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Trusts still have IHT role

Interest in possession trusts within discounted gift trusts should not be ruled out despite concerns over their use as inheritance tax planning vehicles, says Skandia.

HMRC recently clarified its stance on the tax treatment of DGTs set up after March 22 and Skandia says advisers do not need to sacrifice the flexibil-ity of IIP trusts in favour of the benefits being given away.

HMRC has confirmed that the valuation of the gift within a DGT arrangement is the amount invested less the open market value of the investor’s right to receive withdrawals.

Skandia head of tax and financial planning Colin Jelley says this means clients will still be able to invest significantly more than the IHT nil-rate band and avoid tax as the value of the gift will be below the nil-rate band and the remaining fund will be subject to an absolute or bare trust for the benefit of the settlor.

Jelley uses the example of a male client aged 60 next birthday – using a Royal Skandia DGT – who could invest up to 659,000 and take 5 per cent withdrawals without incurring an IHT charge.

He says the fund would then be 374,044 and the discounted gift value would be 284,956. If this client died, Jelley says the beneficiaries would inherit the whole amount tax-free because 374,044 is subject to an absolute or bare trust arrangement and the 284,956 falls under the nil-rate band for IHT purposes.

Jelley says this means IIP trusts are still appropriate for the gift and the client can retain the control an IIP trust affords over an absolute or discretionary trust.

He says: “In the vast majority of cases an IIP trust will still have a vital role to play within a DGT arrangement and advisers should ensure they continue to take advantage of the flexibility and control that IIP trusts can offer their clients over absolute or bare trusts.”


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