Million pound estate: Suggestions how to save IHT?

[greggybia]

My parents are retired in their mid 60s and want to plan to reduce their IHT liability. Their house is worth approx £750,000 and they have cash and shares of approx £300,000.

I know the simple solution is for them to make gifts to me and my sisters but they are not that keen to gift their cash/shares. Their income covers their expenditure but they are wary of care costs in the future.

I’ve read about various insurance based schemes such as discounted gift bonds. Are these suitable or does anyone have any other suggestions. I’d appreciate any thoughts.

[Christian Ward]

I presume that your parents do not wish to move from their home. Planning with the family home is notoriously difficult and best avoided if other methods are available. Many people came unstuck with the ‘home loan double trust structure’ which was deemed ‘unacceptable’ planning by the government.

Schemes such as discounted gift trusts can indeed be a useful method to make an effective gift for IHT yet allow the donor to retain some access to an ongoing income. They should only be considered if your parents do not wish to make an outright gift. However they are not suited to all situations. If your parents have normal life expectancies (are in good health) and do not need an income then a Flexible Reversionary Trust is likely to be a much more suitable option for them. It operates on similar basis to a DGT, but offers considerably more flexibility. This allows each person to invest up to £325,000, which will be outside the donor’s estate after seven years, but allows the donor to retain potential access to capital throughout their life. Although they are unlikely to invest all their liquid assets, an investment of £250,000 would save £100,000 IHT after seven years. The FRT can also be utilised with the normal expenditure out of income exemption, which may be useful for your parents if they have surplus income.

Like DGTs, the flexible reversionary trust, which is only offered by a few specialist companies, has been utilised for many years and HMRC have confirmed that this planning does not breach the gift with reservation or pre-owned assets anti-avoidance rules.

You can read more about Flexible Reversionary Trusts and how they compare to DGTs and loan trusts here:
http://www.taxationweb.co.uk/tax-articles/capital-taxes/flexible-reversionary-trusts-how-to-reduce-inheritance-tax-whilst-retaining-access-to-capital-in-a-tax-efficient-structure.html

Whole of life assurance may also be appropriate - many people have an automatoc aversion to insurance, but if you use a guaranteed premium policy then there is no investment risk whatsoever and yet the equivalent investment return can be surprisingly good. This is generally more suitable for slightly older clients but can form a useful part of an overall plan.

Feel free to email or call me if you would like more information or specific advice for your parents’ specific situation.

[greggybia]

Thanks for your response christian. I’ve looked at the article and done some general searching. I have a couple of queries.

From what I understand, my parents could establish the trust with say £200,000 and opt to receive back 10%, £20,000 back per annum for ten years. But if they do not need it then the annual payment can be rolled over to another year. Can more than 10% be paid in a single year?

I can’t seem to find any information on flexible reversionary trusts whereas there is considerable online information on discounted gift trusts. Can you explain this and does this mean that it’s a riskier strategy?

[Christian Ward]

To answer you two queries:

There is no actual restriction on the maximum or minimum percentage that can revert back to the donor. The 10% is a suggested maximum initial level to make the plan effective and acceptable to HMRC. The donor chooses the exact reversions at outset and generally in line with their requirements for capital. If the donor does not have a set need for a regular payment then the 10% level is usually the maximum advisable. There is nothing to stop more than 10% being paid in later years when the donor might have a greater need for expenditure e.g. to meet care home fees. Bear in mind that if the trust is established by one of your parents then after their death, the trustees can potentially use the entire trust fund to benefit the survivor if necessary.

The flexible reversionary trust structure has been utilised since the early 1990s but has not been known by generic name. Each company has traditionally used their own description. I used flexible reversionary trust in an article in a professional tax journal earlier this year and it seems to be entering common usage. The structure is only offered by a few companies so you will not find the amount of marketing material that exists for DGTs.

All structures such as DGTs, FRTs and loan trusts that offer an element of having your cake an eating it are susceptible to a change of legislation or HMRC practice. However, these schemes have been in use for many years and HMRC have been quite specific with their acceptance of these schemes. These factors mean that most professional commentators agree that these schemes can be considered ‘safe planning’.

[greggybia]

Christian,

Many thanks for your response and information.

Most helpful

Greg