Trusts, Estates & Tax: what makes a winning team - Part 9

Saira provided estate planning advice to a husband and wife, suggesting a course of action that the clients had not considered, but was in fact a more comfortable solution which better suited their objectives. 

The clients were in the process of buying a holiday home within the UK. As their combined estates were already beyond the current threshold for inheritance tax (IHT), they wanted our advice to explore if there was a tax efficient way to structure the purchase, either through the use of trusts or by making an outright gift of the property to their adult children.

The clients planned to stay at the property a few times a year; their wider family could use the property too if wished. It would not be used as a short-term holiday let.

As the clients wished to use the property themselves, our immediate focus was on the rules relating to gifts with reservation of benefit (‘GROBs’). These anti-avoidance provisions provide that where a donor retains a benefit in gifted property, the value of that property continues to form part of the donor’s estate for IHT purposes, unless the benefit is considered so small it is ‘de minimis’ or full consideration is paid for the benefit retained by the donor.  

Gifts of holiday home raise some particularly interesting points which we explored, such as:

1. Whether the client’s intended use of the property for a few weeks a year could be viewed as de minimis so not a GROB (on these facts, the use was unlikely to be de minimis)
2. The potential difficulties in assessing the correct level of consideration the clients would have to pay for their use, bearing in mind, the cost of holiday accommodation varies seasonally throughout the year.
3. The definition of ‘benefit is a wide one. Even what appears to be a minor benefit, such as the clients storing their personal belongings at the property when not there, could be enough to engage the rules.
4. Any payments received from the clients for their use of the property, either to the children or to the trust, would be subject to income tax, resulting in the filing of tax returns.
5. If the property was placed into trust, there would be on going compliance to deal with and potential IHT charges down the line.  

It was clear that without meticulous care, there was a considerable risk that the proposed gift would be a GROB, resulting in adverse tax consequences.

Going back to what the clients wanted, their priorities were:

1. To have a holiday home to be enjoyed in their retirement, having worked hard and having had successful careers.
2. To make gifts to their children as part of their estate planning.

We therefore considered the clients’ wider assets. We agreed it would be better for the clients to keep the holiday home for themselves and instead give their children cash gifts, which they could afford to do and which would fall out of the clients’ estates for IHT purposes after 7 years.

This approach meant the clients could use their holiday home as they wished and the children would have the benefit of an immediate cash gift– a better outcome for all.