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The setting up of this trust would constitute a gift so it would create a Potentially Exempt Transaction (PET) in the IHT affairs of the donor. PETs run off at a taper over seven years and in the event of a decease within that time would be added back to the donor's estate for IHT purposes. PETs are the first to suffer IHT and if the deceased's estate is insufficient to meet the tax on the PET is cascades down to the beneficiary for immediate payment.
The classic defence against a PET is a reducing life insurance policy.
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