Straightforward gifts into absolute, flexible or discretionary trusts are not affected. There are no additional steps involved and there is no reduction in relevant property charges or potential gifts with reservation issues.
Similarly loan trusts (and gift and loan trusts) are established by lending money to the trust and do not fall foul of the new tests.
On the face of it the new tests appear to catch certain mainstream packaged IHT solutions such as discounted gift trusts and flexible reversionary trusts.
However, there are some obvious examples of published HMRC guidance that demonstrates their acceptance of these schemes, which provide comfort that they remain effective and outside the need to report.
Discounted gift trusts
Discounted gift trusts (DGTs) generally involve a gift into trust where the settlor retains a right to future payments from the trust. The value of these rights reduces the amount gifted for the purposes of IHT, ‘the discount’.
This discount reduces the relevant property entry charge. In addition the settlor can continue to enjoy the retained payments without causing a ‘gift with reservation’.
This tax result could not be achieved without taking steps to divide up the interests of the settlor (the retained payments) and the beneficiaries (the remaining fund after the settlor’s death).
Thankfully, there is plenty of HMRC guidance to give comfort that DGTs are established and accepted practice. HMRC IHT manual confirms that provided the settlor’s retained rights are clearly defined, there is no gift with reservation and they have also published guidance on how discounts should be calculated.
Flexible reversionary trusts
These schemes are similar to discounted gift trusts in that there is a gift into trust and the settlor retains a right to future capital payments. The key difference is that the settlor can choose to either defer these payments or not take them at all. As a result there is no discount available on these schemes and the full amount paid in will be a gift for IHT.
Until now there has not been the same published guidance from HMRC on their acceptance of flexible reversionary trusts. However, they have now updated the HMRC IHT manual to reflect their acceptance that there is no gift with reservation provided the settlor’s rights are carved out separately from those which have been gifted.
It is worth noting that ‘established and accepted practice’ is not a generic exemption which can be applied to all discounted gift trusts and flexible reversionary trusts. Instead it operates at each individual scheme level. This means any future development or innovation within these products will take place under the watchful gaze of HMRC and any providers who make changes to their scheme will need to notify HMRC.
