Inheritance Tax Planning

Bod_Man

Ok, I have one questionsabout Discretionary Trusts and that is:-

Do you need to have liquid assets available to fund the Trust, or is it purely a piece of paper that ring fences £264K of assets that passed from my father to my mother on his death.

We want to set this up using a deed of variation this year, as my father passed last year, and i need to understand what if any decisions I need to help my mother make.

Regards
Bod_man

sneekymum

You'll find the answer in earlier posts on this thread - only 192 to read

mycar37

A simple example should help:

Who? Mr & Mrs Gettingonabit. What are they worth? £700,000 in combination.

· The Unplanned Route: Leave everything to each other.
Their wills mean when one dies everything passes to the spouse. Suppose Mr. G dies (it’s the same either way round). Everything passes, tax free, to Mrs G, who is now, alone, worth £700,000.

When she then dies she leaves everything to her three grown up daughters, the little Gettingonabits. Yet she only gets an inheritance tax-free allowance of £263,000. The rest is taxed at 40%.

Calculating the bill. The estate is £700,000 minus the £263,000 which equals £437,000. Forty percent tax of this is £175,000.

Total Inheritance Tax: £175,000 – a huge whack.



· The Planned Route: Give a bit to the little Gettingonabits
Now, in both their wills, they arrange to leave £263,000 to the little Gettingonabits if they die before the spouse. When Mr. G dies their three daughters now get £263,000 between them and there is no inheritance tax.

This means Mrs G is now worth only £437,000. When she dies and leaves everything to the daughters, she still has the £263,000 tax-free allowance, but she is worth less.

Calculating the bill. Mrs G is now worth £437,000 minus the £263,000 which equals £174,000. Forty percent tax of this is roughly £70,000.

(Surely this guidance is flawed. When Mrs G dies and leaves everything to her three daughters, does each daughter not get IHT relief at 263,000 or is it the case that because Mr G already left IHT to the daughters previously that they can' have it again?) Please clarify.

sneekymum

Its the person who dies who has a total nil-rate band of £275,000 (this year's figure). - not the person receiving the legacy. Your explanation is correct - no the guidance is not flawed.

The only thing to add is that if the assests are not liquid (e.g. tied up in property) of if the surviving spouse may need the money then it could be left in trust with the surviving spouse being able to benefit during their lifetime. (See earlier posts for more details of such trusts.)

paulrobinson

My father in law wants to leave a large sum of money (£30,000) to his two grandchildren to avoid paying inheritance tax. I've heard that bare trusts may be a good way of doing this but I'm not sure what they are. Any other suggestions of the best way to handle this gift please?

sneekymum

Is father-in-law likely to survive seven years?

Money in trust is taxed at a whopping rate (which I think can be claimed back in some circunstances - but it all sounds very complicated) - and trustees must fill in annual tax returns - and it costs a whack to set it up in the first place. There is some discussion about this earlier in this thread. Also, £30,000 isn't a large sum in trust terms.

I wonder if he wouldn't be best just giving it to them now and investing it tax free (assuming grandchildren are non-taxpayers) while you take care that grandad survives 7 years. The money must be given directly (i.e. not via a parent, to avoid any interest being taxed as parents' income).

The problem of keeping chilren from spending the money until they're responsible is easily taken care of - just hide the documents and don't tell them about it. It's a good idea to keep a letter with your will mentioning that they exist though.

NB - This is in no way professional financial advice. I'm just someone who handles a lot of money.

sneekymum

Bestinvest do a good guide to Inheritance Tax - they'll post it to you.

It explains how grandad will still have to survive seven years for the gift to be IHtax free even in a Bare Trust.

BobSteva

There is a totally legitimate way of avoiding all IHT in the UK. It does not involve Trusts, offshore manoeuvres, giving money away,etc etc.

I think the options for avoiding IHT are rather limited, especially for the asset rich. The annual exemptions really only tinker with the problem. To call it a voluntary tax is a joke, and a fairly offensive one at that.

I think the above posting refers to the purchase of Commercial Woodland which is reputed to be reasonably tradeable and to return 4-5% annually, and as the poster states, comprehensively and legally avoids IHT.

I have looked into it a little, but there seems remarkably little discussion of it on the web. Any advice/links/discussion would be more than welcome.

Off to the solicitor tomorrow with my Mother to address wills, planning & things. I think she is a bit daunted because these are big decisions, really, and to be honest you could spend your life looking for someone to advise you who is trustworthy, honest, capable and without ulterior motives.

Ultimately I think your own research can be at least as valuable as advice you pay for. The Net has saved me many thousands of pounds and sites like this should be read by everyone.

sneekymum

Definately agree with you there - just wish we hadn't wasted some years and cash to get round to the conclusion that PETs were the best way

- yes not very useful for property - but all the same if you're a close knit family there's no reason why you can't receive every liquid penny of Mother's money as a Potentially Exempt Transfer (and definately yours to do as you like with) yet choosing to keep it safe in case you want to spend it on her...

Downsides to this plan are that
- Mother must live at least seven years - though if she were to die the potential tax bill would be the last thing on my mind,
- you might get divorced and lose half
- you might get sued (I have professional indemnity insurance)
- you might die first (my Will sets up a trust that makes my mother the beneficiary for the rest of her life and then after her death everything is left to my children and my sister).
- if you have siblings they might not understand why you are chosen to be well-favoured...
- you might be tempted to spend it

margaretclare

sneekymum wrote:

Mother must live at least seven years - though if she were to die the potential tax bill would be the last thing on my mind,
- you might get divorced and lose half
- you might get sued (I have professional indemnity insurance)
- you might die first (my Will sets up a trust that makes my mother the beneficiary for the rest of her life and then after her death everything is left to my children and my sister).
- if you have siblings they might not understand why you are chosen to be well-favoured...
- you might be tempted to spend it

What if Mother remarries?

She would then say to a new husband, as I did when I remarried after widowhood: 'All that I am I give you, all that I have I share with you....'

Aunty Margaret