I hate inheritance tax!

We generally find two views of Inheritance Tax.

View one is “My children are going to inherit far more than I ever did and I really can’t be bothered to spend my money making sure they get more”

Or view two, “I don’t want the Government to get a penny of my hard earned wealth”

Completely opposed views.

So some people are intrigued when they discover they can have their cake and eat it.

One approach worth investigating are Discounted Gift Trusts.

These are a kind of trust where capital on death of the Settlor (the person(s) putting the “property” into trust) is made available to the next generation of beneficiaries (or even to grandchildren) but the trust fund itself pays a fixed rate of “income” to the Settlor.

These can be inheritance tax efficient trusts because the income that is paid from the trust fund is fixed and as a result some of the money put into the trust is seen as a return of capital that is immediately deemed out of the estate (the discount).

The balance of the money paid into the trust is deemed to be a potentially exempt transfer (PET) and as long as the Settlor lives a further seven years, after the gift is made, will be completely outside of the estate for IHT purposes.

This is not the right course of action for everyone of course because the Settlors can never get back the capital but they do get the future fixed income and that may be good enough for them.

Of course the trust fund investments needs to be managed and that does involve cost.

For the right people this can be a quite effective way of reducing the overall IHT liability of the estate.

Photo credit: Flickr/lamazone