Loss to Estate Principle

H and W jointly own a residential investment property let out on an AST valued at say £930,000 . Due to the related property rules, H’s share is worth £465,000 and W’s the same. If however, W gifts say 60% of her half share into trust, what is the value of the gift made by W? I would calculate this as follows. Value of half £465,000. Value of retained share £465,000 x 40%, amounting to £186,000. However due to the shared ownership, applying a 10% discount would mean that the retained value is therefore only £167,400. Applying the loss to estate principle, the value of gift is therefore the original value of £465,000 less retained value of £167,400 amounting to £297,600. Do forum members agree?

Further, what would then be the value of H’s share? Presumably this would be £465,000 less 10% discount amounting to £418,500. Does this mean that for a £297,600 gift the combined value of H and W’s estate has been reduced to £585,900 (being the sum of £167,400 and £418,500, the value of the respective retained shares)?

Finally, if H subsequently gifts 60% of his half share into trust is the value of that gift then only £251,100?

Haroon Rashid
I Will Solicitors Ltd

I agree that the share of the property transferred into trust is not thereafter related property. So it enables discounts for the shares still held by H and W to apply, as stated. The trust should not be subject to reservation of benefit otherwise it will form part of the estate on the settlor’s death.

It is one of the principles of estate planning that where there is related property, a gift by one party may reduce the value of the related property without that loss in value being subject to IHT.

Malcolm Gunn

M B Gunn & Co Ltd

Thank you Malcolm. I thought that was the case. As such, would you agree that an IHT 100 needs to be filed by W for her gift, but not for H, as his gift is well below the £285,000 reporting limit. Presumably if they both gifted their respective shares on the same day within a single deed of assignment, then the loss to each estate is £297,600, but by making the gifts one after the other (separate days), then the first gift is £297,600 and the second is £251,100?

Haroon Rashid
I Will Solicitors Ltd

I agree that an advantage is obtained by devaluing the related property first before any gift of it is made. So that means a gift by one before a gift by the other. That also takes the second gift below the threshold for an IHT 100.

Malcolm Gunn

M B Gunn & Co ltd