Bare Trust as IHT mitigation tool?Make Text Bigger
I wonder if anyone could comment on this case.
Two sisters own an unencumbered (mortgage free) leasehold flat with share of the freehold on the residue of a 999-year lease, value approximately £1.2-1.5 million, in London as tenants in common. They are both retired and in their late 60s.
To mitigate inheritance tax, they are considering setting up two Bare Trusts, one for each, into which each will transfer their 50% ownership as donor for the benefit of the other.
Since the property is and has always been their only residence, they will be entitled to Private Residence Relief (PRS) and they envisage that there will be no CGT payable on transfer of the asset into a Bare Trust.
As it is their private residence there is no rental income generated therefore no income tax liability arises.
Since they will be transferring property assets into a Bare Trust, they understand that this will be considered Potentially Exempt Transfers (PET) and there will be no liability to IHT on set up and no IHT liability at 10 yearly intervals, as would have been the case with a Discretionary Trust. Should they survive 7 years then the asset in trust becomes IHT free on death of either and can pass to the surviving sister IHT free allowing her to continue living in the flat unencumbered.
Are their assumptions correct? Can a Bare Trust be used in this scenario or is it only a Discretionary Trust that can remove assets from an estate?
Any comments or suggestions welcome.
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