discounted gift trusts

[anj]

mum died 06/07 aged 85 with full nil rate band allowance in estate £285K. benficiaries myself and brother. i am executor but have not yet distributed.dad, now 85, not especially unwell but slowing down, has estate valued at £330k ( savings and investments) and assigned house to brother in oct 06 (value £200k). dad lives with us elsewhere and does not use house. know this gift without reservation but thus far remains in estate. Accordingly his estate worth £538k, of which approx £30k to go to charity and so IHT iability approx £80000 after this deduction. Taking advice at moment. Sugggestion from professionals is to use deed of variation so that joint nil rate will be used up(currently £624k) and then to put approx £300,000 in DGT with approx discounted gift resulting as £225k. My understanding is that combined estate becomes mum's 285+ 200 for house + the left over 38k +225 DGT- 30k charity = 718K which when 624k removed leaves IHT liability on £94k @40% which would be approx £37k in IHT.considerably reduced. Before i go through the DOV just want to hear if this seems like good advice. Wil dad get the discount given his age. checked on the pru site and 24% approx was the discount they suggested. what does normal health mean for somone of that age ? would it require medical

would appreciate any replies.
thank you

ps would it be worth putting £500k of the combined assets in a DGT and reducing estate by further £50k according to the pru sliding scale.
Sorry for long question.

[DTS]

Simple alternative may beÂ….
1. Leave mums Will as it is i.e. £285K to you and brother – covered by NRB so no IHT.
2. Dad’s estate in broad terms potentially worth £500K after £30K to charity. £200K (house) is a PET but he needs to survive until Oct 2013 to be fully exempt; if he dies within 3 – 7 years of gift then taper will apply to reduce IHT. Therefore planning measure may be to invest £150K out of his £300K savings (£500K less NRB in two years time of £350K= £150K) into an AIM listed managed portfolio, which after 2 years would qualify for 100% BPR. The balance of his estate (including the PET) after that time would be covered by his NRB of £350K. You say he is not unwell, so may he be expected to survive at least that long perhaps? (2 years).

If you would like to discuss this and other alternatives with me in more detail, then by all means contact me via my website at www.derbyshiretaxservices.co.uk There may be a few other things that could be done around the periphery as well, such as gifting surplus income which isnÂ’t classed as a PET, if done correctly.
Regards
David

[Ian Martin]

anj

The DoV is a good idea as it allows you to effectively swap your late mother's NRB of £285k for the NRB available in the year of your father's eventual passing. The NRB this year is £312k, next year £325k, following year £350k, so you could in effect gain £65k or more of NRB, giving you a tax saving of £26,000 - well worth the trouble!

It is important to note that there will be no taper relief on the PET of £200k - the IHT will not be reduced if your father dies within 3-7 years of the gift. The gift of the house (200k) is below the NRB and so is not subject to IHT, meaning there is nothing to taper. In fact the PET has the effect of reducing the NRB (by the full 200k)available on the rest of your father's estate, right up until oct 2013 when it falls out of the calculation entirely. Up until that point it must be included in the total of your father's estate when calculating the taxable estate. I can provide a useful pdf explaining the effect of PETs on IHT if that would be of use.

After the DoV, and before any tax planning, the total estate would be 285k+200k+338K-30k=793k. This can be immediately reduced by 6k using the annual gifting allowance for this year and last year, assuming not previously used (and then by a further 3k each year ongoing). Thus the taxable estate would be 787-624=£163k this year, 784-650=134k next year, 781-700=81k following year and so on. The IHT bill being approx £64k, 53k, 32k respectively.

Whichever route is followed to reduce this, it must be borne in mind that future HMRC changes may reduce the efficacy of the planning.

