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Tuesday 20th August 2019

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Total Number of Property118 Comments: 8


9:21 AM, 23rd November 2019, About 3 years ago

Bare Trust as IHT mitigation tool?

Reply to the comment left by Frederick Morrow-Ahmed at 22/11/2019 - 13:47
Hi Frederick. I was going to go through and offer true or false answers but I don't think those scenarios work properly.

First of all, forget about bare trusts. It's a misnomer. They're not trusts in the same way as a discretionary trust.

In a bare trust the beneficiary owns the asset for all purposes, it's just that its registered in someone else's name. It's a nominee arrangement.

It might be easier to picture if we create a hypothetical situation. We still have sisters A and B but now they each own separate properties, 1 and 2.

Sister A owns property 1. Sister B owns property 2.

Sister A creates a bare trust over property 1 with sister B as the beneficiary. The result is that sister B now owns property 1 for all purposes, including tax and including inheritance tax, but it is registered in Sister A's name as trustee.

If sister B does the same but with property 2 then sister A now owns property 2, but it is registered in Sister B's name as trustee.

There are no tax savings to be had.

With that in mind, let's look at your scenarios.

1. This isn't right. If each sister places their share in a bare trust for each other then there is a swap, not a gift. The 7 year rule doesn't apply, the sisters just own each other's share in the property. You're right back to where you started from.

2. The trust doesn't continue because it's not really a trust. The assets in the trust belong to the beneficiary and are distributed in accordance with the terms of her will (and subject to IHT as part of her estate).

3. A discretionary trust is a true trust in that the assets in the trust do not belong to the beneficiaries. To simplify it a bit, they belong to the trust itself and are managed by the trustees for the benefit of the beneficiaries. Discretionary trusts can be used to keep assets out of a person's estate whilst letting them still use those assets.

However, if a person sets up a discretionary trust that they can benefit from then the gift with reservation of benefit rules apply. That person is treated as owning the trust's assets for IHT purposes, so there is still a charge to 40% on death.

Discretionary trusts are used for IHT planning when passing assets down to the next generation, though, because after that point IHT is charged at 6% every ten years on the trust's assets rather than 40% every generation, which is usually around every 25-30 years or so. Many family businesses are held in trust, as are aristocratic fortunes, partly because arguably IHT is lower overall and easier to plan for but also because discretionary trusts prevent beneficiaries frittering money away and it prevents fragmentation of ownership of businesses and estates.

Hopefully that has answered 4 as well!... Read More


7:11 AM, 19th November 2019, About 3 years ago

Bare Trust as IHT mitigation tool?

Reply to the comment left by Colin McNulty at 19/11/2019 - 04:46
As you say Colin, qualified tax advice is an absolute must - not least because the tax adviser would spot that the investments would also be liable to IHT. In addition, it's no longer possible to reduce IHT by borrowing against a property to fund BPR-qualifying investments - the debt isn't deductible for IHT.

Borrowing against an asset only works to reduce your IHT liability if you plan to dispose of the cash, most often by way of gift to children (but spending also works). However, the cost of borrowing has to be taken into account. Assume an interest rate of 2.5%. In 16 years, you will have paid as much in servicing the interest on the loan as you would have spent on the IHT bill anyway.... Read More


8:24 AM, 16th November 2019, About 3 years ago

Bare Trust as IHT mitigation tool?

Reply to the comment left by Puzzler at 16/11/2019 - 08:06
Hi Puzzler - unfortunately, life interest/interest in possession trusts don't help in this situation. Such a trust set up during a person's lifetime are subject to the same IHT rules as discretionary trusts - so there would be an entry charge, anniversary and exit charges, possible problems with the gift with reservation of benefit rules etc (see my earlier posts).

IHT planning with the family home is very difficult, unfortunately. In these circumstances, if the issue is funding an IHT liability on the first death then arguably life assurance is the best bet. Either that, or downsizing.... Read More


14:31 PM, 12th November 2019, About 3 years ago

Bare Trust as IHT mitigation tool?

Reply to the comment left by Frederick Morrow-Ahmed at 12/11/2019 - 12:20
Yes, the position would be different under a discretionary trust but I wouldn't recommend using one without getting specialist advice.

Firstly, there would be an immediate charge to IHT of at least £170,000 (assuming the property is worth the upper end of your range of values).

Secondly, there would be anniversary and exit charges in respect of the trusts. You can expect these to amount to around £50,000 every 10 years.

Thirdly, you lose the capital gains tax uplift on death although principal private residence relief is still usually available if the beneficiary of a trust occupies trust property.

Fourthly, the sisters would lose the benefit of the residence nil rate band - costing a further £140,000 in IHT (unless the gift also happens to be a gift with reservation of benefit - see below).

Fifthly, there is a serious risk that in any event the gift would be a gift with a reservation of benefit. If so, this would do nothing to reduce the liability on death, but you would still have anniversary and exit charges, and potentially higher CGT overall. There are possible routes out of the GROB provisions but the facts are complicated here. You also need to consider Pre-Owned Assets Tax.

In short, I'm sceptical that the arrangement as envisaged would work, but it may be worth seeking paid advice to confirm one way or the other.... Read More


7:51 AM, 12th November 2019, About 3 years ago

Bare Trust as IHT mitigation tool?

Reply to the comment left by Iain at 12/11/2019 - 07:46
I forgot to add, even if there is no gift being made (i.e. there is a swap of the two shares in the property and therefore no gift for IHT purposes), you do then need to consider SDLT. Each sister is acquiring a half-share in the property, and giving their share in the property as consideration, thus SDLT would be payable on the transaction.... Read More