06/10/25
Where death planning doesn’t achieve all of a client’s aims or solve all their Inheritance Tax issues, our Gift Trusts and Holdover Gift Trusts provide the answer the client is looking for! With clients whose overall estate value is above their available allowances, the only way to reduce the IHT their executors will have to pay on their death is to reduce their estate value by gifting. This also means clients make use of lifetime reliefs or exemptions under the saying ‘use it or lose it’.
PETs vs CLTs
It’s essential you understand the differences between a ‘Potentially Exempt Transfer’ (‘PET’) and a ‘Chargeable Lifetime Transfer’ (‘CLT’) before you get started. A PET is usually a gift from one individual to another; for example, parents gifting cash to a child or an aunt gifting a second property to a nephew. PETs are regarded as exempt from Inheritance Tax when they are made, therefore there is no limit on the value of a PET, but they will become chargeable to Inheritance Tax if the donor dies within 7 years of the gift being made, making them ‘potentially exempt’ until 7 years have passed!
A CLT on the other hand is a transfer to Trust that is immediately chargeable. For a CLT, the available Nil Rate Band (NRB) is used first and this is charged at 0% for Inheritance Tax; anything above the available NRB is charged at a 20% entry charge rate for Inheritance Tax (half the death rate for inheritance tax of 40%). If a client passes away within 7 years of gifting a CLT that was above the available NRB, the portion above the available allowances will then be charged the extra 20% inheritance tax (to equal 40% inheritance tax paid in total). The available NRB replenishes every 7 years so with CLT’s, clients can look at completing a further CLT after 7 years have passed since the first one, in order to avoid paying any entry charges (as long as all of the CLT’s are below the available NRB at the time).
Let’s set out an example of this: A client transferred a property worth £500k into a Gift Trust during their lifetime (assuming they have a full NRB available), the first £325,000 would be charged at 0% inheritance tax, assuming the client had already used their £3,000 annual gifting allowance.
The remaining £175,000 would be charged a 20% entry charge for inheritance tax, meaning that on transfer in, £35,000 Inheritance Tax would be payable by the settlor.
If the client passed away 1 year after completing the CLT, the portion above the available allowances (£175,000) would then be charged a further 20% Inheritance Tax (a further £35,000) to equal a total of 40% Inheritance Tax paid on the amount above the available NRB. An important point to note is that any growth on the gifted assets would not form part of the client’s estate as the value of the gift is fixed at the point the gift is made.
If clients are looking to gift via a PET and via a CLT, it is also really important to consider what estate planners like to call the ‘14 year shadow’ as well as the order of gifting. Please review the course recording for more information.
As you can see from the above example, transfers to Gift Trusts and Holdover Gift Trusts are CLTs, therefore our recommendations are that clients only transfer assets in that are under their available NRB, in order to avoid an entry charge. If a client transfers an asset into a Gift Trust or a Holdover Gift Trust and survives for 7 years, the value of the asset will then be outside of their estate for Inheritance Tax purposes… sounds ideal… but what are the other considerations with this planning?
So, why use trusts?
Clients may question why they should use a Trust for the gift and not just gift absolutely. There are many downsides to gifting absolutely which many of our advisers will already be aware of, the main ones being:
- Inheritance Tax (absolute gifts automatically form part of the done’s estate for IHT purposes whilst also remaining in the donor’s estate for IHT purposes for 7 years, which results in poor planning for both parties!)
- Control (with absolute gifting the donor doesn’t retain any control over the asset) and the fact that holdover relief can’t be claimed on absolute gifts (we will be coming back to holdover relief shortly).
Capital Gains Tax (‘CGT’) is often something clients don’t consider when disposing of assets such as additional properties or shares for Inheritance Tax planning purposes. CGT is charged on the chargeable gains on the disposal of assets – and transfer of an asset to Trust is classed as a disposal of an asset (as is a sale or other transfer).
It is important to bear in mind that a sale or a gift is treated as a disposal at market value even if no consideration is paid, so clients can’t get around paying CGT by gifting assets for no consideration or selling them at an undervalue.
There are some exemptions and reliefs for CGT which are covered in detail in the course. The difficulty that a lot of clients often end up with is that they may be asset rich but cash poor. So, they have assets they can consider gifting to Trust during their lifetime as part of their Inheritance Tax planning, but don’t have the spare funds to pay the CGT upfront on the transfer.
Let’s look at an example of this: A client purchased a second property in 2000 for £125,000 and has rented this property out since then (never lived there as their own main residence). In 2020 they decided to transfer the whole property to a Gift Trust; at this point the property was valued at £350,000, therefore on the transfer to Trust, CGT will be payable as there are no reliefs applicable.
The basic calculation for CGT is the total chargeable gain (£350,000 – £125,000 = £225,000) minus the annual exemption (£3,000 for individuals in 2025/26), which leaves us with £222,000, this is then charged at the client’s rate of CGT which is dependent on which income tax bracket they are in.
If this client is a higher rate taxpayer the CGT will be charged at 24%, resulting in £53,280 CGT payable (£222,000 x 24%). If the client is a basic rate taxpayer, the CGT will be charged at 18% up to the point at which, when the gain is added to their income, they become a higher rate income taxpayer with the balance at 24%.
Hold it over!
In short, if gifting to Trust, then holdover relief can be claimed. Holdover relief defers CGT until a later disposal, so the CGT applicable on the transfer to Trust isn’t eliminated, it is just deferred until the Trust disposes of the asset in the future. It’s really important to remember that holdover relief is only applicable to CLT’s, not to PETs so can’t be used for absolute gifts and also can’t be used for settlor-interested Trusts (where the settlor, their spouse and/or their minor children benefit from the Trust). How this works in practice is that the transferee inherits the asset at the base cost and on future disposal, the Trustees pay the CGT based on the gain made from the base cost to the current value.
