Discretionary trusts can be a good way of avoiding inheritance tax on your capital. They can also allow you to exert control over the trust assets by being a trustee.
However, there is an entry tax (or chargeable lifetime transfer) of 20% on all transfers that exceed an individual’s inheritance tax nil rate band (£325,000 in 2009/10 tax year). This can be a major obstacle where assets exceed this amount.
Normally a gift into trust is still chargeable to inheritance tax in the first seven years of the gift into trust. For someone in poor health this could again present an inheritance tax problem
You can however avoid IHT lifetime transfer and remove assets from the estate in 2 years rather than 7. You can resolve both of these tax problems in the following two stage process:
- Move the asset into a Business Property Relief qualifying investment. It is held in this investment for 2 years when it will be eligible for Business Property Relief and also exempt from inheritance tax.
- After this two year holding period has been met we will then arrange for you to move the assets into trust with no chargeable lifetime transfer
Your assets are secure at all times and you have full control and access to your money whilst it is in the business property relief investment.
When the asset is transferred into trust, as trustee you will be able to determine how the assets are used. You can arrange for the trust to pay an annual income if this is desired.
Those who wish to pass more than the current inheritance tax limit (£325,000 in 2009/10 tax year) into trust and avoid the 20% chargeable lifetime transfer tax and those in ill health or elderly who wish to remove their assets from a charge to Inheritance Tax within the next two years rather than waiting the normal 7 years will definitely benefit from this kind of approach.
Andy Parker
Chartered Financial Planner
To discuss how Parker Chartered Accountants and Financial Advisors can help you save Inheritance Tax call 0121 764 5161.