Don’t forget a narrow but valuable IHT exemption for long-term residents.
Trusts are well established as a cornerstone of succession planning, offering unparalleled flexibility and the ability to operate effectively across multiple generations and adapt to changing family circumstances. However, for UK based individuals that are long-term resident (LTR), there are limited options for adding assets to trusts without triggering prohibitive tax charges.
Gifts made into trust by a LTR will ordinarily trigger an immediate UK IHT charge at 20%, which is usually enough to act as a deterrent for most LTRs. Further, if the LTR fails to survive the gift by seven years, the trustees would be liable to 40% IHT on the gift (with credit for the 20% already paid). These IHT charges are subject to any available exemptions or reliefs, for example any unused annual exemption in the year of transfer and the year prior (at £3,000 per year) and any available nil rate band (£325,000) can be added with no IHT charge. As readers will be aware, there is also an extremely valuable relief for a qualifying business or agricultural property.
However, there is also a lesser known exemption for gifts made out of surplus income: if a LTR transfers their excess income into a trust, it will not be subject to the 20% IHT entry charge, and no additional IHT would be payable if the LTR died within seven years. Surplus income may include both UK source income and non-UK source income. The rationale for this exemption is that IHT is aimed at transfers of capital and not income. For individuals with significant surplus income, the exemption represents a valuable opportunity to fund a trust over multiple years without the 20% IHT charge.
There are three narrow conditions to this exemption:
Gifts must be part of the individual’s normal expenditure. The ability to demonstrate a regular pattern of gifting is helpful (as opposed to a one-off gift), for example the regular payment of school fees.
Gifts must be made out of the individual’s income, as distinguished from capital. Although some carry over is allowed between years, this generally means income for the year of the gift.
The LTR must be left with sufficient income to maintain their usual standard of living.
When relying on this exemption, it is essential to retain detailed records evidencing that each of the three conditions have been met.
Home >Articles > Tax efficient trust planning with surplus income
Tax efficient trust planning with surplus income
Don’t forget a narrow but valuable IHT exemption for long-term residents.
Trusts are well established as a cornerstone of succession planning, offering unparalleled flexibility and the ability to operate effectively across multiple generations and adapt to changing family circumstances. However, for UK based individuals that are long-term resident (LTR), there are limited options for adding assets to trusts without triggering prohibitive tax charges.
Gifts made into trust by a LTR will ordinarily trigger an immediate UK IHT charge at 20%, which is usually enough to act as a deterrent for most LTRs. Further, if the LTR fails to survive the gift by seven years, the trustees would be liable to 40% IHT on the gift (with credit for the 20% already paid). These IHT charges are subject to any available exemptions or reliefs, for example any unused annual exemption in the year of transfer and the year prior (at £3,000 per year) and any available nil rate band (£325,000) can be added with no IHT charge. As readers will be aware, there is also an extremely valuable relief for a qualifying business or agricultural property.
However, there is also a lesser known exemption for gifts made out of surplus income: if a LTR transfers their excess income into a trust, it will not be subject to the 20% IHT entry charge, and no additional IHT would be payable if the LTR died within seven years. Surplus income may include both UK source income and non-UK source income. The rationale for this exemption is that IHT is aimed at transfers of capital and not income. For individuals with significant surplus income, the exemption represents a valuable opportunity to fund a trust over multiple years without the 20% IHT charge.
There are three narrow conditions to this exemption:
Gifts must be part of the individual’s normal expenditure. The ability to demonstrate a regular pattern of gifting is helpful (as opposed to a one-off gift), for example the regular payment of school fees.
Gifts must be made out of the individual’s income, as distinguished from capital. Although some carry over is allowed between years, this generally means income for the year of the gift.
The LTR must be left with sufficient income to maintain their usual standard of living.
When relying on this exemption, it is essential to retain detailed records evidencing that each of the three conditions have been met.
