UK Accountants Urge Clients To Act Quickly On Trust Loophole

by Robert Lee, Tax-News.com, London

13 February 2003

UK accountants are urging married couples to take advantage of a trust tax loophole which allows the minimisation of inheritance tax liability (IHT) whilst at the same time permitting access to the assets contained within the trust.

Inheritance tax in the United Kingdom is levied on estate valued at more than £250,000, and although it is possible for a donor to make potentially exempt transfers (Pets) - which are tax exempt if he or she lives for seven years after making the gift - no benefits from the assets which have been given away can be retained by the donor.

However, according to a Times report on the issue:

'By using a family wealth trust...married couples can get round this rule. A life interest trust is established under which the wife (or husband) holds the life interest - meaning she or he benefits from the trust's income but not its assets.'

'The husband then transfers an asset into the trust- cash, unit trusts, property or any other investment, subject to CGT considerations. At this stage, there is no gain for IHT purposes, as the wife has a beneficial life interest. But after a certain period - usually six months - the other trustees, ideally not including any family, rescind the wife's life interest. And as long as she lives for seven years, no IHT is payable on the asset. Income can be drawn by the husband, and, on his death by the wife.'

Speaking to the Times this week, Moore Stephens partner, Stephen Humphreys observed that: 'It combines the best of both worlds. The asset is outside the estate, while the couple retain access to the income and capital.'

However, this loophole is unlikely to be in existence for very much longer, according to Mr Humphreys.

'The Revenue does not like it at all. We think the loophole will be closed in the Budget speech,' he warned.

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