T2 - Inheritance Tax jargon

Potentially exempt transfers

A form of gifting, whereby the value of the gift becomes exempt from inheritance tax, provided the giver survives seven years after making it.

Discretionary trusts

This allows the trustees (i.e.: the people who look after the assets) to pick and choose how to allocate income to beneficiaries.

Payments can be varied to reflect needs, so money can be paid out to the beneficiary only when it is deemed necessary. Unlike other trusts, gifts over the nil rate band of £263,000 are taxed at the lifetime rate of 20%.

Accumulation and maintenance trust funds

A special type of discretionary trust designed specifically for children and grandchildren. Trustees can use their discretion to pay for education and maintenance costs from the trust. The beneficiaries have a right to the income (or even capital) by their 25^th birthday.

Bare trusts

A straightforward type of trust whereby the trustees hold assets on behalf of a beneficiary, often via an investment fund, who can then draw from the trust at the age of 18.

Interest in possession trust

Often used to pass assets to dependants while meeting the income needs of someone else. A husband may want his estate to be put into trust so the widowed second wife receives income from the trust, but on her death, the capital goes to the children of the first marriage.

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