Trusts can also be used for tax-relieved assets, such as farmland or shareholdings qualifying for business relief, for example, with no tax on the gift.
Another valuable and under-used relief is for gifts of surplus income, ie income not needed to sustain the donor’s lifestyle and needs.
Those gifts, which can be outright or to a trust without regard to the NRB, fall immediately outside the donor’s taxable estate, and there is no need for him/her to survive by seven years.
There are a few qualifying conditions in order to satisfy this requirement.
First, the gift of income must be made as part of the normal expenditure of the donor.
HMRC explains this condition: the gift should form part of a “regular pattern of payments” – a covenant (a legally binding promise) to make such payments in future can be useful in evidencing the intention of meeting this condition.
Secondly, the donor must retain sufficient income to maintain his/her “usual standard of living”.
If necessary, an income and expenditure analysis should be undertaken each year to be satisfied that this criterion is met.
Finally, the gift must be made out of income. This means that the funds must have arisen from a salary, pension income, rental income, dividend payments, for example; conversely, it cannot be made from capital (eg savings).
Given the need to satisfy HMRC that all of the requirements of this relief are met in the event of the donor’s death, it is almost always sensible to keep detailed records any gifts made in reliance on it, including the source of funds, value of the gift and information about the recipient(s).
A little-known exemption to the GROB rules, with the un-catchy name 'section 102B', concerns the gift of an undivided share in land – commonly, a holiday home used by several members of the family.
This exemption allows the donor to give away part of his/her interest in the property to others, typically up to 75 per cent, though the exact share is not set in stone, but still to occupy the property without breaching the prohibition on retaining a benefit in the GROB rules.
Of course, the gift will still be considered a PET and the donor must survive the seven-year period for the value of the share of the asset to fall outside the estate.
This can be an effective way of passing down ownership of part of a family property for tax reasons while retaining its use and a degree of control.
The above strategies by no means exhaust the IHT planning opportunities open to taxpayers, many more not covered here are often implemented within two years of a death occurring.
