Patrick Connolly at Chase de Vere helps a reader with a question.
I plan to gift £200,000 to my 50-year-old daughter, who has learning difficulties and no income. I propose to invest it for her in the City of London investment trust through a Halifax trading account at a platform fee cost of £12.50 a year. The dividends should generate about £8,000 a year for her bank account, which would cover the cost of a leasehold studio flat and living expenses. My wife and I are 74 and own other assets that will attract inheritance tax. Will the £200,000 gift be a potentially exempt transfer? Or will our daughter have to pay tax on the gift?
Stuart Allen, Basildon, Essex
Patrick Connolly at Chase de Vere replies: As the gift you are looking to make is more than the exemption amounts, most of it would be treated as a potentially exempt transfer (PET) for inheritance tax purposes.
For a PET to be free of inheritance tax, you need to survive for seven years after making the gift. If you die within seven years of making a PET, and the total value of PETs you make is less than £325,000, the value gifted will simply reduce your nil-rate band on your death. Your nil-rate band is the amount your estate can be worth before inheritance tax becomes payable. So while this means your daughter won’t be liable for tax, it also means you won’t make any inheritance tax savings by making the gift.
It is only in the event of the value of PETs you make totalling more than £325,000 that your daughter would face a potential inheritance tax bill on your death. Her tax liability would reduce on a sliding scale if you were to die between three and seven years after making the gift. Note though, that if the gift is made jointly by you and your wife, it will be deemed to be a gift of £100,000 from each of you, so you will be able to use both your nil-rate bands.
However, there are other factors to consider. If your daughter is receiving means-tested state benefits, any money she receives could affect those benefits.
Moreover, you need to make sure you have the relevant authority to make investment decisions on behalf of your daughter. Depending on her capacity, this could be through a lasting power of attorney or a guardianship order. You could look to use a trust arrangement to help with the administration of assets. All of this can be complicated, so you should take relevant legal and financial advice, if you haven’t done so already.
Finally, you need to consider the merits of the City of London investment trust. This is an excellent product that invests in UK equities. It has a very experienced manager, it has paid consistent and rising dividends, and it has low charges. However, because the investment trust invests in shares, its capital value and level of income could fall.
If you need help with a tax, pension or financial planning problem, please email: firstname.lastname@example.org
tax position on gift to relative who has learning difficulties
I would stongly recommend that you set up a disabilities trust (type of discretionary trust For which HMRC provides tax concessions) as giving a gift outright to your daughter under these circumstances is very unwise.
How would she manage money ?
She could fall under the influence of somebody who could in extremis deprive her of her assets fraudulently
If you go and see a reputable solicitor he can advise you and cost of setting up a trust. It should not be excessive. You need to nominate trustees (at last 2) and beneficiaries (your daughter).
IfYOU GIVE A GIFT TO YOUR DAUGHTER OUTRIGHT YOU WILL FORFEIT ALL STATE BENEFITS - AS if you have more than £16K assets these are clawed back.