Discretionary Trusts

Discretionary Trusts

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Client is looking to settle some properties into a discretionary trust for the benefit of his three children. This is a chargeable transfer, but will be below the NIL rate band. If he survives 7 years from the transfer, then no tax will be due on death, correct?

He does not need the income from the properties at this time, but may need it in the future. Is it possible for him to be a potential beneficiary of the trust? If he does, will this effect the gift of the property falling out of his estate after 7 year?
Gary

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By AnonymousUser
14th Nov 2005 14:03

And another thing

The income of the trust will be taxable on the settlor because he has the power to enjoy it.

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By michaelblake
13th Nov 2005 21:41

it does not work quite like that
A transfer of property to a discretionary trust is an immediate chargeable transfer. If the value transferred is less than the transferors unused nil rate band there is no tax due. If the value exceeds the unused nil rate band the excess value is charged at the lifetime rate of 20%.

There is therefore no question of the gift falling out of the transferors estate after 7 years. It falls out immediately the transfer is made.

If the transferor is a potential beneficiary of the trust there is a gift with reservation of benefit, and the property remains in the transferors estate. The gift is ineffective for iht purposes.

If the trust is settlor interested any gains the trust made would also be attributed to the settlor.

If the transfer is to be effective for tax purposes therefore the settlor has to exclude himself from all benefit under the trust.

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By andymeeson
14th Nov 2005 10:16

Daren
It's actually even harsher than you suggest: a chargeable lifetime transfer (CLT) has the ability to remain on the clock for nearly 14 years even if it's only a PET which is made within 7 years of it.

That is because, if death occurs within 7 years of the PET, the PET becomes chargeable to death tax, and its nil rate band is compromised by the previous CLT.

And Michael: we mustn't forget that, if death occurs within 7 years of the CLT, the CLT is reassessed at death rates, so there may be additional tax to pay on the CLT in addition to its effect in reducing the nil rate band on the death estate.

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By User deleted
14th Nov 2005 16:49

Let's be positive.
A gift into a discretionary trust is indeed subject to a charge now of 50% of the lfetime rate, with another 50% being payable on death within 7 years. Because it is a chargeable transfer , and not a PET, holdover relief for CGT is available under TCGA s260.


Given that the subject of the gift is property, it should be possible to carve out an interest to gift[say a 20 year reversion] with the donor retaining the right to income for the next 20 years. Donor and spouse are both excluded from benefit, so no GWR and no s.77 CGT charge on donor.

This is not subject to a POA charge , as the property is not occupied by the donor

Don't forget the 10 year charge to IHT-if the value has increased materially ensure an "exit" charge before the end of the first 10 years, when the exit rate is a % of the rate when the trust was established-this is we are told nil, so there is no exit charge.

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