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In part 1 of a series of articles on this subject, we outlined some basic steps that can be undertaken to plan to reduce the assessable estate for IHT.

In part 2, we examined the benefit of wills and, in particular, discretionary will trusts (DWTs) in assisting with IHT planning.

In this next piece, we shall take a look at other planning opportunities available to assist in mitigating a liability to IHT.

The simplest solution is for individuals to give money away. However, as is often the case, clients may well be wealthy enough to have an IHT problem but not wealthy enough that they can afford to gift money away without detrimentally impacting on their own quality of life. Therefore, the ideal would be to ‘gift’ money away but retain access ‘just in case’. However, the Government’s approach to anti-avoidance legislation makes it virtually impossible to achieve this. There are though two options available that may be considered: -

• Gift & loan schemes

• Discounted gift trusts

Gift & loan schemes

This type of arrangement may not provide any immediate IHT savings but rather ensures that any liability does not become worse, by ensuring that any growth accrues outside the estate.

The ‘gift’ is essentially a token amount, say £5, that is gifted by an individual to essentially create the trust. Thereafter a sum of money is loaned to the trust, which is then invested by the trustees on behalf of the beneficiaries. The growth on this investment accumulates outside the estate whilst the original investment amount, i.e. the loan remains within the estate.

Access is retained as the loan is repayable upon demand and, in theory, this could be called upon at any time.

An example of this arrangement can be evidenced below: -

Steve has an estate valued at £1.5m and decides to create a Gift & Loan (G&L) trust using £300,000 of cash assets, which is subsequently invested by the appointed trustees. Seven years after creating the Gift & Loan trust, Steve still has £300,000 owed to him by the trustees, which will be subject to a 40% IHT liability upon death. However, through investment growth, the trust proceeds have grown to £450,000, therefore, saving £60,000 IHT on the excess of £150,000.

Discounted gift schemes

Discounted gift schemes allow an individual to make a gift of funds to a trust whilst retaining a right to income. This will either be paid for life or until the trust has insufficient proceeds.

The gift is treated as a transfer of value for IHT purposes, the value of which is determined as the loss to the estate. This is ascertained by discounting the value of the investment, thus creating an immediate IHT saving. The discount is calculated based on the open market value of the right to income, which in turn is dependant on the individual’s sex, age and health at the time the gift is made.

The effects of this can be illustrated below: -

Jeff currently has an estate worth £422,000, £312,000 house and £110,000 cash. He decides to make a gift of £90,000 to a discounted gift scheme, and elects to receive an income of 5% per annum. Based upon his age, sex and state of health, a discount of £30,000 is calculated. For this purpose, it is assumed that annual exemptions have been utilised.

Clearly, when considering either of these arrangements, it is extremely important to plan carefully in regards to two main issues. The first is how they fit into an individual’s IHT planning, providing a satisfactory combination of tax planning and accessibility. Additionally it is also imperative to plan with the client’s attitude to investment risk in mind, carefully balancing between the immediate needs of the individual and longer-term objectives with regards to the beneficiaries. Hence independent financial advice is highly recommended.

Date of Article: 14th August 2008