The most popular ways of avoiding inheritance tax

1. Discretionary Will Trust

A Discretionary Trust is created within the Will for the benefit of the spouse and children. After the first death the trustees grant a loan to the surviving spouse up to the amount of the ‘nil rate band’. The estate of the surviving spouse is therefore reduced by the amount of this loan, possibly together with the interest which would accumulate under its terms. For this to be effective the property must be held as a ‘tenancy in common’.

2. Loan Trusts

Initially payment, often just £3k (ie. the annual allowance), gifted into a trust to start it up (invested in a single premium Insurance Bond). Then a further interest free loan, probably to a maximum of £285,000, made to the trust (invested into a 2nd bond).

Settlor is a beneficiary of the trust and can receive money from it in the form of 5% capital withdrawals for 20 years. After 20 years all the capital will have been drawn from the trust leaving no asset in one’s estate (alternatively the withdrawals can be more or less than 5%). The advantage for IHT is that the growth of the investment remains inside the Trust.

Remember that Insurance bonds may not be a good investment and that if they become too popular, HMRC may decide to tax them.

3. Discounted gift schemes

A sum is transferred to a bare Trust, which is then divided into two sections. Firstly an element (the reversionary interest) which will revert to the settlor, subject to them reaching a specified age. Secondly an element remains as Trust funds and becomes a potentially exempt transfer.

If the settlor dies within 7 years only the PET is valued in full and the reversionary interest is valued at considerably less than the amount transferred because of the uncertainty as to when the investment might have been realised.

Finally remember that as a result of the Budget all Trusts will have to be reviewed. As usual contact Martyn if you require further information on the above.