Mr and Mrs Phillips

Mr and Mrs Phillips wanted to make some plans for managing their inheritance tax burden, they had a normal family house and good pensions, over the years they had used their full ISA allowances and had built up substantial savings.

The did not however want to lose control of their savings, nor did they want to give large amounts away, as they may need some of the money to pay for life’s luxuries in their retirement.

As such we introduced them to the Discounted Gift Trust.

Most IHT planning involves gifting assets during your lifetime so that they do not form part of your estate on death. The problem with this approach is that you may be depriving yourself of capital or income that might be required at a later date. You may therefore wish to look at options around the transfer of your savings & investments into a more tax efficient arrangement.

By transferring your savings and investments into an investment bond with certain financial planning attached to it, the value of those savings could be reduced immediately for IHT purposes, subject to your health and life expectancy, with the remainder becoming exempt after seven years. For this arrangement to work effectively the ‘income’ would need to be spent as it was received, you should therefore only consider this option if you considered that your future need for ‘income’ was not currently being met.

These are trusts typically offered in conjunction with investment bonds and these are used as the basis of the investment. The assets within the bond are able to grow free of income tax and CGT. The settlor is able to take an ‘income’ of up to 5% of the original value of the bond each year tax deferred; this ‘income’ has to be established at outset and cannot be varied. If you were to take an income in excess of 5%, income tax would be payable on the excess, however if you are a basic rate taxpayer, no additional tax would normally be payable.

Income tax is payable on the growth, but this would only become payable post death, and if the recipient was a basic taxpayer no additional tax would be payable.

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