IHT planning with trusts hinges around the scope of the GWR rules. It is vital advisers keep this issue in mind when reviewing trust plans.

1. Advisers should note there is far more to gifts with
reservation rules than is generally understood.

2. The Issue
IHT was introduced in the finance act 1984 & replaced the old capital transfer tax
regime.
Whilst being billed as a real boost to the public the tax paid quickly trebled.
In 1986 the IHTA was amended to add a gift with reservation rule ie if you want
the tax breaks that go with gifting you cannot benefit from the gifted asset.
Trusts set up between the initial act & its amendment can still take advantage of
the loophole closed in 1986.

3. The quote
Under Section 102 Finance Act 1986, any property given away on or after 18 March 1986 subject to a
reservation is, on the death of the donor, treated as forming part of the donor’s estate immediately before
his death. Gifts with reservation (GWRs) are defined as gifts where either:
● the donee does not assume bona fide possession and enjoyment of the property at the date
of the gift or 7 years before the donor’s death, if later; or
● at any time in the period ending with the donor’s death and beginning 7 years before that
date or, if later, from the date of gift, the property is not enjoyed to the entire exclusion or
virtually to the entire exclusion of the donor.

4. Carve outs
Many trusts work by virtue of carving out an interest retained with the balance
being gifted. In these cases itis necessary to value any retained rights in order to
put a value on the gift.
The carve out must be clear & should be easily identified within the trust.
Examples of carve out trusts include split trusts (death benefit gifted but maturity
rights retained), DGT’s, reversionary interest trusts.

5. Split trusts
A number of trusts exist where the maturity or surrender rights are retained but
death benefit or critical illness benefit is gifted.
As long as the interests are clearly expressed then they work.
Premiums or costs associated with the life cover are gifts for IHT.

6. Discounted gift trusts
The settlor makes a gift of capital whilst retaining the rights to income. The key is
that you have to put a capital value on the retained rights to calculate the value of
the gift but what is retained is a right to income not an amount of capital.
The discount is only relevant if the settlor dies within 7 years. The settlors income
rights (the bit that attracts the discount) are based on their market value
immediately prior to death. In short at this point the capital (or sale value) of the
income stream is nil.

7. Flexible reversionary trusts
Many advisers will be familiar with the Canada Life WPA plan. In essence the
settlor retains maturity rights but gifts the death benefit, rights to extend the
maturities & surrender rights on policies.
The retained rights are not subject to GWR rules because they are deemed to
have no value. Again what could you sell a maturity value for when the trustees
could surrender or extend maturity dates at any point prior to maturity?
Although the settlor can on some versions be a trustee some advisers feel this
gives them too much control over whether a maturing policy is allowed to mature
or surrendered/extended, surely creating more scope for a challenge.

8. Loan trusts
Not technically a split trust as the settlor retains absolutely no rights within the
trust & is never a beneficiary. As the settlor is only gifting the growth its value on
day one as a PET/CLT is £0.
Instead the settlor does not gift capital but makes a loan to trustees. The settlor is
entitled to seek loan repayments & can make these on-demand to the trustees at
any point. Should the settlor wish they can waive all or part of the loan later (a
PET or CLT at that point).
The loan must be interest free to avoid a GWR breach, ie if not interest free the
growth is not truly gifted as the settlor has retained an interest in it.

9. The flip side to GWR rules
There is quite rightly much attention to the issues over what might amount to the
settlor retaining rights over the asset & thus bringing into the scope of GWR.
There should also be attention paid to making sure that beneficiaries rights are not
circumvented. Take a bare trust where the settlor has no access to the asset
gifted. You also need to make sure all beneficiaries with absolute rights are
informed of their rights. As a minimum trustees must inform beneficiaries of their
rights when they reach 18.

10. Take care with the small print
Most trusts contain a clause that only professional trustees can charge for
expenses furthermore settlor & spouse cannot charge for expenses. Like all GWR
issues it is less about whether they charge but all about whether they retained the
potential to charge. If they do there is a clear GWR breach.
Advisers need also be careful about chargeable events (may breach the 5%
allowance simply because of adviser charging). In short if the tax charge should
have fallen on the settlor but is paid by the trustees we have a GWR breach.
Perversely, if paid by the settlor then HMRC could view any payment (which of
course reduces the value of the settlor’s estate) as an additional gift to the trust!!

11. And finally - consider changes in practice
Advisers are used to having a robust repeatable investment process.
A similar robust repeatable process may not yet be an absolute requirements but
how often have we seen today's best practice becoming tomorrow's compliance
norm.
For more help contact me on:
Email: kevinraftery@adviserskills.co.uk
Mobile: 07760 880626

12. The legal bits
Legislative references are based on Adviser Skills Ltd understanding of UK law &
HM Revenue & Customs practice. Tax & legislation are likely to change.
The value of reliefs depends on an individuals circumstances
No guarantees are given as to the effectiveness of any arrangements when
applied to individual clients
These are simply suggestions and Adviser Skills Ltd accepts no responsibility for
advice which may be formulated on the basis of these examples