We acted for a married couple on this innovative IHT planning, which is a further development of so-called double dip IHT tax planning and is based on the assumption that the husband (H) will die first before his wife (W).
We established that H’s estate would contain a mixture of assets, some qualifying for IHT relief and others not. In particular H owned an unlisted company which carried on a trading business. If H’s will was drafted so that the company’s shares were left to W, the shares’ value would form part of her estate, and if she were to sell the shares the cash proceeds would not qualify for business property relief (BPR). (BPR may also not be available in W’s estate if the nature of the company or the BPR rules changed.) The aim was to set up arrangements to maximise BPR (giving 100% IHT relief) and minimise other tax charges in respect of the couple’s assets.
One option would have been for H to make a will incorporating a discretionary trust; on H’s death the shares passing into the trust would qualify for BPR, crystallising the relief at the earliest point. If for whatever reason BPR were not available when W later died, there would be no IHT charge as a result of her death. Additionally the trustees would have flexibility to decide how the trust assets were dealt with, and how and to whom they were distributed (acting in accordance with H’s detailed letter of wishes). W would be able to buy the shares from the trust (double dipping) and after owning the shares for 2 years they would re-qualify for BPR, and the cash within the trust would immediately fall outside W’s estate and not be subject to IHT on her death. However the downside of double dipping is that the sale of the shares from the trust to W could trigger tax charges (CGT and stamp duty).
To avoid these tax charges we incorporated sub-fund trusts in H’s will, so that on H’s death the assets would pass into a single trust with two sub-funds but a single trustee legal owner. A discretionary sub-fund would hold the shares (no IHT), and a life-interest sub-fund in favour of W would hold the other assets. W would be entitled to the income from these other assets (and the right to occupy residential property within the sub-fund) and so these other assets would also be free of IHT (spouse exemption). The overall result is that there will be no IHT on H’s death. Additionally we made sure that the trustee has the power to swap assets between the sub-funds, which will be possible without triggering CGT or stamp duty. Provided W survives for 2 years the shares will requalify for BPR. The trustee will have discretion to distribute assets from both sub-funds to W if required, and her occupation of any home within the discretionary trust would allow the property to qualify for capital gains tax principal private residence relief.
This type of IHT planning can also work where a husband and wife each own some of the assets qualifying for IHT reliefs.