Treatment of house via a will trust??

Hayelyhayley

Hello forum, glad to have found this place as i have lots of questions!!

My first is due to do wuth trying to avoid inheritance tax. My partnert and i are not married and will not get married (persaonl reasons) and the 2 kids.

He owns a rental property and has some cash in the bank (total value is about £380,000), i pretty much just own our main house (£500,000).

Before seeing a solicitor i just want to get some things clear in my mind so i know what my options are: We're looking at using nil rate trusts via our wills so that we can utilise both out IHT allowances (thinking ahead to when both of us have gone).

I'm happy with how it would work if John died (house + some cash into trust, i can acesss the funds, IHt chargeabke on the remainder), but im not so sure about me:

Becuase my house is valued at £500,000, is it possible to just place £325,000 of it into a trust? Or would i have to give part to John as tenants in common, so that i could then out my £325,000 into the trust.

My other questions are: Can the surviving partner access the capital of the trust or just the income? Would it be better if i gave john half the house as joint tenants so that it passes to him via survivorship (am aware of the CGT issue here). And finally, if I went with the orignal suggestion i think i read somewhere on a website that as John would be benefiting from living in the house (part of which would be i the trust) he would be deemed to have an interest in possesion which would make the trust useless??

Sorry for all the quesrions but am a bit confused :eek:

Thank you :heartsmil

SeniorSam

Hi Hayeley,

First of all, is the Main house yours or owned as Tenants in Common? If the latter, then you each own half of the main house and the value is split.

The Discretionary Trust clause in Wills was a way of protecting the first allowance from adding to the survivors estate and increasing the IHT liability, but since the changes to the rules, both allowances can be claimed, but only for married couples. In your case, you each have your own allowance above which inheritance tax of 40% of the residue will become payable by your respective Executors before Probate would be granted and the balance of the estate passed to beneficiaries.

Anything placed into a Trust is the responsibility of the Trustees and may be dealt with within the rules of the Trust. Usually this means that the Trustees can make loans to others, but if the 'beneficiaries' are to be the children, then it is important that the estate is maintained for them.

If you were to die first and the main house is in your name only, then your entire estate needs to be accounted for in your Will. What proportion of that is put into Trust is for you to decide. Your solicitors should be able to guide/advise you in detail.

If your house is put into Trust and has a Tenant (John), he can be allowed to remain there during his lifetime and pay rent or not. These are the matters to clarify with your solicitors before a draft Will is drawn up. Do bear in mind that any income that the Trust received will be taxed.

John's house which is let off will suffer CGT when it is sold, but there may be some relief if he has used it to live in before letting it off.

Finally, depending on your ages and health, there may be ways of reducing IHT on your respective estates but it would be best to seek toe advice of a qualified IFA, who specialises in this area.

Hope this helps

Sam

jimmo

Sam,
I watch your posts on here with a lot of interest because the one thing I know about trusts is that I know precious little about them.
Can I just pick on one point about Capital Gains where I think I am pretty good?

SeniorSam wrote: »

John's house which is let off will suffer CGT when it is sold, but there may be some relief if he has used it to live in before letting it off.

John's house which is let is definitely potentially liable to Capital Gains Tax if John sells it or puts it into a trust whilst he is still alive.
However, as far as I am aware, if John dies still owning the house it will form part of his estate for IHT purposes but pass from John to his estate at market value. Then the beneficiaries (people or trusts) will have a new acquisition value, opposed to John's original acquisition value, for Capital Gains Tax.
I guess the question is am I missing something or are you?

SeniorSam

Nothing being missed.

John' house that is let off is an asset and on death the market value will form part of his estate. CGT does not come into it if that happens, as his whole estate is then assessed and if over the nil rate band, then you know what happens.

Any disposal of that property prior to Johns death will make it liable to be assessed for CGT and if the gain is above the CGT allowance for that tax year, (£10,600 at present), then tax may be payable and in that tax year. At present that is 18% for basic rate taxpayers and 28% for higher rate tax payers. Trusts only have an allowance of half that if they have a capital gain.

If John bought the house for his own occupation and lived in it before letting it off, there will be an allowance based on the period he has held the property as his principal residence.

Hope this helps

Sam

Hayelyhayley

Thanks but you havent really answered my questions: the main house is solely in my name.


am, i able to leave £325,000 of this in a trust, butt he remainder not? Or would i have to gift part of the house to john so we own it as tenants in common, allowing me to leave my share (£325,000) in a trust. I know about the CGT, that isnt an issue neither is John's house.

Either way would John be deemed to have an interest in possesion, therefore making the vlaue of the trust come into his estate?

SeniorSam

Hi Hayley,

When as Trust is set up, the Settlor decides what is to go into the Trust, who the Trustees will be and who the beneficiaries are, so amounts and permissions are entirely up to you, as your solicitor will no doubt explain.

Any amount above the nil rate band allowance will be subject to inheritance tax, but when drawing up your Will, you may wish to make arrangements for John to have a lifetime interest in your home. Usually this means that the Trustees can allow the change of home, by selling and buying something else, but the values remain part of the Trust for your beneficiaries, possibly the children? Who's children are they?

The full value of your estate can be put in Trust if you wish, but only after payment of any inheritance tax. You can also make provision for an income to be paid to John if you wish, or, possibly better still, loaned to him so that the loans are repaid from his estate when he dies.

You do not have to split the value of your home if you don't want to. However, if you do gift half the home to him now, then the home should be registered as being owned as Tenants In Common. This means you each own half. If the ownership were Joint Tenants, then whoever dies first, will automatically gift their half to the survivor on death.

Sorry if it sound a little complex, but Wills and Trusts are a complex subject and why it is important to seek the solicitors advice. You can always ask more questions on this site after seeing the solicitor if you feel the need.

Hope this has dealt with the queries so far, but ask if not.

Sam