The following Private Client practice note produced in partnership with Phillipa Bruce-Kerr of Harrison Clark Rickerbys provides comprehensive and up to date legal information covering:
It is a common misconception among practitioners that using one type of personal injury trust or another confers some inheritance tax (IHT) advantage. People often feel that discretionary trusts might do this particularly. In fact, for a self-settled personal injury trust, it does not matter what type of trust is used. The gift with reservation of benefit rules will apply and mean that the value of the trust fund is treated as part of the settlor’s estate for inheritance tax, regardless of whether the trust fund falls into the estate on death or not. That is even the case for disabled trusts.
From an inheritance tax point of view, an ill-considered personal injury trust can actually make things worse. Where an amount over the nil rate band (£325,000 for England and Wales 2020–21) is settled into a relevant property trust, ie a discretionary trust or life interest trust, which is not eligible to be a disabled persons trust, there will be an immediate charge to inheritance tax of 20% on the amount that exceeds the nil rate band. A slightly higher figure (maximum £331,000) might apply if the person has unused annual exemptions (£3,000 per year) going back a maximum of one year. The 2013 case of Pitt v Holt is an example of where,
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