Inheritance Tax on gifts into a lifetime trust

[Raasu]

I am in my mid 50's and have two children aged 18; one has a disability which means they that won't be able to manage their finances by themselves, if I and my wife die. We've included a Discretionary Trust in our Will for their share of our estate. Currently our assets are below the combined IHT allowance for myself and my wife (2 x 325000 = 650000).

We will at some point inherit a large amount which will push our assets over the IHT allowance. So we are looking at gifting some assets to our children. Our lawyers suggested setting up a Lifetime Discretionary Trust or a Disabled Person's Trust for the one who is disabled. I want to ask about how IHT works on gifts into Trusts.

Normally each gift to children is a potentially exempt transfer that falls out outside IHT if the donor survives for 7 years after the gift. Subsequent gifts have the same rule with the 7 years starting when each gift is made. That's how I understand it. For gifts into Trusts, however, we were told the 7-year window starts again on the whole Trust whenever a new gift is made. But then I read elsewhere that's wrong, and gifts into the Trust fall out of IHT after 7 years just like outright gifts to children. Can anyone clarify this?

For example, take this scenario:

1 Sept 2020 - Parents set up a Lifetime Trust with initally £50k
1 Sept 2026 - Parents make gift into the Trust of £100k
1 Sept 2028 - Parents die

In this case, would the amount to be included in the parents' estate for IHT purposes be £100k, or £150k?

[scrumpyjack]

When you say that at some point you will inherit a large amount, bear in mind that it might be possible to do a deed of variation in respect of that inheritance so some or all of it goes directly to your children, thus avoiding a further IHT charge.

[fca2019]

This may be helpful, HMRC guidance on trusts for vulnerable people.

https://www.gov.uk/trusts-taxes/trusts- ... ble-people

If you leave your house to your children you will also receive residential nil rate band. This is £175k per person. So a married couple who leave their home to their children have combined allowances of £1m, under current rules.

In your example I think the 100k would be potentially taxable, but only above combined allowances.