Discounted Gifts and implications on Inheritance Tax
You have an annual IHT exemption for lifetime gifts of up to £3,000, and above the annual exemption you can also make gifts of up to £250 to any number of individuals -- so fear not, Christmas gifts are generally a non-event for IHT, unless you are feeling particularly generous! However, with the Nil Rate Band for IHT fixed at £325,000 until 2015, increasingly many of you may now wish to look at ways of mitigating your IHT liability during your lifetime, and how you can gift in an IHT efficient way. Generally any estate over the £325,000 is taxed at 40%, although there are exceptions.
One way that those who are retired or otherwise financially secure can “gift” to others in an IHT efficient way, whilst still benefitting from the gift themselves, is through a Discounted Gift Trust (“DGT”).
A DGT allows you to “gift” a sum of money to be held in trust within an investment bond for your chosen beneficiaries, whilst you receive a regular income from the fund.
There are three potential benefits of doing this:
1 You can take a regular income of up to 5% per annum (for a maximum of 20 years) of the original sum gifted to the trust, and this will not be subject to income tax.
2 The sum you gift to the DGT will be a chargeable lifetime transfer for IHT purposes. This means that, if you survive for seven years after making the gift, the original sum you gifted and any capital growth in the DGT becomes exempt from IHT on your death.
3 There will be a “discount” given to a percentage of the sum you gift, making this percentage immediately exempt from IHT. The balance of the gift is subject to the seven year timescale.
On your death, your chosen beneficiaries will then ultimately receive the funds of the trust.
For further advice on Discounted Gift Trusts or investments generally, please contact Clare Kerr.
