An Inheritance Tax Trap

This article explores ways in which simple Inheritance Tax planning can come back to haunt the lives of the vulnerable elderly. The figures and names in this article have been changed.

Mrs T, a 65 year old widow, wanted to reduce the impact of Inheritance Tax on her estate. She took advice and was persuaded to buy into a "gift and loan" scheme. (Under such an arrangement, a person lends, not gifts, a sum to a trust. This transaction has no impact on Inheritance Tax as the loan remains within that persons estate. However all income or growth belongs to the Trust and it is outside the estate for Inheritance Tax planning).
Twenty years later, Mrs T had consumed all the rest of her savings and needed help with care. She went back to her adviser and asked for some money from her trust. To her surprise, she found that she had no entitlement from the trust. Why? When she had taken out the arrangement, one of the selling points was that she could take an income of 5% a year without paying any tax. What she had not understood, because her adviser had not told her clearly, was that this income was in reality a return of her capital. A 5% capital withdrawal facility is one of the attractions of an investment bond, the investment underlying the arrangement.

Consequently, after 20 years, she had drawn out 100% of her capital. Although the plan had now grown in value to over 200,000, she was unable to take any money from the trust. Her financial security and wellbeing had been severely compromised by the use of this plan.

What might she had done differently? There are other possible techniques that could be used here. A discounted gift trust would have allowed her to continue to draw back even when the capital was exhausted. An alternative would have been a flexible trust allowing her periodic access to all of her funds in annual segments.

In conclusion Inheritance Tax planning needs to consider the very long term and not just the seven year period immediately following a transaction. Always take professional independent advice from an expert and don't fall for sales patter.

About the Author:
The author of this article is John Kelly.

Square One Financial Planning LLP is a leading firm of Chartered Financial Planners based in Sussex, UK. Please click here for more information on how Square One Financial can help you with your Inheritance Tax Planning.

Article Originally Published On: http://www.articlesnatch.com

Tags: Inheritance Tax planning

, investment bond

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