Inheritance tax

Vagabond3

I've got a question about inheritance tax...

I believe each person has a threshold of £325,000 before inheritance tax is paid at a rate of 40 per cent for all money inherited above this figure.

My Dad unfortunately passed away three years ago. My mother now has a house worth around £650,000 and other assets totalling around £150,000 - so a total of £800,000.

She set up a trust fund through a solicitor back in 2007 when the threshold was £285,000. My understanding is that this 'protected' from inheritance tax her allowance of £285,000 and my Dad's of £285,000 so a total of £570,000.

Is there any measure the family can now take to protect from inheritance tax the difference between £570,000 and £800,000 - a total of £230,000?

Is it necessary to set up another trust? Or is there another way to ensure the taxman does not take 40 per cent of this money?

Thanks.

jem16

Vagabond3 wrote: »

She set up a trust fund through a solicitor back in 2007 when the threshold was £285,000. My understanding is that this 'protected' from inheritance tax her allowance of £285,000 and my Dad's of £285,000 so a total of £570,000.

It doesn't protect her IHT allowance. She will have the full £325,000 (or whatever it is when she dies) plus your father's £285,000 (this was protected) so total at the moment of £610,000.

Unfortunately with recent changes it would have been better not to have this trust as with the new rules your mother would have her allowance x2 at the time of death (hers plus her husband's). This would give her £650,000 this tax year but obvioulsy will increase each year whereas the protected part of your father's will not.

Is there any measure the family can now take to protect from inheritance tax the difference between £570,000 and £800,000 - a total of £230,000?

There are some investments like Investment Bonds which take the money out of IHT but most of your mother's wealth seems to be tied up in the house so more awkward.

Is it necessary to set up another trust? Or is there another way to ensure the taxman does not take 40 per cent of this money?

Another trust will not help - your mum's estate will be liable for IHT. However removing the original trust may be beneficial but I don't know if it's possible. You would need to seek professional advice.

Vagabond3

Thanks for the full and speedy reply, Jem16.

localhero

jem16 wrote:

However removing the original trust may be beneficial but I don't know if it's possible. You would need to seek professional advice.

If the trustees had appointed the trust assets to Vagabond's mother within 2 years of the father's death, then that would have nullified the trust and a 100% uplift of the nil rate band would be available on his/her mother's estate - so it's obviously too late to take this route now.

OP, aside from investment bonds, your mother could consider making gifts and hope to live for 7 years or alternatively buy assets such as certain AIM shares which have attractive IHT exemptions once owned for 2 years. As JEM correctly states - obtain the services of a decent financial adviser to discuss the available options.

SeniorSam

Vagabond3 wrote: »

I've got a question about inheritance tax...

I believe each person has a threshold of £325,000 before inheritance tax is paid at a rate of 40 per cent for all money inherited above this figure.

My Dad unfortunately passed away three years ago. My mother now has a house worth around £650,000 and other assets totalling around £150,000 - so a total of £800,000.

She set up a trust fund through a solicitor back in 2007 when the threshold was £285,000. My understanding is that this 'protected' from inheritance tax her allowance of £285,000 and my Dad's of £285,000 so a total of £570,000.

Is there any measure the family can now take to protect from inheritance tax the difference between £570,000 and £800,000 - a total of £230,000?

Is it necessary to set up another trust? Or is there another way to ensure the taxman does not take 40 per cent of this money?

Thanks.

Hi Vagabond3,

good advice so far and there may be other avenues available depending on your mother's age and health.... can you say what this is?

One consideration could be equity release, using capital to gift into Trust in a bond in trust. There are schemes available that would allow an annual withdrawal from the bond if required, but the total gift would be outside the estate after 7 years even though the annual withdrawals could continue for her lifetime. Depending on age and health, the liability could be protected and 'effectively' be out of the estate immediately.

With equity release there would be interest payable on the amount borrowed from the property when your mother dies, or is taken into care when the property would be sold.

There is no need to sell any part of the property for this and no payments to make until the debt is repaid.

If the estate is presently worth £800,00 and the first nil rate band of your late father (£285,000) has been protected by the Discretionary Trust from his Will, then the nil rate band of your mother will be £325,00 in this tax year, increasing to £350,000 in April 2010.

With your mother's estate of £800,000, were she to die in this tax year, the IHT liability would be £800,000 - £325,000 x 40% =£190,000. If your father's Trust hold this amount in capital, then those funds can be used to pay the tax before Probate.

However, if his assets were passed to your mother and an IOU used for the Trust, that amount will be repayable to the trust from your mother's estate .

If you do consider the equity release route, be very careful and look for an IFA who specialises in IHT work and is familiar with Trust Schemes and how they work and get full explanations on everything before comitting to anything.

Hope this helps

Sam

Vagabond3

Thanks very much, Sam. My Mum will be 80 next month and her health is OK at the moment.

SeniorSam

............... Equity release should not be a problem and the IFA should be able to clarify the details. If your mother lives for seven years after setting up the Trust, the inheritance tax will be reduced. In any case there will be an improvement with the growth in the Trust and making that capital accessible before Probate, which may also help.

In addition, it may be prudent to check who the Executore of her Will are. Hopefully family members who may be able to deal with Probate if not too complex?

Don't be afraid to check out on this site anything that is not clear in advice you may receive from the IFA or anyone else for that matter, there are many good people around that have a great deal of knowledge and are willing to help.

Good luck

Sam

Vagabond3

Many thanks again.

Vagabond3

I don't know if it makes any difference, but up to £200,000 came from life insurance policies.

Does this have any affect on inheritance tax or is the money treated as any other asset would be?

dzug1

It's possible that the life insurance policies fall outside the estate - it depends who they were written in favour of.

Sounds a bit unlikely alas in this case if they were written to benefit your mother.

SeniorSam

Vagabond3 wrote: »

I don't know if it makes any difference, but up to £200,000 came from life insurance policies.

Does this have any affect on inheritance tax or is the money treated as any other asset would be?

Hello again Vagabond3

The policies were on your father's life, or joint lives, possibly for the benefit of the survivor and perhaps to meet some oher commitments such as mortgage?? If so they were payable to the survivor, in this case your mother and would add to the value of her estate.

If the policies were other than this, say for the protection of inheritance tax, then they should have been written in Trust and any adviser connected with these shoud have given clear and specific advice in writing.

However, if there were no debt to repay, or a debt had previously been paid off, best advice would have been to have the policies put into Trust. I would be interested to know if the family had a Financial Adviser either prior to your father's death or since???

In situations like this, it is most important to seek financial advice and if a solicitor was involved with the Probate of your fathers estate, did HE 'specifically' suggest that financial advice be sought from an Independent Financial Adviser?

Answers to the questions here may add to the advice you need now and I hope I can help

Sam