IHT mitigation etc.

[logistic]

We would be grateful for an opinion on the validity of this plan to mitigate the impact of our eventual IHT liability and to help with our grandchildren’s school fees.

My wife is the owner of a small flat that has been rented out for several years. Its value is now around £120,000. We have never lived in it as it was bought as a buy to let investment.

She envisaged gifting it to our two grandsons who are aged 11 and 13, with the rent being used to assist with their school fees. We appreciate that it would need to be held for them by an adult until they are 18.

Hopefully she will probably survive for 7 years when it would become a successful PET and no longer be a part of our estate for IHT.

As an additional benefit we have been advised that the grandchildren will be able to set the rent against their personal tax allowances, which would mean that the gross rent would be available for school fees and possibly eventually university fees.

As the property was originally purchased for £90,000 some CGT would obviously be due.

Would this scheme be acceptable to HRMC or would it be deemed tax evasion.

[Lee Young]

Rather than an outright gift you should transfer the property into a trust with your grandchildren being the beneficiaries. They can be given an entitlement to the income, thereby ensuring that they can minimise the payment of income tax by using their personal allowances. For CGT purposes the gain could be deferred till the trustees or your grandchildren dispose of the flat and for IHT purposes (as with an outright gift to an individual) you need to survive seven years from the date of the gift before it falls outside of your estate.

Nothing wrong with your plan. Simply making use of legitimate tax planning opportunities.