Brian from Bury writes: "I have recently retired and sold my business. I have realised just under £800,000 after tax. My wife and I already have significant investment assets, but we would like some extra income to replace the salary I received from my old business. However, we are aware that if we keep this money in our estate, we will be building up a huge inheritance tax bill for our sons. Is there any way we can have an income from this money but ensure it goes to our sons on death with
Under normal circumstances if you make an absolute gift or a gift in to a trust for your sons, the money is legally theirs and if you are seen to take an income from it the gift would almost certainly fall foul of the 'gift with reservation' rules for inheritance tax purposes.
It would be deemed that the gift had never been made and your sons would still pay the inheritance tax on it.
However, if you are prepared to never have access to the capital again there is one very viable option. You can gift the money into a Discounted Gift Scheme – basically, an investment plan which allows you to gift a sum of capital via a special trust to your nominated beneficiaries on death.
These plans utilise special reversionary interest trusts which actually allow you to take a taxefficient income from the capital for your lifetime.
The gift into the trust is a Potentially Exempt Transfer, so you will need to live for at least seven years after making the gift into the trust to escape inheritance tax completely.
However, once you are past the seventh year, you know that your sons will inherit the capital plus any growth on that capital completely free of inheritance tax when you eventually die.
The only downside with this type of scheme is although you can have a tax efficient income for life, you must decide what that income will be at outset and you can never get your hands on the capital again once it is gifted into the trust.
Also, the trust is absolute – once you have set it up, the beneficiaries cannot be changed at a later date.
If you are happy with those conditions, a Discounted Gift
Scheme presents a great opportunity to save your children a massive sum in inheritance tax, while still enjoying a good tax-efficient income from your capital in retirement.
Contacting NickNick Plumb is an independent financial adviser. Send your questions to Nick at Bright Financial Planning, 58 Station Road, Sudbury, Suffolk, CO10 2SP, email them to
nickplumb@aol.com or telephone Nick on 01449 675674.
Nick's answers to reader questions in this column are provided only as a general guide and do not constitute personal financial advice. For any readers requiring specific advice on their own circumstances, Nick is happy to offer a complimentary initial meeting.
