IHT property loan tax avoidance

[AndrewM]

I have heard that certain companies (Skandia and Scottish Equitable to name 2( are offering schemes wherby you take a home equity loan on your house at 7.5%, put the money in a trust and tehy hope to give you 8% back in return. The idae being that after 7 years the money can be pased on tax free.

Can anyone answer any of the following:
1) Appart from receiving less than 7.5% return, are there any risks of such a vehicle?
2) If the property owner dies within 7 years, can the trust be run until the end of the 7 years and still be tax free?
3) Is there any risk to setting up a shell company, taking a home equity loan out from a bank at a cheaper rate, and investing the money yourself, thus avoiding servicing fees of the large institutions?

Thanks Andrew

[timbo33]

Andrew,

The concept is not new and you do not need to restrict yourself to Skandia or Scottish Equitable.

If your main concern is saving IHT, you do not need to achieve 7.5% growth anyway as for every £100,000 you borrow and invest into a Trust outside your estate, the beneficiaries of the estate would only see £60,000.

Therefore the trusts fund need sto grow by only 60% of the interest rate of the mortgage to break even. Using a common rate of about 7.2% this equates to 4.32% after charges.

As to risks, the only relevant risk is the growth of the investment vs. the increasing value of the loan. Any consideration of the value of the property is irreleveant, though you do need to recognise that if the property grows by less than the interest rate then your equity is reducing.

Modern Home Income Plans have in-built guarantees that ensure you can never end up owing more than your house is worth nor be evicted in your lifetimes, though you could in theory end up with nothing if the value of the house falls and the equity released is in a trust outside your estate.

The typical plan of this type uses a 'Discounted Gift' or 'Reserved Interest' trust where a portion of the gift is deemed outside the estate immediately, depending upon your age, sex and state of health. This is calculated by multiplying your expected annual withdrawals from the trust by your life expectancy.

EXAMPLE

You invest £100,000 and set up withdrawals of £5,000 per annum. Actuarily you would survive 12 years, so at the end of that period you would have received back £5,000 x 12 = £60,000.

If you die within the 7 year period, The Revenue would count £40,000 of the Trust assets towards IHT. The 'discount portion' is immediately outside the estate, but the PET portion needs to be survived 7 years.

You should realise that using this type of plan is fairly IHT efficient but you give up access to the capital in favour of the 'income' from the trust. You could use a Loan trust as an alternative which would be less IHT effective but which allows the return of your initial investment if required.

Your 3rd question is a little harder to answer. Firstly, unless you want to give up Principal residence relief for your home, you don't want to go anywhere near Investment Companies (which is what your proposed company would be) They are not as tax efficient as trading companies or FURBS and would give you no perceivable benefit.

You can't get a home equity loan for less than about 6.2% (capped at 8.5%) so i don't know where you are going with this idea. if you are asking, can you borrow the money from other sources and invest where you like the answer is yes, of course you can.

If you need help locating a suitable lender, planning your investments or your estate planning strategy, please call me on 01491 411022 or e-mail me at tim.lowe@regatta-ifa.co.uk

Tim Lowe
Regatta Wealth Management Ltd
Rotherfield House
7 Fairmile
Henley-on-Thames
Oxfordshire
RG9 2JR