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On discretionary trusts

[Further Information]

http www hmrc gov uk cto customerguide page16 htm

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Less is more when it comes to IHT reliefs

Passing It on

One of our money-conscious subscribers asked us whether an off-the-shelf will was suitable in his circumstances given that he owned the vast majority of the shares in a limited company. The simple answer is that it doesn’t matter who writes the will as long as it does what you want it to. Near the top of his wishes was that the Taxman should get his hands on as little as possible.

Tax strategy

Our subscriber had picked up a DIY will from WH Smith and worked through the advice that comes with it and reached the question “Who do you want your assets to go to?” Not atypically, he answered “my wife”, but then had second thoughts. It wasn’t a secret lover he suddenly had a conscience about but a worry over whether it was a good Inheritance Tax (IHT) strategy to pass the company to his better half.

IHT double relief

Our subscriber’s instincts were right. He knew that gifts between spouses were exempt from IHT, and that there was also some form of tax relief where your company is a trading business. Actually, a gift of company shares will be completely IHT free where they qualify for something called business property relief (BPR) (see The next step). But these two tax breaks don’t work well together. The exemption takes priority over BPR, meaning that our subscriber’s gift of his company shares to his wife would be entirely covered by the spousal exemption and the BPR wouldn’t be needed. Or to put it another way, the BPR would be lost.

The next generation

Our subscriber’s wife didn’t work for the company but his son and daughter did. If he gave his shares to them, the gift would qualify for BPR. And what’s more, the spousal exemption would still be available against the rest of his estate given to his wife.

Tip. Where an asset qualifies for BPR or other IHT relief, e.g. agricultural property relief, it’s more tax efficient to give it away to a beneficiary other than your spouse, e.g. children, brothers, cousins etc.

Not enough to go around

The trouble for our subscriber was that giving the company to his children wouldn’t leave his wife with sufficient assets to generate enough income to live off after he was gone, so we had a suggestion.

Tip. He should leave the company shares to a discretionary trust, of which his spouse would be a beneficiary (see The next step). The spousal exemption can’t apply to the gift but BPR will, meaning that it will still escape IHT, and dividends paid on the shares can be passed to his spouse by the trust.

Not a DIY option

DIY wills have their place, but as a director/shareholder of your own company they are probably not going to be the right option for you. In our subscriber’s case, he soon headed off to his solicitor to get his will written up.

For more information on BPR (CD 12.05.02A) and for more detail on discretionary trusts (CD 12.05.02B), visit http://companydirector.indicator.co.uk.