My client wishes to gift £450k to each of her two sons (PETs) and her IFA has advised that she also enters into a discounted gift trust - he suggested £1m, which after a 10% discount would leave a chargeable lifetime transfer (CLT) of £600,000, less NRB, resulting in £275,000 taxed at 20% - £55,000 which cannot be refunded if she survives 7 years.
I understand that if the CLT was made within 7 years of the PETs taking place and the PETs failed, the 14 year rule would result in £1,175,000 being charged to IHT on her death. I have suggested that a lesser figure of £360,0000 be placed into the DGT, which after a discount of 10% would leave a CLT of £324,000 which is within her NRB and so no immediate IHT to pay and IHT only on the £900,000 failed PETs - would this avoid the disadvantage of the 14 year rule if the CLT was entered into first?
The reason I ask is because I also understand that if the PETs were made before the CLT (to avoid the 14 year rule) and the PETs fail, they become chargeable transfers and chargeable transfers in the 7 years prior to a trust being created are added to the periodic charge computation of the trust. In this scenario £900,000 would be added to the £324,000 to calculate the periodic charge - is this correct? Would this also apply by way of an exit charge if the DGT was terminated following the death of my client?
The IFA is also advising my client to consider creating a discretionary trust in 6-12 months time into which dividends, being surplus income, can be placed to benefit her children and grandchildren with their school fees, etc. If the PETs to sons fail, would the value of them also be added to the value of this surplus income discretionary trust in calculating the periodic charge given that the PETs (now chargeable transfers) were made in the 7 years prior to this trust being created?
It would, of course, be better to avoid adding failed PETs/chargeable transfers to period charge calculations and so I am considering advising the DGT (CLT) be entered into first at the lesser amount of £360,000 to avoid the aggregation disadvantage with the 14 year rule?
In ascertaining the charge on a ten year anniversary account is taken of, inter alia, the value of the relevant property at the date of the anniversary; notional previous transfers ie CLTs made in the seven years prior to the creation of the trust together with amounts on which exit charges have been levied within the previous ten years.
The general rule is therefore to make CLTs into a relevant property trust before making any PETs. Otherwise, the cumulative total of the CLTs would be affected where PETs had been made prior and the donor dies within seven years thereof.
Malcolm Finney
1 Like
Hi Geraldine,
Here is a really good resource on the topic: Order of gifting (abrdn.com)
I agree that it makes sense to do the CLT first, followed by the PETs to reduce periodic and exit charges on the discretionary trust.
I’m not sure the discount is 10% if a discounted gift trust of £1m results in a CLT of only £600,000. That would imply a 40% discount?
If the tax liability on the CLT is £55,000 on a gift of £1m and the initial discount on the gift of £1 million is 40% then it seems a small price to pay, to benefit from an initial IHT saving on the discounted element of £160,000 and then a further £240,000 in 7 years?
if client lives for 7 years from the CLT and PETs then no IHT to pay on those so it would be more effective to proceed with the IFAs plan purely from an IHT mitigation point of view.
Your client could take Gift Inter Vivos life cover out to cover the potential risk of not surviving seven years if they have surplus income. It’s pretty good value when I’ve looked at it in the past.
Hope this helps.
Adrian
It is possible to create a ‘bare trust’ variant of the DGT which will give rise to a PET rather than a CLT and may be a better option.
NB assuming she pays the tax on the CLT the effective rate is 25% rather than 20% with grossing up.
Paul Davies
Clarke Willmott
Thank you all for your replies and Adrian for the very useful resource.
Adrian, my client is taking out life cover for the potential IHT should she not survive 7 years - the figures I’ve seen are pretty good value.
Paul, would a ‘bare trust’ variant of the DGT provide my client with an income, which she would receive with the DGT?