Up until 2006 trusts were a very good way of extracting value from your estate without losing control. Rules came in in 2006 which subject gifts to trusts to an immediate 20% inheritance tax charge to the extent that they exceed the nil rate band of £325,000. As a basic rule this limit applies over a seven year period before it is wiped and it can be used again.
Not everyone is aware that there will be no 20% charge if the gifts to a trust constitute regular gifts out of income. A regular gift out of income must be made out of income which is surplus after defraying normal lifestyle expenses and must be made with the intention to make a similar gift at regular intervals.
For example we had a client who was earning £500,000 per annum from a pension. He typically had annual expenses of £160,000 for holidays and general living expenses. He resolved to put £300,000 per annum into a trust and because we have carefully documented everything as appropriate there will be no inheritance tax payable in respect of these gifts.
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