Effect of 2006 budget on Discounted Gifts

[David LaGuardia]

The 2006 budget affects all interest in possession trusts and a&m trusts. Three questions:
I In a discounted gift trust will the whole of any investment in excess of the nil rate band be subject to the 20% tax OR, since the retianed interest is not a gift and remains in the settlor's estate, is it just the residual benefit (this would certainly make sense).
II. will the 6% charge every ten years apply to such trusts in respect of the amount over the Lifetime gift allowance or the whole amount in the trust.
III. If an individual has put the Lifetime allownce in a trust seven years ago, will they have a nil rate band on the remainder of their estate?

[bob.fraser@towrylaw.]

We need to wait for the Finance Bill for greater clarification but initial thoughts are:

1. The whole of the gift. The "discount" was simply a reduction in the PET on death within 7 years.
2. The value of the underlying bond.
3. My understanding is "yes".

Bob Fraser
Chartered Financial Planner

[David LaGuardia]

Thank you for your reply.
I. Would I be right in saying that it is still possible for a discounted gift trust to be used for up to the nil rate band without any other implication except 6% charge every 10 years?
II. If a person has set one up for the nil rate band seven years ago, can they set another one up for the nil rate band without intial tax or is the "Lifetime" gift allowance really one for the rest of one's life?

Just pondering one point:
I agree the "discount" is only relevant within the first seven years but surely, the only reason the discount exists in the first place, is by virtue of the fact that part of the total amount remains in the settlor's estate and logically cannot be part of the value of the gift??

[bob.fraser@towrylaw.]

Until the Finance Bill is published, and the different providers have had time to consider the ramifications, I would not wish to comment. One uncertainty centres on how the trustees will pay the 6% charge.

I am not aware that the 7 year period to regain the nil rate band has changed.

I agree with your point about the discount. Nevertheless, at the moment it seems as if the 6% is over the total value of the bond. But we need to wait until the Finance Bill for clarification. I would not be surprised if we find that the full ramifications of the Budget statement in this area have not be fully thought through.

Bob