The best route will depend on your father's requirements for income and the need to protect the estate from the possible costs of long term care. The DGT is the only method that will provide an immediate discount on the estate; however, at a discount rate of 24% (subj to medical) you will need to invest a large amount - approx £679k to reduce the estate by £163k and therefore avoid IHT altogether; even then HMRC may contest the discount following death, so it may be rather a large chance to take. HMRC have recently contested discounts on the over-90s, although they do recognise DGTs in principle. I can let you have a copy of an article on this point if useful. Most companies will now insist on a medical exam being undertaken before commencement of the DGT.

There are schemes available which use business property relief to place an investment out of the estate in its entirety after 2 years. Some of these invest into an AIM portfolio, some use a lower risk approach; the preferred schemes provide an insurance that the value of the portfolio on death will be no less than the amount invested, thus protecting the investment from market falls. Either way, these would allow you to invest significantly less than through the DGT, and still avoid IHT, provided your father survives 2 years. In order to bring the estate below the joint nrb value in 2 years' time you would only need to invest £81,000. Again, I would be happy to provide further info on these schemes by email.

This is of course a complex situation and a combined approach is likely to offer the most appropriate solution.

I hope this info helps

Regards
Ian Martin APFS
Qfinancial
Independent Financial Advisers
ian@qfinancial.co.uk

[bob.fraser@towrylaw.]

The above answers cover most of the ground very thoughtfully.
One point to bear in mind is that, based on actuarial tables, your Dad's life expectancy is 5 years. So planning for the 7 year threshold begins to look risky.
The DGT idea is worth considering, but your father must ensure that he is medically underwritten before parting with any money. Any good advisor will recommend this precaution.
The AIM is also a good option because of the reduced period for exemption, but beware the investment risk. By definition AIM investments are 100% in equities, and are definitely high risk investments. You would need to ensure that a specialist broker is used, and one with a long track record (there are too many "me-also" brokers jumping onto this bandwagon)
You also need to watch the charges - always insist on paying a fee for any advice, never commission, and ask for a quote up front.

Bob Fraser
Chartered Financial Planner

[anj]

thank you Bob, ian and David for your comments and your trouble. I understand most of what you say. I am aware of the Bower casse in the FT re contested discount and I undestand the importance of Dad being medically underwritten. Not clear one two things. 1 is the assignation of the house not entitled to taper relief - difference of opinion above ?
2 re DGT: how long does it take to set up a trust if mixture of cash and investments.if deed of variaton in place would it be better to use cash assets of mum and dads estate approx 300k and dont understand tax implications of beneficiaries of trusts.

Have meeting end of May and will have to have made decisions by then

anj

Thankyou very much again for your help

[bob.fraser@towrylaw.]

IHT taper relief only applies to that part of the cumulative gifts over the previous 7 years that EXCEEDS the nil rate band. And then it applies in reverse order; ie the relief is taken first from the most recent gift (with the lowest level of taper relief). So gifts up to the nil rate band have no relief; the amount above it might have if gifted 3 or more years ago.
The time to set up a DGT will depend on how long it takes to make the recommendations (following a proper analysis of all the circumtstances) and how long the medicals will take.
I'm afraid that I would not wish to comment on which assets to use since I do not have a sufficient understanding of your parent's affairs. But feel free to contact me if you want a more detailed discussion

Bob Fraser
Chartered Financial Planner

[Ian Martin]

anj

Bob's comments provide a good further explanation on the taper relief.

Regarding the Trust and it's set-up, 4-6 weeks is typical; I would echo Bob's comments on the need for a detailed discussion before advising on the most appropriate assets, and, indeed, on the best combination of scheme - ie DGT and/or Business Taper Relief

If you are at all unsure of the advice received to-date, I would strongly recommend a consultation with a specialist in the field; DGTs are, in the main, irreversible, in order to protect the interests of previous settlors, so all parties to the transaction, settlor and beneficiaries, need to understand their position (or at least have confidence that the advisor does). Business Taper Relief schemes are reversible, and do not involve a trust, so provide some manoeuvrability, but should still not be entered into until all implications have been considered.

Regards
Ian Martin APFS
Qfinancial
Independent Financial Advisers
ian@qfinancial.co.uk