In the last week I met with one of my clients, as she would like to hand some assets down to her son.  The ensuing discussion resulted in the mother handing down a different asset from the one that she thought.  This combined with the use of a discretionary trust will result in a large tax saving.

The mother’s assets consisted of farmland, her house, a let property and a small amount of cash.  The son has farmed mother’s land for several years for a low rent.

As the son farmed the land, mother wanted to gift the land to her son, but retain the let property to ensure that she had sufficient income in her retirement.  This was logical, however we then undertook a calculation of the possible Inheritance Tax payable upon her death.

In total her assets were valued at more than £800,000 and the Inheritance Tax payable upon her death would be over £150,000.

The farmland that was let to the son, would receive full relief from Inheritance Tax, however all the other assets were liable to an Inheritance Tax bill.  Gifting the land to the son will put the asset into the right hands, by passing it down a generation.  However, it will not save any Inheritance Tax, as it is already tax-free.

We discussed the possibility of handing over the cottage as well, but this would leave mother without sufficient income.  She would then be reliant on her son for handouts, which is not a good idea if you can help it.

So an alternative option was discussed.  This involved the mother gifting the let property down to the son.  It also meant that mother retained the farmland at present.

She will lose the rental income as this will go to the son in future.  To give mother sufficient income she will then rent the retained farmland to the son at a higher rent level.  The son can afford to pay her a market value rent now that he receives extra income from the let property.

The resulting gift of the let property to the son will save around £110,000 in Inheritance Tax, at today’s property values.  Of course, mother will need to survive seven years from the date of the gift to achieve this saving in full.  Assuming the farmland continues to be Inheritance Tax free, this can be gifted at a later date, or left to the son in her will.

What about the trust?  Well, the let property had been in mother’s hands for over 20 years, and was always let out.  There is Capital Gains Tax immediately payable upon a gift of such property.  In this case the tax bill would have been around £50,000.

To get the property into the son’s hands we are using a Discretionary Trust.  Mother gifts the property into the trust.  Under current rules the Capital Gain can be held over upon entry to the trust, so no tax is payable upon this gift. 

In a couple of years the property will be appointed out of the trust into the son’s sole ownership.  Again, there should be no Capital Gains Tax payable as the gain is again held over.  This does assume that the property is worth less than £285,000 at present, although there are still savings for more valuable assets.

So we have a winning situation.  Mother can have an income from her farmland, paid by the son who has extra income from a let property.  Also the let property can be gifted Capital Gains Tax free, and the potential Inheritance Tax bill is reduced by £110,000. 

First published in The Western Morning News

Posted on 30 Jan 2007