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OCL Accountancy: how to reduce your IHT with a simple trust

To reduce or avoid inheritance tax (IHT) directly or indirectly involves giving away your assets & you’ll often hear that you should give away as much as you can as soon as you can, because until seven years have elapsed from making the gift, it will remain part of your estate for IHT purposes.

If you gift money or another asset it is gone for good, meaning you won’t have access to the capital later – and if you retain any rights over the gift, HMRC’s anti-avoidance rules mean that it remains part of your estate for IHT purposes and so defeats the object.

One IHT planning opportunity is to make your gifts into a trust, with those you want to receive the money / assets as the beneficiaries. Where you use a “loan trust” you can keep access to the capital while giving away the income in an IHT-efficient way, with the good news that you don’t need to pay high legal fees to set up this type of trust.

Typically, a loan trust involves an investment bond and a reversionary clause in the trust. The bond can be one you already own which you transfer to a trust, or you can make a cash gift to the trust which then purchases a bond, with the admin handled by the insurance company. For the trust to be effective for IHT saving you must tie your money into it for at least seven years, preferably more.

Gifts to a reversionary loan trust are most tax efficient if they don’t exceed the IHT nil rate band (NRB), currently £325,000. Above this, IHT is payable at 20% on the excess. However, depending on whether you have made other IHT chargeable gifts, you can create further reversionary trusts every seven years. This means that you can make more IHT-efficient gifts up to the value of the NRB each time.

For tax saving tips contact us – call Marie Sheldrake, Tom Hulett or Samantha Taylor on 01225 445507

oclaccountancy.com

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