Q&A: trusts and potentially exempt transfers

In this week’s Q&A, Croner Taxwise tax advice consultant Kiya Jacobs, explains the tax compliance issues when passing on substantial financial gifts to family under inheritance tax rules

I want to set up a discretionary trust for my grandchild with £100,000 cash but I have already gifted them £325,000 in cash directly so will I now have to pay inheritance tax if I set up this trust?

Making a gift into a discretionary trust is a chargeable lifetime transfer as per section 2, Inheritance Tax Act 1984 (IHTA 1984). The inheritance tax nil rate band available is £325,000 so only if you have already used up your nil rate band (NRB) in the last seven years would inheritance tax be payable – at 20% on the transfer of value into the trust.

A gift of cash from one individual to another is a potentially exempt transfer (PET) within s3A IHTA 1984 and does not utilise your nil rate band. Generally, these will only be within the scope of inheritance tax if the donor does not survive seven years after making this gift making this a ‘failed PET’.

If there is a failed PET, then after allowing available annual exemptions (£3,000 per annum) your available nil rate band would first be used against the failed PETs as the chargeable transfers are calculated in date order – s7 IHTA 1984.

If there is only a single nil rate band available (ie, there is no transferrable spousal/civil partner nil rate band), then this would mean part or all of the transfer to the trust would become chargeable depending on how much of the NRB has been used against the failed PETs.

At present, the earlier gift you made to your grandchild of £325,000 in cash was a PET so this would not affect the availability of your current nil rate band. Therefore, you do not have to pay any inheritance tax settling £100,000 into trust, providing of course that you have not made any other chargeable transfers in the last seven years prior to this.

About the author

Kiya Jacobs is a tax advice consultant at Croner Taxwise


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