Reducing Inheritance Tax with a Trust


For those wishing to make inheritance tax-free gifts to family but in need of capital for their retirement, an investment bond and trust may be a good option.

Reducing or avoiding inheritance tax directly or indirectly involves giving away your assets. The usual advice is to give away as much as you can as soon as you can because until 7 years lapse from making the gift it remains part of your estate for IHT purposes. Normally, once you gift money/assets, there’ll be no capital later on for you.

All the time you retain rights over an asset you gave away, HMRC anti-avoidance rules mean it remains part of your estate for IHT purposes. One IHT tip is to make your gifts into a trust with beneficiaries. If this is done through a loan trust, you can retain access to the capital while giving away income from it in an IHT-efficient way. Speak to our tax team to best advise you on the finer details.

Usually a loan trust involves an investment bond and ‘reversionary clause’ in the trust. The bond can be one you already own which you transfer to a trust, or you can make a cash gift to the trust which then purchases a bond. For the trust to be effective for IHT saving, tie your money into it for 7 years, but preferably more.

Gifts to a reversionary loan trust are tax efficient if they don’t exceed the IHT nil rate band (NRB), currently £325,000. Above this, IHT is payable at 20% on the excess. However, depending on whether you have made other IHT chargeable gifts, you can create further reversionary trusts every seven years. This means you can make more IHT-efficient gifts up to the value of the NRB each time.

How loan trusts work

An insurance company invests your money into a series of bonds worth e.g. £2,000 each. These are held by the trust which the insurance company looks after. Bonds pay out at different times as scheduled at the outset. When each bond matures, you can either take the money or money can be rolled back into the trust for your beneficiaries.

If you want beneficiaries to have access to capital sooner than 7 years, ask the insurance company to include a clause that allows the trust to make interest-free loans to them as an advance against the capital which will become available when each investment bond matures.

Typically schemes are pre-packaged and sold by insurance companies. They involve you giving money to a reversionary trust which then buys insurance bonds. These pay out at regular intervals and leave the capital intact. For the scheme to be effective in reducing your estate you must survive seven or more years from the date of your gift. It’s best to speak to a tax expert rather than doing it without their expertise.

Let’s Talk

For help with any of the above matters, talk to our inheritance tax specialists here at LHP. With offices across South Wales including Carmarthen, Cross Hands near Swansea, Haverfordwest, Tenby and Lampeter, our friendly and knowledgeable team is here to support you.

Let’s Talk.

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