"I gave away my home to limit death duties, but now need to pay rent"

The problem:

A widow in her early 70s gave her main residence (where she continues to live) to her two minor grandchildren, on the advice of her solicitor aimed at reducing her inheritance tax liability. For this to be effective, she must pay a market rent to her grandchildren. She wanted to increase her income to allow for this rent, as well as undertake other inheritance tax planning.

Cazenove Capital’s solution:

We advised the client to invest £500,000 into a discounted gift trust via an offshore investment bond. With this arrangement the client can withdraw 5% of the sum invested per year (£25,000)  which is treated as a return of capital. Putting the money into a discounted gift trust means that for inheritance tax purposes the sum can be reduced, based on a calculation which takes into account the investors’ age and likely future withdrawals. In this case the inheritance tax discount is 54% (£270,000). The balance of the investment into the trust (£230,000) is a “potentially exempt transfer” meaning if she survives for seven years, that too will fall outside her estate and so not attract inheritance tax. The money within this arrangement is invested in a tax efficient structure by Cazenove Capital.

We also advised that the client invests 100% of their ISA investments (totalling £550,000) into the Cazenove IHT Portfolio Service which invests into a portfolio of Alternative Investment Market (AIM) shares. These holdings qualify for Business Relief, meaning they are exempt from inheritance tax provided the investor owns them until death and for a minimum of two years. These investments are often in smaller companies, which can result in more abrupt price movements and volatility.

In this scenario, by putting £500,000 into the discounted gift trust and switching the ISA investments into qualifying AIM investments, the client has increased their overall income and potentially reduced their IHT liability by £420,000. This should mean more of her estate will pass to her grandchildren.