My VIP Tax Team question of the week: Settlor Interested Trusts & IHT
I have a client who is interested in setting up a discretionary trust with a sum of £500k, however he also wishes to be a beneficiary of the trust. Are there any Inheritance Tax (IHT) implications which need to be considered? He has not previously settled into any other trusts.

AIHT is charged on the value transferred by a chargeable transfer. Transfers into most trusts, since March 2006, are chargeable lifetime transfers (CLTs).

The value of the transfer for IHT purposes, as per FA 1986 s3, is found using the ‘loss to donor’ principle. This is the difference between the value of the donor’s estate before and after the making of the gift, or as here, the transfer into the trust. In your client’s case, as he is settling cash into the trust, the amount of £500k is the amount of the CLT.

It needs to be remembered that under FA 1986 s102 there will be a Gift with as your client is also a beneficiary of the trust. This means that the trust assets are treated as still forming part of his estate on death as well as also being within the trust for IHT purposes with trust being liable to IHT on Ten-Year Anniversary charges and exit charges.

It may appear that as there is a Gift with Reservation (GWR) that the loss to the client’s estate in creating the trust is nil. However, IHTA 1984 s102 makes it clear that a GWR is only taken into account for IHT purposes on death, not in lifetime.

IHT is payable when a CLT exceeds the available nil rate band (NRB), which is currently £325k. Assuming no other CLTs have been made in the previous 7 years (and, for ease, ignoring any available annual exemption) IHT will be charged on the excess of £175k at the lifetime rate of 20%, i.e., £35k. If the donor pays the IHT due rather than the trustees, this has to be grossed up to reflect the position that the loss to the donor’s estate also includes the IHT that he has agreed to pay. Therefore, £35k is grossed up to become IHT payable of £43,750.

As per IHTA 1984 s226 this is payable by the later of:

1. 6 months from the end of the month the transfer was made or
2. 30th April of the following tax year.

This is reported using Form IHT100, and Form IHT100a assuming only cash is being settled. As tax is payable, an IHT reference will firstly need to be obtained before the IHT Forms can be submitted which will require submission of Form IHT122.

In addition to the lifetime IHT paid when the trust was created, if death occurs within 7 years of the transfer, there will be an additional charge on the CLT against which the lifetime tax already paid can be deducted –IHTA 1984 Sch. 2 paragraph 2.

Regulation 5 of the IHT Double Charges Relief Regulations (SI 1987/1130) would mitigate the IHT charge on death if there is both a GWR in the chargeable estate and a CLT within 7 years of death.

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Tax Adviser
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Marsha began her career in tax 13 years ago working in the personal tax departments of 2 small accountancy firms where she mainly dealt with sole traders, partnerships and OMBs. Having gained the ATT and CTA qualifications she then moved to a firm of Chartered Tax Advisers working for the last 8 years as an Assistant Tax Manager in the private client department where the majority of her clients were high net worth individuals.

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