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Use your discretion

I am 61 years old, widowed with two sons aged 27 and 25. My house is worth


about £400,000 and I have further assets of about £550,000, including a


large second property. I am worried about my potential IHT liability.



While you know your two sons will be more than comfortably off after your


death, you hate the idea of the Inland Revenue benefiting almost to the


same extent as your boys.


We have talked at length about the need to make direct transfers for any


effective IHT planning, making use particularly of the potentially exempt


transfer rules.


You have quite substan tial inflation-protected pens ion income which meets


all your requirements and so you do not rely on the income arising from


your portfolio of investments.


In principle, therefore, you could simply pass on a chunk of your capital


to your sons.


However, you do not feel at all comfortable doing this because you feel you


might need it at some stage in the future. This is not unreasonable given


your age.


More important, though, you are not at all keen on passing money to your


sons because you do not feel they are mature enough to use it wisely.


You are also afraid of your sons having failed marriages or relationships


in the fut ure which would involve whatever you give to them hav ing to be


used in some sort of settlement.


The time will come when your sons have to be given their rein but you would


prefer to defer this for as long as possible.


We have talked about the various insurance products that use such


strategies as gifts, loans and serially maturing endowments. You are not


interested in anything like this, believing these products are expensive,


complicated and inflexible.


You are, however, interested in the idea of using a trust into which you


can transfer your rented property. It is unlikely this property will


qualify for any sort of business property relief for IHT purposes because


it is not properly run as a holiday letting.


You do not make much money out of it income-wise – not enough to worry


about giving away at this stage – and it seems to be sensible to do


something with this property by way of an inter vivos transfer.


As with any transfer of an asset such as this, it is important to consider


the capital gains tax implications as well as the IHT implications and


indeed any income tax impact.


The property is roughly worth around £180,000 and has some gain built into


it. The disposal will give rise to a capital gains tax liability after


indexation and annual exemption. This makes a discretionary trust the more


sen- sible structure to consider because you will be able to elect to hold


over any gain under “gift relief”.


This is because the transfer to a discretionary trust will be an


immediately chargeable one as opposed to a potentially exempt one.


There will not actually be any IHT to pay because it is within your


nil-rate band but neither will there be any immediate capital gains tax


liability because of this holdover relief. The held over gain becomes a


gain for the trustees to be dealt with when the property is finally


disposed of.


This tax benefit is re-enforced by the feature that, as discretionary


beneficiaries, neither son will have any beneficial entitlement to capital


or income and so the danger of misuse of the assets will not arise. The


trustees will be able to deal with the capital and any income arising from


it as they see fit and you like the idea that you can be a trustee along


with anybody that you feel would be suitable.


The trust therefore allows you to make some IHT provision by reducing the


value of your estate by about £180,000 – as long as you survive the


cumulation period. This effectively lops more than £70,000 off your IHT


bill.


I have suggested you start to make small-scale gifts within the annual


exemption. You are happy to do this because the levels of transfer are


quite small. In due course, if you feel comfortable, you will make bigger


gifts but you are happy to be in a position to ma

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