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
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
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
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
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