09 October 2015

The information contained within the following news articles have been pre published. The articles were published on the dates indicated and the information contained within these issues include references to taxation, legislation, regulation and other issues or concerns that may no longer apply

Don’t Make Promises You Can’t Keep


Clients often use gift trusts, loan trusts and discounted gift trusts as a way to help mitigate Inheritance Tax (IHT) planning.  Depending upon the type of trust, this will mean giving up all access to the trust fund or at least access to the trust fund will be restricted.  On many occasions clients are advised to use brothers or sisters as trustees without realising the responsibility that places on them (although this will be the subject of a future blog).

Clients should take this process seriously as we have been asked in the past to help break the trust as the settlors’ (clients who established the trust) circumstances have changed.  However, it is important to note that it is not possible to break the trust unless the settlor is a trust beneficiary and if the trust was set up for IHT mitigation then they wouldn’t be a beneficiary. 


There are two main reasons for this:


Firstly, under trust law the trustees have an overriding duty of care to the beneficiaries.  Therefore the trustees can’t consider the settlor’s interests unless they are also a beneficiary.  This applies no matter what financial difficulties the settlor may now be in.


Secondly, most trusts nowadays are used in conjunction with IHT planning.  These work because the settlor makes some form of outright gift to the beneficiaries (normally children/grandchildren) with no further access for themselves.  How this is treated depends on the type of trust.


  • Gift Trust – settlor makes an outright gift of the capital with NO further access in any circumstances.
  • Loan Trust – the settlor lends the trust capital which is repayable on demand (usually by way of an income of 5% over 20 years).  The benefit of this type of trust is that any growth is outside the estate.  Once the loan is repaid in full, the settlor can have NO further access to the trust fund.
  • Discounted Gift Trust – the settlor makes an outright gift of the capital, subject to them reserving the right to a specific income from the capital (a specific annual amount on set dates) for the rest of their life.  In this type of trust the settlor has the right to income from the trust but still NO right to the trust fund in any other way.


When using the above types of trusts for IHT planning, the settlor cannot be a potential beneficiary.  This has applied to these types of trust since 18 March 1986, when legislation was passed introducing the concept of a gift with reservation.


It used to be possible to create trusts for a range of IHT planning purposes, where the settlor was a potential beneficiary, however these trusts use strategies that are no longer available in the current IHT legislation.


A settlor can be a potential beneficiary in other types of trusts which are not used for IHT planning.  For example a probate trust.


As you can see there are numerous complications with regards to trust planning.  If you are looking for IHT advice or want to check that your existing planning meets current legislation etc, then contact Census Financial Planning for a no obligation consultation.


Paul Dixon
Chartered Financial Planner

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