Suppose you want to make a gift for the benefit of your children but still need income or other use of the assets. HMRC will usually attack such arrangements under the “retention of benefit” rules. In particular, you should not give your home to your children if you intend to stay living there.
Not only will this fail to save IHT but you will also be giving up your CGT exemption. There are, however, exceptions.
Suppose you are single and move back to the family home to live with your widowed mother and she agrees to give you a half share in the home. Although this looks like a reservation of benefit it will not be if you both agree to share the running costs of the home equally. A special relief also applies if you give your property to a relative but subsequently become ill and move back in for them to take care of you.
An arrangement accepted by HMRC is the “discounted gift trust”. You often see these marketed by insurance companies who link it to purchase a single premium insurance policy from them. The basic plan is that you transfer funds into a trust with an obligation on the trustees to pay you a set annual amount.
The value of the payment into the trust for IHT purposes is discounted to reflect the right retained by you to this income stream. The hope is that you survive for seven years so that the gift drops out of IHT completely but even if you do not there is a saving of IHT on the discount. The younger and fitter you are the higher the discount accepted by HMRC. For example, a lady aged 75 in good health might be allowed a 40pc discount on the transfer giving an initial IHT saving of £16,000 on a £100,000 payment into trust. The plan is not suitable for those in their late eighties.
You sometimes see arrangements where only a part of the family home is placed in trust but with occupation of the whole property. This will be deemed a “reservation of benefit” but a saving should arise on death on the basis that a joint property discount applies to the value.
I understand that HMRC will usually accept discounts of up to 10pc in the valuation with a consequent IHT saving. However, there may be some CGT when the property is sold and legal advice will be required. It is also important that the trust has the CGT private residence exemption. The legislation allows this but only if the trustees make an election within four years for the relief to apply.
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