IHT and income shortfall question

I have a case with someone with assets over the £2m IHT threshold (mainly property) but currently has an income shortfall of £5k p.a. but £200k sat in cash accounts.
They have an existing Onshore Bond with an initial investment of £300,000 which has been running for 10 years and they have made no withdrawals.
Would you ;
a) Set up a DGT with the £200k which provides the income shortfall and address a little IHT
b) Take withdrawals from the existing Bond to address the shortfall an invest the £200k in a Unit Trust
I'm a bit inexperienced and unsure what the best advice is here?
Hope this makes sense and thanks in advance.


  • When you say the £2m threshold are you referring to when the RNRB becomes non-applicable?

    Do they have children to hand the property to?

    (I'm just trying to determine if £2m is really important - otherwise you'd be aiming to reduce to £650,000 to avoid IHT)

    With the information provided you'd have to say that removing £200,000 from the settlor's possession (and into trust) would only leave £300,000 in liquid assets - that might not be sufficient for a lifetime?

    What might make this really simple is that with a £5kpa shortfall, the estate will naturally decrease via spending - if we forget about natural increase in property values.

    Point is: Is there anything that would improve the client's IHT position more than spending the money, which is an essential objective?

    By the way - does this person have a pension?

  • Hi , yes estate is £3m with house worth just over £2m and he has children to pass the property down to.
    He's in receipt of his State Pension and an annuity of around £20kp.a. in payment. Plus £1m uncrystalised PP to take before 75. Reducing the IHT liability to bring it under £2m to benefit from RNRB could be hard in this scenario unless he downsizes and reinvests the difference.

  • You could weigh up the option of putting the house into trust for the benefit of the children.

    This wouldn't regain the RNRB because there is no house owned by the settlor (it's now owned by the trust) but he would save IHT. The kicker is the costs in implementing this strategy - you pay going into trust, you pay every 10 years and you need to pay rent.

    It's whether or not the sum of those parts is better or worse than paying IHT.

  • OK thanks, I'll look into that. But to address the income shortfall, maybe a DGT is the best way forward and address some IHT?

  • Not sure because he has to give up £200,000 of his liquid assets.

  • Yes,quite. May as well just start reducing the Onshore Bond with his 5% withdrawals which was my initial plan and that will cover the shortfall and place some of the £200k in a Unit Trust for potentially better growth than the bank account.

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