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Unsettling thoughts

AC Eggleton’s letter (Money Marketing, February 22) raises an important issue for those establishing tax planning strategies – transfers between spouses must be genuine gifts.

One strategy where particular care needs to be taken is in the use of joint-settlor discounted gift trusts. Where one spouse (or civil partner) in reality provides all the capital for such a trust but half is treated as passing through the other spouse’s ownership, the spouse providing the capital is the settlor and the only settlor for inheritance tax purposes.

The legislation defines the settlor as any person by whom the trust was made directly or indirectly and includes anyone who has provided funds directly or indirectly for the purpose of or in connection with the trust.

If one spouse has provided all the capital, then he or she must be the only settlor. If the planning strategy involved the use of two nil-rate bands and it transpires that only one is available, there is likely to be an immediate tax charge and a very unhappy client.

IFAs should be aware of this issue – HM Revenue & Customs certainly is – and take specialist advice before recommending joint-settlor trusts.

Gerry Brown
Technical manager
Scottish Life International


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