I want my money back: The most common IHT arrangements

In the first of a series of articles on trusts, Jeremy Pearson, technical support manager at Canada Life, explains the advantages of estate planning to solve clients’ IHT problems.

The main reason people do not give away large lump sums to save IHT, even if they can afford it, is because they are concerned as to what the recipient would do with their gift.

In the words of the legendary George Best, 90% of the gift could go on women, drink and fast cars and the rest wasted. But there are also more salient concerns, such as that the donee may become bankrupt, be subject to a divorce settlement or lose their gift in other ways.

So trusts are used to reassure people that they can make substantial gifts to save IHT and the gift will not be frittered away or wasted.

Advantages of trusts

Trusts are all about control over where the assets are invested and who gets what and when. The change of ownership of an asset from an individual to a trust is a transfer for IHT purposes.

The trusts usually now used for IHT planning are discretionary trusts or bare trusts, the choice depending on, among other things, how much the settlor can rely on the beneficiaries.

The most straightforward arrangement is that of a gift trust, whereby the donor gives up all interest in the assets gifted and does not expect to have any entitlement to capital and income in future.

But when discussing estate planning and the use of trusts with clients, the question that commonly arises is: “Can I get my money back?” Or the client may have investments that could be transferred to a trust, but are living off the income they produce.

So estate planners had to develop arrangements involving trusts that met clients’ needs or preferences.

Here is a brief summary of the most common trust arrangements and packaged products that have been developed.

1 The client wants a regular income (or not to part with capital)

On the face of it, an impossible venture; to save IHT but allow the donor full access to their gift in trust.

This can be accommodated to some extent by the use of a ‘gift & loan trust’, or in some cases simply a ‘loan trust’.

An interest-free loan is made to the trustees, who invest it in an investment bond. If the client wants a regular payment to supplement their income, the loan can be repaid in instalments.