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Use of Gifts for Family Maintenance to Mitigate Inheritance Tax (Case Study)

David, a single Dad aged 40 is diagnosed with a terminal illness. He has a son “Simon” aged 10.

His assets (including the family home worth £300,000) are together valued at £825,000. Assuming he has not used his personal Nil Rate Band of Inheritance Tax (“IHT”) (but has no transferable NRB’s) it is possible he could leave all his estate to Simon in his Will, which would trigger a charge to Inheritance Tax on everything in excess of £500,000 (D’s personal NRB and Residence NRB combined).

The IHT payable would be £130,000, ie 40% of £325,000.

However D could use the IHT rules that exempt Gifts for Family Maintenance during lifetime to mitigate the tax bill. Importantly, there is no 7 year survivorship rule to consider here, the relief is not conditional on anything other than the value transferred being a fund for the purpose of the maintenance, education or training of a child.

Not knowing when D will actually die, making a lifetime transfer of everything to S would be problematic, but would potentially reduce the IHT bill to Nil.

Alternatively, D could put £325,000 into a Family Maintenance Trust for S (no IHT) and retain £500,000 in assets in his own name (including the family home). The retained capital is within D’s available nil rate band and the level of residence nil rate band, and if D passed away, there would be no IHT payable on those assets.

If D wanted to put the family home into a lifetime trust for S, that would be possible, but to avoid the rules about gifts with a reservation of benefit, D would have to pay a full market rent to the trustees.

If the amount put into trust for S by a lifetime transfer is considered excessive by HMRC (Inland Revenue) some form of apportionment would be necessary, and to the extent that the transfer is excessive, the transfer would be a chargeable lifetime transfer by D, and subject to 20% tax in so far as it was above D’s available Nil Rate Band (currently £325,000).

To qualify for the relief, the trust receiving the Gift for Family Maintenance needs to specify that it ends when S reaches age 18 or, after attaining that age, ceases to undergo full-time education or training, and any balance still in the trust fund should then be paid to S.

The relief is available in other circumstances, spouses, other dependent relatives, subject to statutory conditions.

Despite the Family Maintenance Trust falling into the relevant property regime, and therefore being liable to the 10 year charge (if the trust lasted that long) the maximum rate of tax on the trust would be 6% and in practice might be considerably lower. By no stretch of the imagination would it be as much as £130,000!

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