Best way to not incur or minimise IHT and CGT

[ltd]

My parents have properties at the current value of 2.5 million GBP.
Their main home that they do not live in is worth about 400k GBP. They live with me.
The total amount of mortgage on all the properties equates to about 400k GBP.

I am their only son. Both my parents are alive.
Is the most tax efficient way (for them and myself) for them to gift me all their assets?
I am married with two teenage kids. Can my parents gift any asset to them (tax free) to use as collateral for a loan for university fees in the future?

If my parents were to gift these properties to me, or my kids, will they be liable for CGT?
Does “gifting” effectively mean a “transfer” of ownership therefore deemed as a sale?

Kind Regards
Sam

[Arnold Aaron]

If they gift the properties (or anything for that matter), it will be immediatley classed as a disposal for CGT purposes, at full market value. If it remains in their estate, then of course it will be liable for IHT on death.

If they are in good health and 'relatively young' they might consider joint life second death life assurance in Trust. This provides the funds to pay IHT, so that you dont have to start selling properties to pay the tax, though the tax bill is still there. Have they made any gifts in the last 7 yrs?

Dont forget that they will each get their allowance of £325k - so £650k is already IHT free and this is increasing each year, so the liability is on ~£1.85m (after deducting mortgage). £1.85m at 40% is ~£750k in IHT. (Is the mortgage decreasing each year, or is it interest only?)

An advanced method of circumvavigating the CGT and IHT on the properties would be as described as below, but it is only for clients who understand and accept the risk factors, in particular interest rate rises...

Solution: Your parents could borrow against the properties. This creates a debt on the estate. They then invest the cash raised into a Discounted Gift Trust (see aticle below). This exempts it from IHT - a portion of it immediately and the rest after 7 years (see article). The Trust gives them an income for life, usually 5% p.a, sometimes more where required, e.g 7.5% p.a.

They then have two sources of income to service the loan - the rental income, and the 5% / 7.5% income. Given that interest rates are at historical lows they will now be in receipt of this extra income to use as they please, and more importantly this extra income is a buffer should interest rates rise in future.

On death, there is no IHT on the cash (assuming 7 yrs passed) and the outstanding mortgages wipes out the IHT on the propeties.

Only warning is that if rates rise in future, one could end up paying more in interest than IHT saved. However if the growth rate on the discounted gift trust exceeds the interest rate payable on the Trust, then one will be better off. Having said that given that we are at long term lows in the midst of recession so now may well be an excellent time to invest, with superior growth expected over the next 10 years for example. It works very well because it avoids both the CGT and IHT, but is ONLY for clients who understand this point thoroughly and are willing to accept this.

A way around this point (for high net worth families) is where they are able to make a family loan to the parent, interest free (not withstanding section 103 - another discussion altogether!), which avoids this issue.

See article below on the Discounted Gift Trust, feel free to come back to me for further discussion.

The Discounted Gift Trust
http://www.taxationweb.co.uk/tax-articles/capital-taxes/the-discounted-gift-trust.html

[ltd]

Thanks for the quick and excellent reply Arnold.
To answer some of your questions:

1. Have they made any gifts in the last 7 yrs?
None.

2. Is the mortgage decreasing each year, or is it interest only?
Yes decreasing. It’s not interest only.

Kind Regards
Sam

[Arnold Aaron]

- If the mortgage is decreasing, then the IHT is increasing with time - something to be aware of.

As regards the first option of life assurance, feel free to e mail me privately your parents dates of birth and their smoker status and I'll give you a quote. This will assist you in knowing the costs of the various options.

arnold@arnoldaaron.co.uk

[maths]

Arnold Aaron has noted some of the issues which rightly need to be appreciated re DGTs.

Whilst, prima facie, HMRC accept the efficacy of DGTs not all practitioners are convinced of the analyses adopted by HMRC in arriving at their acceptance of such vehicles. Laws change and there is no guarantee that HMRC will not at some point change their approach.

Post FA 2006, the initial transfer into the DGT (if other than a bare trust) will precipitate an immediate IHT liability if the value of the discounted gift exceeds the current nil rate band (ie £325,000) as it will constitute a chargeable lifetime transfer (not a PET as applied typically pre FA 2006).

Subject to the above comments the concept as suggested by Aaron is worth looking into.

[Arnold Aaron]

In my experience bare trusts aren't an issue at all, and clients are generally happy to accept that the beneficiaries cannot be changed. Their children have peace of mind that the beneficiaries can't be changed either! Granted though, in certain cases where divorce or other domestic issue is on the cards, it is sensible go for the discretionary trust version. Bear in mind that an entry charge is only triggered if the gifted element (that is after the discount) exceeds the available nil rate band, so this still allows more than £325k to be invested in such a vehicle, and for two spouses, each would have a nil rate band.

As for the efficacy of a DGT, while HMRC can change the goal posts (as with ANY form of tax planning) they have and do regularly issue guidance notes for life companies offering this Trust, and this further shows they recognise and acknowledge DGT's as mainstream tax planning tools.