A ‘hidden’ rule means assets given away as many as 14 years before someone’s death could land recipients with tax liabilities.
IHT’s ‘seven-year rule’ is well-known and dictates that if a person dies within seven years of establishing a trust, its assets are usually taxable. Conversely, those surviving the seven-year period see the gift freed from their estate for IHT purposes. These gifts are known as ‘potentially exempt transfers’.
But Richard Dyson, The Telegraph’s personal finance editor, has highlighted lesser-known stipulation. He says that if the person establishing the trust dies within seven years, other gifts made during a seven-year period prior to the trust’s creation will also be in the taxman’s sights.
Describing the situation as a ‘catch’ in a system yielding an otherwise ‘incredibly valuable potential get-out for families’, Mr Dyson wrote on the newspaper’s website: “In this way, gifts made up to 14 years before death can attract tax.
“You would not need to be either especially unlucky or especially wealthy for your estate to find itself stung in this way.”
He added a general warning that where trusts were set up, IHT rules could become complex.
In Moore Thompson’s last IHT Article, we reported how discretionary trusts could inadvertently become the beneficiary of a will, even if descendants are beneficiary of the trust. But under measures announced in the Summer Budget, only direct descendants (including adopted and foster children) may be beneficiaries if new nil-rate bands are to apply to bequeathed houses. As a result, an estimated one in three wills may need to be rewritten.
At Moore Thompson, we make sense of the complex area of IHT for you. If you have any questions as to your future liabilities, please contact us.