My brother and I own a leasehold flat in London (55 years remaining). The flat is valued at £325,000 and rental income is around £15,000 per year net. We are both over the age of 70 and thinking of giving the property, its use or income to my two grandchildren (both under ten years of age) so that they can have enough money for their future education. Which would be the best tax-efficient way of doing this: outright gift, lifetime interest trust or something other? 

Arthur Weller replies: 

If the potential capital gain on the property that would be triggered by a direct gift to your grandchildren is not too great (it is a connected person transfer, so it would be at current market value), then a direct gift would be best, probably to a bare trust for them. I don't know your income tax position, and I don't know your inheritance tax (IHT) position, but gifting the property would get the property out of your estate, and possibly save on future IHT. And it would also save you paying income tax on this rental income. Since the lease has only 55 years remaining, an alternative could be to sell the flat and invest the £325,000 in a long-term investment (e.g., a high-yield bond). Perhaps this could earn 5%+ annual interest (which is more than the current £15,000).