Gift schemes for dodging IHT

You want to give away some assets to save Inheritance Tax but you can't afford to lose the income they generate. If you transfer the asset but continue receiving the income the Taxman will treat the assets as yours. Is there a scheme that will give you the best of both worlds?

The usual problem

The mantra of the Inheritance Tax (IHT) planner is “give away as much as you can, as soon as you can”, and it's good advice! But not all of us are so fortunate that we can afford to give away our savings just to save IHT. So what are the options?

IHT schemes

Certain insurance-based schemes allow you to retain some income from your investments whilst reducing the value of your estate for IHT purposes. There are two similar plans that allow for a regular predictable income, these are known as “loan schemes” and “discounted gift schemes”.

Discounted gift schemes

These plans offer IHT saving to people who, whilst wanting income from their assets, can afford to give away the capital outright. How do they work and how much income can you expect?

The schemes require you to invest a lump sum which will be invested into a bond in return for an annuity paid to you. Commonly, this will be at the rate of 5% per annum and is tax-free.

Some schemes pay higher annuity rates but these rely on an assessment of your health and life expectancy. A small part of these annuity payments would be taxable. We recommend that if you want to find out how much you could receive as income, you should obtain quotes from more than one insurance company.

How does it work - discount scheme?

The bond you purchase is placed into a trust for the beneficiaries of your estate. The annuity you receive is set at an amount so that its long term value is less than the value of the bond. The difference between these values is “discounted”, i.e. it immediately falls out of your estate for IHT purposes rather than having to wait seven years as is usual for gifts.

Loan schemes

This type of scheme allows the investor to draw on capital rather than income, but as a consequence is not as efficient at saving IHT. So what is involved?

The intention of the scheme is to stop the growth in your estate from being chargeable to IHT, e.g. if you made an investment of £100,000 into a loan scheme, the increase in value of that investment, usually over 20 years, could be significant but it won't be part of your estate for IHT purposes.

How does it work - loan scheme?

The plan requires that you make a loan into a trust which is repaid to you, usually interest-free, over a 20-year term, thus giving you a regular income. The trust uses the loan to purchase an investment bond of the type that allows withdrawals of 5% tax-free per annum, which therefore provides enough money to repay the loan to you.

Tip. Using a discounted gift scheme you can reduce the value of your estate for IHT purposes immediately. With a loan scheme you can reduce the value of your estate over time.

If you need more information on inheritance tax or feel like you need someone to talk to about this issue, dont hesitate to contact us for a free initial meeting on 0191 386 4786

Gift schemes for dodging IHT

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