Q: We want to pass our assets to our two children when we die. They themselves are both married with children of their own. The value of our estate is c£950,000 consisting of our home which is about c£550,000 with the balance in various savings & investments. We are concerned about Inheritance Tax and have considered gifting money but we may need it ourselves in future. Could you make any suggestions?

A: The Nil Rate Band for Inheritance Tax (IHT) purposes is £325,000 each and upon death this allowance, if unused, can be passed to the surviving spouse or civil partner. This means upon second death the total Nil Rate Band would be £650,000 and up to this can be paid to your beneficiaries tax free. The remaining £300,000 would be subject to IHT at 40% giving a tax bill of £120,000. You could make gifts but you are concerned, quite rightly, that you may need the money yourselves in future. There are a number of other options to consider but I am going to focus on two solutions that may be suitable. Both solutions involve a monetary gift to a Trust but you have some limited access.

The first is called a Gift & Loan Trust. You make an Interest Free Loan to the Trust which is then invested and over time the value should increase. The loan (original amount invested) will still form part of your estate for IHT purposes and you can demand repayment, in full or part at any time i.e. you can get the original investment amount back if needed. The IHT benefit of the Gift & Loan Trust is that any growth realised will not be subject to IHT. In effect this helps to cap the Inheritance Tax Liability to 40% of the amount originally lent to the Trust. If as an example £200,000 was put in the Trust and upon death the value was £320,000. The original £200,000 would still be subject to IHT but the £120,000 of growth would be IHT exempt giving a saving of £48,000.

The second trust is a Discounted Gift Trust. You do NOT have access to the capital but you CAN receive an income. The amount of income needs to be selected at the outset and cannot be varied. If an income is not required it could be saved/invested until such time as it is. Part of the money is immediately outside the estate giving an immediate IHT saving. The balance is exempt as long as you both live 7 years. After 7 years assuming no change in value, a £200,000 investment would give an IHT saving of £80,000. Ultimately IHT can be mitigated if not avoided altogether; it is in essence a voluntary tax.

Warren Shute