Inheritance tax and discretionary trust - USERNAME:Milcurr
Tax Question: Divorced woman has a house worth £700,000 in which she lives and two other properties which are let, worth about £150,000 each. She does not have much cash and no life insurance or pension - the rent from the let properties provide her with a modest income. She is healthly and in her early 60s so probably ok to make PETs but it may not be wise to give away lots of capital and leave her vulnerable in her old age. Wants to leave her property to her daughter in her will but is worried about IHT. Lack of cash means that CLT must be avoided too if over the NRB. Would it work to transfer a share in the equity of the house that she is living in, equivalent to the value of the NRB, to a discretionary trust of which she is a beneficiary and then she can carry on living inthe house and top-up the transfer later if the NRB goes up or she survives 7 years? Will the fact that she will carry on living in the property (as a joint owner and beneficary of the trust) cause any problems e.g. reservation of use? (Assume that this would be a problem if she gave a share in the property to her daughter, but not sure if using a trust with her a beneficiary will help - and using a trust is good in case she needs money in later years.) She can't afford to take out life insurance. Any other ideas to reduce IHT without incurring CGT or other charges now? Thanks! Answer: No a transfer of a share in the property to the trust with her remaining a trust beneficiary would still be caught by the reservation of benefit rules. Could her Daughter not move into the property with her? She could then make a gift of an interest in the property without the reservation of benefit rules applying. Alternatively could she raise debt over the properties and gift this to her Daughter. This would be a PET, and excluded from her estate after 7 years but the debt would still be deductible as a liability.
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