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Taxation of absolute trusts

A gift into an absolute trust become a Potentially Exempt Transfer. As such it escapes the immediate lifetime charge associated with Chargeable Lifetime Transfers (CLT) of 20% of the amount written in trust. Taper relief applies to the Potentially Exempt Transfer (PET), if the amount gifted exceeds the available nil rate band and death occurs between 3 and 7 years after making the gift. All of the gift will be exempt from Inheritance Tax after 7 years.

The beneficiaries share of the trust property will be included in their own estate for inheritance tax purposes. Whilst they cannot change their entitlement they can gift it to their nominated beneficiaries as either a CLT or as a PET.

As long as the beneficiary is of aged 18 or more (16 in Scotland) and of sound mind, they can demand to take possession of their share of the trust property. This absolute entitlement at age 18 can be a cause for concern for some parents or settlors who may feel that the beneficiaries will lack the financial sophistication and maturity to spend the proceeds appropriately.