Gifts with strings - a taxing problem

The new inheritance tax (IHT) allowance to bring a married couple's effective nil-rate band to £1m has been widely reported since the budget. However the increased 'main residence nil rate band' will only apply from 2017, and will be phased in slowly so that the effective £1m rate is not available until 2020.

In addition, the new main residence nil rate band will not be given to estates worth more than £2m. The question of how to reduce the IHT liability for your beneficiaries will, therefore, continue to be on the minds of many.

A very simple answer to this question is to give away your assets early. Providing you make outright gifts and survive seven years, there will be no IHT to pay. There is no need for a complex structure or 'dubious' scheme. Sounds wonderfully straightforward, doesn't it?

A recently reported case on its way to the High Court is that of Manny Davidson, a multi-millionaire who, it is understood, transferred the family home to his children and set up a trust for their benefit; primarily, it would seem, to mitigate IHT.

Both the home and the trust fund are now incredibly valuable. The children want to sell the family home against Mr Davidson's wishes and are challenging his influence over the trust. He is said to regret giving his assets away for the sake of saving tax and tells other parents not to make the same mistake.

Press commentary is thin on the details of the case and so we will have to wait and see how the arguments on both sides unfold. But the story is likely to sound alarm bells for anyone who has considered making lifetime gifts, but is reluctant to pass responsibility and control to the next generation.

For gifts to escape the IHT charge in the simplest way, you must pass them to the recipient absolutely; there must be no strings attached and you must hand over control and enjoyment of the assets completely.

Another option is to pass some value on, but remain a joint owner. This will enable you to have some say in the future of the asset but divest your estate of some of its value. Joint ownership arrangements must be considered carefully, to ensure that you are not treated, for IHT purposes, as owning the whole asset completely.

Trusts

Trusts can be used very effectively and efficiently in lifetime giving. There are tax charges (subject to reliefs and the nil-rate band) but the 20 per cent tax charge on entry, and the on-going 10 yearly and exit charges of up to 6 per cent, can be a fairly tax efficient way of giving up control gradually.

Mr Davidson's case illustrates that if the settlor of the trust remains involved, his or her role must not undermine the duties owed by the trustees to the beneficiaries.

Equally discretionary beneficiaries only have a right to demand that the trustees consider exercising their discretion in their favour and manage the trust fund for the benefit of the trust as a whole. A court is unlikely to be able to challenge the decisions of trustees if they have complied with their duties, even if the court would have come to a different decision.

Investment company

Another option that is mentioned quite regularly but not yet seen widely in practice, is a family investment company. The idea is that the parent establishes a company and creates shares for different classes of shareholders, with different rights attached.

Children can therefore enjoy the value of a company but have no say in the way it is run. There is not a great deal of evidence available regarding the overall success of this structure; one drawback seems to be that the children will still be shareholders and the extent to which their shareholders rights under company law and common law can be limited is uncertain. And fundamentally, it is still unclear whether or not a corporate structure is appropriate for a family.

Perhaps the message is that if you are considering making gifts, you need to think carefully about what is motivating you. If you are doing it solely to save tax, then you may need to think again and take Mr Davidson's advice.

If you no longer need the assets but you are reluctant to hand them over without any strings attached, then there are options. The word 'control' is often used to imply a Machiavellian influence, but that ignores the paternalistic concern that most feel about handing property down the generations.

There is a desire to preserve assets and to protect beneficiaries from themselves and others. If these are your concerns, then a well-managed trust could be your answer. But if you want to keep things at their simplest, then you will have to be comfortable with handing over assets absolutely and completely, with no going back.

Laura Regan is a solicitor at Pemberton Greenish and Jeremy Curtis is a partner in the private wealth team at the firm

Copyright & permissions