Lifetime Gifting

If you wish to make gifts in your own lifetime (as opposed to on death) then there are very good reasons to use a Protective Gifting Trust (known as a ‘PGT’) as opposed to simply making the gifts outright.

The PGT offers a mechanism for making the gifts, but through the trust structure, rather than directly to your chosen beneficiaries.

This is only relevant if you can give up the rights to the capital sums being gifted. You cannot aim to hold onto the capital or receive income from it, in any manner, which is why it is perfect for absolute gifting.

To explain the benefit of using the PGT here is a case study comparing the difference between making gifts without using a trust versus using one.

In both cases the seven year rule applies, this means once the gift is made it will take seven years for the value of the gift to be removed from your estate for Inheritance Tax (IHT) purposes.


Case Study

No trust versus using the PGT

If you make your gifts without the use of the trust, for example, you pass over a capital sum, this has the effect (under the seven year rule) of fully removing it after seven years from your estate, but you have now placed it into the estate of your beneficiaries.

This means it is now ‘in play’ in their estate for the twin threats of future IHT on their death or negative social impacts in their lifetime.

For example, if your beneficiary receives a capital sum you have gifted to them (direct, no trust involved) and they are then subject to divorce proceedings, their ex-spouse will probably be entitled to a share of the gift. Other social threats are claims from creditors, for example in a bankruptcy, or an assessment against care fees entitlement.

In terms of their future IHT liability the gift, which is now firmly in their estate, could easily be subjected to IHT (currently 40 percent) on their death.

If, instead, the same gift is made but, this time, via the PGT, the threats are considerably reduced and, possibly, totally negated.

The mechanism is that you make your gift, but this time into the PGT, and you appoint trustees and beneficiaries. Your trustees have flexibility to disburse the capital or income from the trust as appropriate and/or to pay-out the capital sum in the form of a protected loan to your chosen beneficiaries.

Where the loan method is used the same effect has been achieved, the capital value of the gift has been made (and passed out of your estate – after seven years it will be free of any IHT) but now the value is not in their estate and is protected.

This means it cannot be claimed by third parties (e.g. an ex-spouse or creditors) and is not subject to IHT on their death.

The benefits and the protection afforded to your family of using a trust in this way can be substantial:

  • The PGT can provide protection against the value of the gift being decimated at a later date through one or more of your beneficiaries going through a divorce, becoming bankrupt or dying;
  • The PGT can protect against ‘third party’ claims and is useful in supporting a surviving spouse who may go into care;
  • For larger estates, the PGT can be used for additional tax planning opportunities for beneficiaries.

The primary benefit of any trust is to ensure family and bloodline protection, at the same time as ensuring your wealth is directed exactly where you want it to go.

Furthermore, for larger estates trusts can be used to create additional tax planning opportunities and by extension, significant tax savings.

The Protective Gifting Trust is a discretionary trust which allows your appointed trustees a great deal of flexibility in how the benefits are used. The PGT allows your beneficiaries to maximise both bloodline protection and tax efficiency.

Putting such a trust solution in place is straightforward and can be established now with your Financial Planner.