To illustrate this, let’s consider an example where holdover relief is claimed: A client purchased a second property in 1985 for £80,000 and in 2015, when the property was worth £200,000, they transferred the whole property into a Holdover Gift Trust with the transferor and the transferee both agreeing for holdover relief to be claimed so no CGT was payable on this transfer (client didn’t have any liquid funds available to pay the CGT). In 2025 the client passes away and the Trustees decide to sell the property and use the cash to benefit other beneficiaries. The property sells for £280,000. It is at this point that CGT will be payable, so how do we calculate it? As the CGT was held over previously, the Trustees of the Trust received the property at the base cost of £80,000. Therefore the total chargeable gain here is£200,000 (£280,000 – £80,000), minus the annual exemption (£1,500 for Trusts in 2025/2026), which leaves us with £198,500. This is then charged at the Trust’s rate of CGT, which is 24%, resulting in £47,640 of CGT payable on the Trust’s disposal of the property. However because the property has now been sold, the Trustees have access to liquid funds to be able to pay the CGT before they consider utilising the remaining funds for the other discretionary beneficiaries.
Gift trusts vs Holdover gift trusts
When would we use a Gift Trust and when would we use a Holdover Gift Trust? Gift Trusts are best used when a client has assets that either 1) have no CGT payable on them due to the type of asset they are (e.g. cash), 2) have no CGT payable on them as the client has only recently acquired the asset so it hasn’t increased in value yet or, 3) the client has the funds available and wishes to pay the CGT now rather than deferring this cost to the Trustees. Holdover Gift Trusts should be used where there will be CGT to pay on the transfer to Trust and the client does not have the funds available to be able to pay this now.
Both Gift Trusts and Holdover Gift Trusts are designed to receive assets as a gift with the transfer being irrevocable and the donor never being able to benefit from the assets again, therefore clients need to consider carefully whether they can afford to ‘lose’ this asset when considering one of these Trusts. The benefits of the settlor never benefiting from the assets again is that if they survive for 7 years, the value of the asset will be out of their estate for inheritance tax purposes and therefore no inheritance tax will be paid on this asset on their death. The Settlor can, however retain some control over who does get to benefit from the asset by appointing themselves as one of the Trustees of the Trust; they will then be involved in discussions and decision making with their co-Trustees. As is also the case with any type of discretionary Trust, there is flexibility in who benefits (compared to absolute gifting) meaning that beneficiaries circumstances can be taken into account when deciding who to utilise assets for the benefit of. For example, if a beneficiary is in the middle of a divorce, the Trustees can retain assets in the Trust so as to ensure the assets aren’t taken into account in their divorce proceedings. Our loans from Trusts also work alongside this with beneficiaries being able to utilise funds how they wish, but then also having the loan in the background so if their circumstances change, the Trust can recall the funds and protect them for use by other beneficiaries. The benefits of a discretionary Trust can be invaluable when dealing with minor, vulnerable or spendthrift beneficiaries.
You may have clients who want to consider a combination of Gift Trusts and Holdover Gift Trusts as a share of the asset equivalent to the client’s CGT annual allowance could be transferred to a Gift Trust with the rest of the asset being transferred to a Holdover Gift Trust! Just always make sure you bear in mind the CLT gifting allowance of the available NRB in order to avoid the client incurring an entry charge of 20%.
Gift Trusts can also be utilised for SDLT benefits when the Trust will be purchasing a property… Please review the course recording for more information here.
What’s stopping clients?
One of the key reasons why some clients don’t want to consider gifting assets, whether that be absolutely or via a Trust, is the fact that they have to give up all of the income of the asset in order for the gift not to fall under the ‘Gift With Reservation of Benefit’ rules (‘GWROB’) and to fall out of their estate for inheritance tax purposes after 7 years. This can cause issues if for example, clients have a second property which they rent out to tenants, and then rental payments are being used to pay the mortgage on the property, or the client does not work and is relying on the rental income to live. This can also be the same for income on investments. Luckily for clients, there is a solution to this issue that comes under S102(b)(iii) of the Finance Act 1986. This legislation deals with anti-avoidance rules for GWROBs, and clients can dispose of an undivided share of a property they don’t reside in (i.e. they can’t gift 100% of the property) and retain 100% of the benefit (rental income) without this being classed as a GWROB. This planning can be used as a PET or a CLT so clients can get the discretionary Trust benefits here too. It is important to bear in mind HMRC’s thoughts on how much of the property being gifted would be viewed as ‘aggressive tax planning’ where a client is gifting but retaining a benefit in the asset. For more details on this please review the webinar recording.
Clients will often have to weigh up whether they want the holdover relief for CGT or whether they want to be able to gift part of an asset but retain 100% of the income it generates. With Gift Trusts and Holdover Gift Trusts you can’t retain any benefit in the asset in order to avoid it being a GWROB, however with S102(b)(iii) you can gift a share of an asset and retain 100% of the income but you can’t holdover the CGT. Unfortunately, clients can’t have both (retain income and holdover CGT) and this is a concept that a lot of clients often struggle to grasp.
There are of course more intricacies and details to each of these planning strategies, and each case needs to be reviewed independently. This article has provided a brief introduction to the topics, but any specific cases should be discussed with the Estate Planning Team for thorough review and advice. The recording for this Webinar can be found here.
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