Inheritance Tax Planning

baffcat

Wow, the "Martin's Money Tips" landed in my (e)mail box at a strangely coincidental time. This morning, Mrs No Mates & myself were sitting with a guy from HSBC, trying to sort out our wills, as we had last made wills in March '88. A lot has changed since then- another child, a fifteen-year-old business, life policies that might actually pay out something worthwhile, etc, etc.

It seems that, if I died, or we died at the same time, our net worth is close on a million gazoolies. It certainly made us start to think about inheritance taxes, I can tell you.

We wanted to set up wills in such a way that we could keep IHT to a minimum, yet ensure the survivor would be well cared for; our parents, if any survived us could also be cared for (yet keeping our assets away from social services if they had to go into a care home); and our children would get as much of our money as we could possibly leave them.

One of the first things he suggested was becoming Tenants in Common, and setting up a discretionary trust. This would make use of one of our £263k nil rate bands, but can only be used by a married couple. I'm sure Martin would be able to explain this better than me, but I’ll have a go anyway.

A discretionary trust is a very flexible type of trust. The trustees of the trust own the trust's property on behalf of the beneficiaries. The beneficiaries need not all even be born at the time the trust is created.
The trustees can pay out income or capital to any one or more of the beneficiaries entirely at their own discretion. No beneficiary has a right to demand income from a discretionary trust.

The nil rate band is often wasted by married couples on the death of the first spouse.
Many couples choose to leave all of their estates to the surviving spouse on the first death, eg "I leave all of my estate to my wife provided that she survives me...". This may be to ensure that the surviving spouse has sufficient assets for the rest of his or her life - or simply because it is perceived to be the “done thing”.
Transfers between spouses including transfers on death are exempt from inheritance tax (subject to a limit of £55,000 if the surviving spouse is not domiciled in the UK). Thus, there is no tax to pay when the first spouse from a marriage dies if all of that spouse's assets are left to the survivor. However, the combined estate is then taxed when the survivor dies.
Where all of the estate is left to the surviving spouse, the deceased's nil rate band is not used, except to the extent that the individual made certain gifts during his or her lifetime.
Currently an extra tax charge of up to £105,000, on the death of the survivor, could be saved if the nil rate band is used. It is therefore far more tax effective to use up the nil rate band of both spouses by creating a discretionary trust in the will. This kind of trust is called a 'nil rate band discretionary trust'.

The surviving spouse can be included as one of the beneficiaries of the trust. The trustees can be empowered to pay out income or the underlying capital to the surviving spouse at their discretion. Thus the surviving spouse can enjoy both the income and capital of the trust. However, with this kind of trust (unlike life interest trusts) the capital is not added to the estate of the surviving spouse on his or her death and is not charged to inheritance tax on that occasion.

You can leave a 'letter of wishes' with the will. Such letters are quite usual and are read alongside the will, though they are not binding on the trustees. It is quite normal for such a letter to state that the first aim for the trust is to ensure adequate provision is made for the surviving spouse for the remainder of his or her days. The letter will usually say what is desired to happen thereafter, such as passing assets to the children.

The executors will pass the assets which are to be the trust property to the trustees. Very often, the trustees are the same people as the executors. In this case, they simply own the property as trustees as opposed to holding it as executors.
The trustees will then need to register the trust with the Inland Revenue who will send a short form for the trustees to complete. This enables the Inland Revenue to register the trust.

The trustees are subject to income and capital gains tax in the same way as individuals. Prior to 6 April 2004, after a deduction for the trust's management expenses, the trust income was taxed at 34% (25% for dividends). From 6 April 2004, the rate of tax applicable to trusts has been increased to 40% (32.5% for dividends). In addition, capital gains are also now taxed at a flat rate of 40% (previously 34%) after deducting the trustees' annual exemption which is, at most, half that of an individual.
The trustees will receive a tax return in exactly the same way as an individual. The filing deadlines and the dates for the payment of tax are exactly the same as for individuals.
Distributions of income to beneficiaries, including the surviving spouse, will suffer income tax in the hands of the beneficiary but with a credit for the tax paid by the trustees. To the extent that the
tax paid by the trustees exceeds the income tax liability arising to the beneficiary on such income, a tax refund will be made to the beneficiary.
Capital can be appointed to beneficiaries tax free in all but exceptional circumstances.
A discretionary trust is subject to inheritance tax every 10 years after the creation of the trust. The rate at which the tax is paid at current rates is not more than 6% of the market value of the trust's assets at the time of the charge and a nil rate discretionary trust will often escape tax altogether.
There is also a charge when assets cease to be held on discretionary trust, eg if assets pass out of trust to a beneficiary. In this case, the charge to inheritance tax is based on:

a/ the value of the property leaving the trust

b/ the proportion of the period of 10 years for which the assets have been held on discretionary trust since the last 10 year charge

c/ the rate of tax at the last 10 yearly charge
but subject to any IHT reliefs available at the time.

Hope this is clearer than mud.

Billy

baffcat

Oh yes.... the reason we decided to update our wills now?

An offer of FREE wills , which runs out on Saturday.

Billy

Jaime_Bien

IHT is generally paid before applying for probate but with instalment option property (e.g. your home) only 1/10th of the tax is payable at outstet with the balance payable in equal yearly instalments thereafter (plus some interest.) If the property is sold the whole balance falls due.

If there is sufficient cash held in banks, building societies and national savings products these can be released to pay IHT and probate fees - the form the personal representatives need to complete is D20.

System

my aunt has died and left about 150.000 in cash as she was receiving income from two trusts in her life time I am told the estate is liable to share the IHT and her share is about 20.000 - does this seem right when the level for IHT is much higher

Jaime_Bien

Policies of insurance to cover IHT is one solution - the premiums can be paid by someone else as, generally, they will fall within the regular gifts from income exemption as so not cause any further "gift" problems for the premium payer.

The policy should be written in trust for the benefit of the executors/beneficiairies as otherwise it will fall into the estate and, to the extent it is over the nil rate band, be also taxed at 40%.

Most insurance companies have standard trust/nomination forms.

Jaime_Bien

Billy - the charges that are listed at the end of your entry will not apply if the amount going into the trust is equal to, or less than, the current nil rate band.


As your will is setting up a "nil rate band discretionary trust" you do not need to worry about these in the current tax cliante.

System

??? Can anyone recommend a Will specialist...I mean a cut above the rest???

System

Just sent an email for a Will Specialist/solicitor but never mentioned area! North London, Herts or Middlesex

System

My wife and I are getting to that age when IHT etc are most important issues - especially since we are both on our second marriage and there are so many related issues eg children from previous marriages, separate properties in UK and abroad etc - everyskinny bit of advice here helps - thank you

one thought that strikes us is that there must be a central place for information - a reference point that everyone can tap into and not necessarily via the solicitor - after all nowadays we are persuaded to do our own conveyancing (by Which) - even our own divorces (by Tesco)!

discovery of that source of information would be extremely useful and help to broaden the investigation.

System

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. It requires you to invest any amount you choose, in your own name,with total control. The only stipulation is that you have held the investment for at least 2 years. After 2 years, the entire investment is free of all IHT, no matter how your will is left. The investment is always available to liquidate, but should you choose to do this and re-invest in a similar available scheme, then the 2 year qualifying period starts again.
Does anybody have the answer?