How will a Discretionary Trust reduce the IHT liability?

What is the best way to protect from IHT liability for the children for property being transferred upon death, but does not want give up on its control during the life time.

The estate is worth over 1 million at the moment. Would a trust be suitable and can you suggest how this should be set up and any implications that should be considered before embarking on such a move.

Arthur Says

This question is a bit scarce on detail. It doesn't say whether it is an individual, or husband and wife, who are transferring. It doesn't say whether the home that the transferor is presently living in is a significant part of the  £1M estate, or whether other property makes up the bulk of the estate.

Generally, the way to take assets out of the estate without losing control is to put them into a discretionary trust (DT). However a transfer into a DT is liable to inheritance tax (IHT) at the lifetime rate of 20% if more than the nil rate band (currently £275,000) is transferred (taking into account transfers made in the previous seven years).

If both the husband and wife transfer, then £550,000 can be extracted from the joint estate, and if they survive for seven years, then they will have solved a major part of their IHT problem.

Three things to note.

1.       The above will help for property in which the parents do not reside. However if they are still living in the property they wish to transfer, then the solution becomes more complicated.

2.       Assets in a DT are subject to an exit charge and a ten year charge - but this is should not be a significant matter at this stage. 

3.       If the assets are income producing, this may also change the best advice for the taxpayers re putting into a DT.