Accumulation & Maintenance Trust or Outright Gift?

by **TimAl** on Thu Jun 02, 2011 6:22 pm

My mother wishes to pay for my child to have private education. She is considering an accumulation and maintenance trust which could be set up to benefit my child and also to be able to perhaps pay for school uniform and trips for three other grandchildren.
I have been trying to understand the workings of such a trust and understand that each grandchild would need to complete a tax return each year and gross up the amount that they physically received by 50% (the amount of tax paid by the trust) and reclaim some or all of the tax. School fees/costs for my child could amount to £15k per annum.

However if I have understood the administration and tax issues correctly would it not just be better for my mother to pass to me ( or perhaps my child?) the £325k as a cheque /outright gift (or a much lesser amount to be calculated based on needs) as a PET rather than putting it into an accumulation and maintenance trust and then I pay the school fees directly for my child and then pay cheques to my sister for her children which would not exceed £3k per annum so could be part of my £3k annual allowance which would not otherwise be used. This way seems to avoid the need for tax returns and tax administration etc on the trust and avoid the partial tax reclaim on £15k school costs for my child.

I am a basic rate tax payer although interest on £325k could take me over when interest rates rise.

I understand the trust would need to be completed within 10 years and a one-off gift payment to me or perhaps my child would appear to make more sense. Am I missing the point? And not understanding all the issues?

This would be my mothers first PET in seven years.

by **tax_schmax** on Fri Jun 03, 2011 11:05 am

Can your mother afford to pay the fees from her income?

by **TimAl** on Fri Jun 03, 2011 11:27 am

Hi, she doesn't have enough income to pay out of surplus income. Most of her income is from 2 discounted gift trusts and I believe HMRC don't count that as 'income' for such purposes? She has reasonably large amounts of capital which she could gift outright just at present not particularly income generating.

by **tax_schmax** on Fri Jun 03, 2011 1:16 pm

Thanks for that.

A discretionary trust would be taxed the same as an A&M trust, but is more flexible. The discretionary trust could take a nil rate band and assign value out to a bare trust in the name of your child to meet school fees. The bare trustees could immediately encash the trust assets and this would be taxable as if it belonged directly to your child. This would remove the 325K from your mothers estate and would not have to be treated in such a prescribed way as an A&M trust. If you chose the right assets for the trust, the ongoing taxation can be deferred until it is crystallised in the bare trust, i.e. changing from a 50% taxpayer to potentially a non taxpayer.

This is the type of planning I do quite a lot of. I have found it particularly useful for grandparents with issues similar to your mother. If you need more specific help, just let me know.

by **tax_schmax** on Fri Jun 03, 2011 1:19 pm

Oh by the way, you're absolutely correct about HMRC not taking DGT "income" as income for IHT free normal expenditure.

by **maths** on Fri Jun 03, 2011 1:44 pm

The concept of the A & M trust no longer exists ie the historic favourable IHT consequences are no longer available to such trusts.

They are now treated for IHT as relevant property trusts (as are discretionary trusts).

The straightforward discretionary trust offers great flexibility.

There is no point setting up an A & M trust.

by **TimAl** on Fri Jun 03, 2011 3:56 pm

Very much appreciate both of your replies. Is the discretionary trust routes still more tax efficient than just giving an outright cash gift to me? my mother doesnt have any desire or need to have to be a trustee or control over the money? she just wants my child to be able to benefit from a particular school.
Many thanks again

by **tax_schmax** on Fri Jun 03, 2011 4:55 pm

As discussed, if it is in a discretionary trust, ongoing taxation could be zero if the right assets are chosen. If the money rests in your estate, and you were to die, there may be IHT on your estate. A discretionary trust would allow you to borrow from the trust if you needed any money, without the burden of it resting in your estate. You mention holding it could make you a higher rate taxpayer, this would also be avoided, although it is not a very big problem. Even if you want to hold the money yourself you should consider the trust. You would have debt equal to the value of the gift, thereby cancelling its value out in your own estate for IHT purposes.

The only advantage in giving the money to you directly is that the gift would be a Potentially Exempt Transfer, and not a Chargeable Lifetime Transfer. This would avoid periodic charges, but with these not being chargeable until at least 10 years have passed and even then at a maximum rate of 6%, it is still likely to be more efficient than you holding the money yourself.

To clarify; using a trust, all taxation is capable of being deferred using the right assets, it is then chargeable within your sons personal allowance. You pay tax at a minimum of 20%, he would be paying tax at 0%