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Jelley reveals Pet hates of IHT planning

Skandia expert warning estate planners to prioritise chargeable lifetime transfers over Pets.

The order in which clients make gifts into trusts is crucial for controlling the future inheritance tax liability, warns Skandia head of tax and financial planning Colin Jelley.

He says people should first use exempt gifts, followed by loans to trusts, then chargeable lifetime transfers and potentially exempt transfers although each case must be determined individually.

He warns that CLTs to discretionary trusts must be made before Pets because the 10-year periodic charge on the discretionary trust will depend on what other CLTs were made in the seven years prior to the discretionary trust being set up.

Jelley says if a client made a Pet in this seven-year period and died within seven years of making it, the failed Pet would become a CLT and so be included in the discretionary trust’s tax calculation at the 10-year anniversary. But if the Pet was made after the CLT, it would not be included and the tax bill would be reduced.

Jelley gives the example of two gifts, each for £285,000 – one made into a discretionary trust for a grandchild and a bare trust for two adult children.

If the client dies 18 months later and it is assumed that the estate is passed, exempt of IHT, to his wife and his annual exemptions have been used elsewhere, if the Pet was made before the chargeable lifetime transfer, the tax charge would be £18,600. However, if the chargeable lifetime transfer was made before the Pet, the tax charge would fall to £1,500.

Jelley says: “Advisers really need to understand their clients’ transactional histories over the last seven years. The idea that the order in which gifts are made could have such an impact on a client’s tax bill may be surprising to some advisers and not what they are used to. But ensuring gifts are made in the right order must be part of the financial planning process. Getting it wrong could result in unnecessary tax bills.”


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