neither George nor Susan has made previous gifts (i.e. in the previous seven years) and each has available £6,000 of annual IHT exemption (£3,000 current year plus £3,000 previous year carried forward).

Consider George and Susan both gifting their interest in the let properties to the trustees of their respective discretionary trusts set up to benefit their children and grandchildren (present and future). The proposal will result in each trust having a one-half share in each of the two let properties.

The transfer to the trustees will result in George and Susan making a lifetime gifts immediately chargeable to IHT but, on the above figures, the calculation of that tax will be as follows:

Ten Years later

Tax Payable on trust assets at first ten-year anniversary 2016 – say properties valued at £475,000 each. Say Nil rate band 2016/17 £360,000

• £475,000-360,000 = 115,000 @20% = £23,000
• Effective £23,000/475,000 X 100 = 4.842%
• Actual rate 30/100 of 4.842 = 1.452%

IHT on 10th anniversary 1.452% of £475,000 = £6,897 (A)
(n.b. For each Trust)

IHT on George's death in 2017 = Nil
(The trust does not cease on George's death)

Fifteen Years later

IHT on Susan's death in 2021 – exactly five years after 1st ten-year anniversary charge. (Say, assets pass absolutely to surviving adult children on Susan's death when valued at, say, £600,000, with the children paying IHT. Say, holdover any capital gain under section 260 TCGA 1992 (re-starting taper relief clock.))

Tax Payable (by beneficiaries) on trust cessation five years after previous ten-year charge calculated as follows. Say Nil rate band 2021/22 £400,000

• 475,000-400,000 = 75,000 @20% = 15,000*
• Revised effective rate 15,000/475,000 X 100 = 3.158%
• Actual rate 30/100 of 3.158 X 20/40= 0.4737%

*recalculation of ten-year effective rate to reflect changes in rates

• IHT on assets leaving trust 0.4737% of £600,000 = £2,842.(B)
• Total IHT re life of Trust (A) + (B) £9,721.
• Value of asset passing £600,000, therefore actual IHT rate 1.62%*.
  
  SAVING 38.38% = £230,280

* 9,721 x 100
600,000