Lifetime gifting in a changing world

Brian Radbone, Head of Technical Services at Transact, reflects on potential changes to the current inheritance tax regime, trusts and how International Bonds, such as that provided by IntegraLife International Limited - a Transact group company, can help achieve planning goals.     

The UK Government’s desire to address the complexities of the current inheritance tax (‘IHT’) regime has so far been seen in an initial report published by the Office for Tax Simplification (‘OTS’), with a second to follow shortly, and a consultation document issued by HMRC. The overriding message is one of simplifying the current IHT framework, reducing the burden on those dealing with estates and ensuring any IHT planning is not disadvantageous, either to the Treasury or beneficiaries.

The OTS has highlighted confusion that arises when Potentially Exempt Transfers (‘PETs’) fail and also on chargeable transfers whereby settlements as old as 14 years could be impacted and IHT becomes payable. The Nil Rate Band (NRB) and residence NRB may also be considered along with exemptions and allowances in the next OTS report, due in spring.

Meanwhile, HMRC wants to look at the transparency, fairness, neutrality, and simplicity of trusts. Within the second of these, HMRC states the policy principle to be one of neutrality so that there is no tax incentive or disincentive for using trusts. It has cited the NRB and rolling seven-year period together with the taxation of relevant property trusts, as a potential area for change. It has also highlighted the need for increased simplicity to ensure certain trusts, and in particular those for vulnerable beneficiaries, can be operated more easily without the beneficiary suffering any potential loss because of the complexity of obtaining the available reliefs.

So, despite the possibility of some potential changes to the operation and taxation of trusts, lifetime gifting strategies do not appear to be under threat and still seem relevant for those seeking to mitigate IHT legitimately and ensure bloodline protection of accrued wealth.

The need to ensure that accrued wealth is passed on as intended has seen an increase in the use of trusts as many family’s needs have become increasingly complex. Remarriage could mean that the path for the family wealth’s distribution may end up being different from what was originally intended. For example, if a surviving spouse inherits and then remarries the children from the original relationship may not benefit to the extent originally intended. By putting a trust in place, the required ‘bloodline protection’ of the family wealth could be safeguarded if considered important.

International investment bonds will continue to be important as trust property because of the flexibility they provide trustees when managing and distributing it. The ability to change investments within an international bond without generating a capital gains tax liability and being able to manage when income tax is payable on any gains and income received will continue to be an attractive option to trustees. Using the 5-per cent tax deferral rule also enables trustees to repay loans made to a trust by a settlor in a tax efficient manner.  The same rule also means that the settlor of a discounted gift trust can receive their regular payments due under the trust without triggering an income tax charge.

Trustees also have the ability to pass on any tax liability to beneficiaries by assigning some or all the international bonds to them. if the beneficiaries are absolutely entitled to the trust property, they will be the taxable entities in any event.  This will also be the case for beneficiaries of a discretionary trust so that they, rather than the settlor (or trustees if the event arises in a tax year following the tax year in which the settlor died) will be liable for the tax due on any gain. In these cases the rate of tax applicable to beneficiaries is often below the rate applicable to the settlor or trustees.

International bonds can also give a lower administrative burden for trustees. If a property held in a trust that is not a bare trust generates any type of tax liability during a tax year (other than bank or building society interest of less than £100) then it must register and report under the Trusts Registration Service (TRS). If the only type of asset ever held in such a trust is an international bond there will be no requirement to register and report as long as there is no chargeable event gain. Once a chargeable gain arises then the trust will have to register and regular reporting will become necessary.

So, at a time when there is a degree of uncertainty around the IHT framework and what changes may be made, an appropriate lifetime gifting strategy is still important to ensure bloodline protection of wealth and tax mitigation where possible. The international bond still offers one of the most tax efficient and flexible investment options for settlors and trustees when seeking to achieve planning goals.