Inheritance tax and trust confused

holly44

Hi please can anyone advise ,we have been left a house , money and trust fund , all totalling 345,000 ,the trust which is included in 345,000 was set up in 2005 so relative has died within 7 years the trust is in mine and my sisters name totals 130,000 ,

Does anyone have any idea what IHT we will have to pay we are totally confused with HMRC website

Gogled

Hi,

The answer to this is not necessarily simple, or short.

The starting point is IHT is payable at 40% over the nil rate band which is currently £325,000. The estate is valued at £345,000. This gives a chargeable estate of £20,000 and therefore £8,000 IHT is payable.

This will not be correct if there have been any other gifts in the last seven years.

What exactly is this trust - life interest, discretionary etc? Was it set up by the deceased, or was the deceased a beneficiary? This is most likely irrelevant. As you elude, if the deceased did set this up, it was within 7 years. The transfer will still erode the nil rate band and if they were a beneficiary it will likely be considered part of their estate. There are a few exceptions to this, but I doubt they will be relevant here.

Also, was the deceased a surviving spouse? If so, you may be able to claim deceased's spouse's nil rate band and remove the IHT liability.

I would suggest you go and see a solicitor.

Oh. I have assumed you/the deceased are domiciled in England/Wales. Scotland is a bit different.

holly44

Hi Gogled

Thanks for reply , the trust was a distribution bond set up with mother as settler, she set trust up , me and my sister as trustee's ,the seven years would have been up in october 2011.

She was a surviving spouse , but he had a will which she then inherited house and insurence money when he died also his pension and yes domiciled in england ,

It does 'nt look like she has given money away , however a few large withdrawl's have been made we think at time for paying decoraters , and furniture etc

How far will they check into her accounts regarding gifts as how do we account for money leaving her account over a period of years when we dont know where some of its gone she was very houseproud and spent quite a lot on exterior ie paving , gates etc

You have put my mind to rest somewhat as we thought we would have to pay full 40% IHT on whole 345,000

We are to see a solicitor sometime this week

Gogled

If she was a surviving spouse and her spouse died post about 1974 and she inherited the entirety of her spouse’s estate then you will not have to pay any inheritance tax.

Although you do have to make the claim for the transferable nil rate band within two years of her death (I’m guessing plenty of time?) This only applies if they were actually married not just living together as a couple. You will need to obtain a few documents from her spouse's estate, but solicitor will give more info.

If you can transfer the whole of the her spouses Nil Rate Band then you will not have to pay IHT unless the estate exceeds £650,000. As such, gifts will not be relevant unless you're looking at £300,000+. I can give more detail re gifts if you want, but there seems little point as I do not think it will now be relevant.

holly44

Hi

Have I got this right , even if he left a will with her as beneficiary we could still do this ? , just to complicate it more would a compensation payment she received 5 years after he died 1992 due to industrial death still be included in his original estate ,which at the time totalled 140,000 maybe a bit more so alltogether she would have got insurance payment of approx 80,000, house worth 60,000 and compensation of about 250,000(five years later

John_Pierpoint

I am still a little confused by the generalisations in the first posting.

Can I summarise what appear to be the bare bones:

Mum has died within the last two years leaving an estate of 345K

Back in 2005 (before the transferable nil rate band concept) she thought it a good idea to put 130K into trust, but this "potentially exempt transfer" PET has not achieved its 7th birthday so its whole amount comes off the IHT nil rate band of 325K.

http://www.hmrc.gov.uk/rates/iht-thresholds.htm

However dad (still married) died in XXXX ? When the IHT nil rate band was YYY,YYY. At that time he left ZZZ,ZZZ to "mum" his wife and AA,AAA to other people. So at that time he used up YYY,YYY minus AA,AAA of his nil rate band, in other words mum inherited
(YYY,YYY minus AA,AAA) divided by YYY,YYY = 0.BB times 100 = BB% of a nil rate band.
So if BB% is say 50% then mum died with a nil rate band of 325K + 162.5K (Geddit;))

Technically speaking the executor has to complete all the IHT calculations on a series of forms in the IHT400 family, one of which is a claim form for the percentage of dad's nil rate band. It is like doing a self assessment income tax return, if you have had to do one of those.

If dad's total estate was clearly below the IHT threshold at that time, then HMRC will accept his probate grant as proof in my experience (an embossed copy costs a few quid from the probate registry).

==================================================================================

I cannot comment on the compensation issue - It could be like life insurance written in trust, a bit of a mine field.
Talking of mines, was the compensation in some way relating to war, especially WW2?


====================================================================================

On the topic of checking mum's records for further gifts in the last 7 years, remember mum can have given away 250 quid to lots of different people plus gifts out of income plus "reportable" gifts of 3k in total per year.
http://www.hmrc.gov.uk/inheritancetax/pass-money-property/exempt-gifts.htm#5

Did mum not pay the "mystery" sums by cheque and stubs give you some idea where the amounts went?

If push really does come to shove (for a fee?!) her banks will disgorge their records.

I have had to go through this process recently as sole executor of my late uncle (nick named Mr Dog on this forum). I think I stumbled into most of the problems after I had set about sorting out what appeared to be a simple estate [He turned out to be wealthier than expected (house inside the M25), his solicitor written will was partially intestate, his INCOME tax affairs were in a shambles, and his record keeping was chaotic (I found a life assurance policy in a box of photographs!)].

I used a firm of solicitors for advice when I needed it - I have an admiration for good solicitors, it is a very frustrating job - however however good the solicitor, it is is the executor who has to find the saving certificates hidden behind the gas meter and reconciling the figures will be very expensive if the solicitor's clerk has to do all the work.
[Put this into Google if you are interested in the saga of Mr Dog:
“Mr Dog” site: forums.moneysavingexpert.com


Best wishes at this difficult time.

John.

Gogled

Holly,

Yeah it will be fine, as the transfer from the deceased in 1992 to his wife will be exempt under the spouse exemption. If she was the only beneficary then 100% of his nil rate band will be transferable.

The industrial payment is irrelevant. If it wasn't paid to his estate then don't need to be concerned by it. If it was paid to his estate then it will move by the Will and benefits from spouse exemption.

John_Pierpoint

Good point Gogled, it was the "?" that threw me.
If dad left everything to mum there is no IHT to pay and 100% of the now 325K nil rate band is available for mum's in addition to the 325K available in her own name.

I mentioned the war because some sorts of compensation are outside IHT - such as compensation from foreign governments/banks and restoration of property stolen during hostilities.
The "Duke of Westminster" exemption for death in service, or as a result of injury on active service, is still available. There are something like the estates of half a dozen former pensioners that qualify each year.