Reducing tax from Discretionary Trust and IHT

arambol

My grandfather left his estate in a Discretionary Trust which is now to be divided amongst the family.

There is an option for my fathers "cut" to be paid to me instead of him and therefore this will reduce his Inheritance Tax liability in the future. If he accepts the money in his name it will be added to his estate and IHT will eventually tax the money again. My grandfather already paid a criminally high amount of IHT so we'd prefer to avoid it.

Is it possible that I take his "cut" in my name and if he needs it in later life I can give/ loan/ gift ??? the money back to him and no tax will be due or tax will be limited?

Anyone know the answer?

arambol

I know tax is paid when father gives cash above £3000 per year to son ...... but is tax paid in son giving money to father?

If it was done as a loan from son to the father over say 20 years (for example) and father died before loan was repaid would tax be due?

Not trying to avoid tax as such, but the Trustees of the Discretionary Trust are offering this option and I'd like to understand all our options in non-lawyer speak and this forum is far more savvy than the above mentioned lawyers.

Thanks guys.

localhero

Are you one of the beneficiaries of the discretionary trust? In which case no problem - the trustees appoint you the capital and you can lend it to your dad if you wish.

sdooley

Are you an only child? If so and your dad trusts you to have the resources to help him in the future when he needs it this could work.

It sounds like the trust is going to be wound up now - is that for tax reasons or just to save money on administration?

If the trust is fully discretionary, another option if it is to be wound up would be to split the money between you and your dad, on the understanding that the half you get now is yours to put into housing your family or whatever you need to do, might make you feel better not to be beholden in the future. After all there's no guarantee you will outlive your dad, though passing assets to lower generations is generally seen as a good idea so long as no-one loses out.

It's up to you and your father really but although inheritance tax is emotional, don't let the tax issues stop you doing whats right for your family, even if it might cause some tax. Also worthwhile thinking about what to do with the inheritance - do you or your father have debts to pay down?

The £3,000 rule refers to gifts which are fully excluded from tax. But larger gifts you make to your dad (or vice-versa) would also be free of tax if the person making the gift survives 7 years - and even if you don't survive 7 years will not make you worse off than you would have been if you didn't make the gift.

arambol

Thanks for the replies.

The trust was a 10 year trust and was in the hands of a law firm with 3 trustees. It was a complicated estate and they've taken their fair share. However the value of the Trust has fallen below probate value because of the markets, so the Trustees have decided to end the Trust early as their will be no CGT to pay and they expect the markets not to recover significantly by the time the Trust matures.

They are dividing the Trust equally between 6 beneficiaries, myself being one. The others are the two children of my grandfather (ie: my Dad and Auntie) and their kids, who include me, my sister and my two cousins.

The Trustees have suggested that my Dad and Auntie don't accept the money and pass it straight down onto their kids so not adding to their estate and eventual IHT.

While my Dad doesn't need the money and has savings, he might in later life, especially with the cost of care homes etc.

I was just thinking that if his share was passed directly to me or my sister, that would be a better and more efficient for tax.... even if we had to give it back or lend it to him further down the line.

What do you think?

arambol

So if I "gift" him the money and live 7 years (which I expect to do), then it's tax free. I didn't know there was the 7 year rule son to father....just parents to child ie Inheritance.

Will he or I have to pay any tax of any type on this money in the meantime?

If I gift him the money and he dies before the 7 years, then what?

Thanks again.

s12s

arambol wrote: »

So if I "gift" him the money and live 7 years (which I expect to do), then it's tax free. I didn't know there was the 7 year rule son to father....just parents to child ie Inheritance.

Will he or I have to pay any tax of any type on this money in the meantime?

If I gift him the money and he dies before the 7 years, then what?

Thanks again.

the 7 years rule applies regardless of who it is too, only exception is to a spouse which is exempt transfer. It only becomes an issue if the person giving the gift dies within 7 years and has over the IHT limit. It makes no odds if your father, if he receives a gift, dies within 7 years it is you as the person gifting that has to survive the 7 years to be sure no IHT. There would only be IHT payable though if you are above the IHT threshold.

arambol

So for sake of argument....

If the Trustees pay me my Dad's share and then once cleared in my bank account, I could then transfer ("gift") his share back to him next day.

That has got to be a better way than him accepting the cash and adding to his estate.

He's already going to be stung with IHT so this seems a good solution as far as the Trust money goes.

Am I understanding correctly?

sloughflint

arambol wrote: »

Am I understanding correctly?

As soon as you've gifted him the money, it'll form part of his estate if not spent so IHT would come into play for him.

And if you were to die within 7 years of making the gift and the total of your estate plus value of gift exceeds the IHT allowance, then IHT would be due on your estate too.

arambol

Oh.... so it doesn't make any difference either way really.

whatatwit

I'm sure that a poster with far more knowledge than myself will pick up on this, but if you gift the money to dad and he than passes away next week, then the gift will form part of his estate and be liable for IHT.

Maybe you could deposit the money in an account and give your dad the passbook

Edit..too slow