Ask Money: should I opt for gifting or a designated account in my IHT planning?

Ben Yearsley at Shore Financial Planning helps a reader caught in a designated account conundrum.

December 22, 2018

I have been considering options for passing on wealth to my adult offspring with inheritance tax (IHT) planning in mind. I am leaning towards the simple option of direct gifting, in the hope that I have seven years of life left in me. However, my financial adviser has suggested that I should consider a designated investment account where I can retain control of monies in terms of managing fund switches. He has cautioned me to not withdraw any funds, as the account would then be deemed as not being fully designated to my offspring and, accordingly, be likely to be considered part of my estate.

I have been looking for designated investment accounts and drawn a blank, although some providers offer ‘bare trust’ investment accounts. But I’m unsure how these differ and how to find out who offers what. Can you help?
John Davies, Camberley

Ben Yearsley at Shore Financial Planning replies: Gifting is the easiest option if you have adult children. Bare trusts are usually, if not always, for minors, as at the age of 18 the beneficiary of a bare trust can legally ask for the assets. You could obviously use other forms of trust, but you should get specialist advice about these.

Account designating is simply the naming of the investment – earmarking, if you will. Unless it is clear the gift is irrevocable, the ownership and therefore tax position stays with you. HMRC would/could argue that you still own it, as you can access and control it, so it is still in your estate. As your off spring are adults, this doesn’t seem like a particularly good option. Beware, incidentally, of income generated by these. As the investments are still in your name, you will be liable for tax on any income generated. You can’t designate an Isa.

There are investments, known as business property relief investments, that remove assets from an estate within two years, but you still control them and you aren’t giving them away. If the assets are sizeable enough, these could be an option. They essentially invest in unquoted trading companies, which often own assets such as renewable energy plants, care homes and other asset-backed investments. The likes of Downing, Time and Foresight offer them. 

If you need help with a tax, pension or financial planning problem, please email: moneyobserver.ed@moneyobserver.com

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