Case studies


by | May 20, 2020 | Case studies

With Capital Taxes there is often a trade-off between paying CGT or IHT.  Using tax reliefs to save both of these taxes is therefore well worth the effort.

Daniel is a successful business owner in his fifties and is married to Helen.  He is at the time of life where he wants to take some fairly simple steps to reduce the long-term IHT burden on his family.  Recently we helped him to structure the acquisition of a second home in a very tax effective manner.

Daniel wanted to purchase a London flat for his daughter Emily to use as a base when she finishes at  Edinburgh University.  He is relaxed about passing the value of the property to Emily but wants to control the timing of that event and not give Emily any expectations.  Daniel is buying in a London hot-spot and expects the flat to increase in value and then be sold a few years later when Emily wants to move-on, though they may let it out for a while.

We helped Daniel to set up a Discretionary Trust that will own the flat.  He and his wife Helen have each put £300,000 in to the Trust, which is enough to buy what they want and cover the incidental costs.  Daniel and Helen are therefore reducing the value of their own wealth by a combined £600,000, which should lead to IHT savings of £240,000.  They have to survive seven years for this to be wholly effective.

The Trust is extremely flexible.  Emily is named as an initial beneficiary but other people can be added later and no one has any set entitlements.  Only the Trustees decide what happens to the funds and Daniel and Helen are the Trustees.  They have appointed a close family friend as a third Trustee just in case anything untoward happens in the future.

The only practical restriction is that neither Daniel nor Helen is able to benefit themselves in the Trust.  If they decide to use the flat themselves they will need to put further money in to the Trust in the form of a notional rent.

We helped Daniel and Helen as Trustees to give defined and evidenced rights of occupancy to Emily so that she can use the property as a residence when back from University.  This paves the way for the Trustees to be able to claim a form of PPR relief – the relief that saves people paying tax on their main home.

Even if Emily does not occupy the flat full-time and it is let out we are confident that the PPR relief available to the Trustees will go a long way towards protecting them from CGT on the gain that they hope to make.  In the meantime Daniel and Helen have started the clock running on some important IHT planning without taking value out of their family’s use.

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