Tax on inheritance after inheritance tax

jonny2510

Simple question(s) hopefully.

After inheritance tax has been paid on an estate, and the money paid out to any/all beneficiaries, do the beneficiaries then need to pay any tax on the money they receive (income, capital gains, anything else)?

If money has been put into a trust, does tax need to be paid when withdrawing from that trust?

Lokolo

Not on the actual money itself, as it has already been through the tax process. However the money may gain any future taxes, such as income tax on any interest, capital gains if the money is invested etc.

Think of though the money is your net income from a job. It's already been through the main tax process, and could have future tax applied on it depending what the money is then used for.

jonny2510

Thanks for that clear explanation

John_Pierpoint

jonny2510 wrote: »

Simple question(s) hopefully.

After inheritance tax has been paid on an estate, and the money paid out to any/all beneficiaries, do the beneficiaries then need to pay any tax on the money they receive (income, capital gains, anything else)?

If money has been put into a trust, does tax need to be paid when withdrawing from that trust?

What sort of trust is it?

If it is a "bare trust" then the assets involved are just held for you by a trustee as your agent and the interest/rent they earn should be reported to HMRC annually as part of your tax return. (For example half a dozen of you may have inherited a rental property but you cannot all legally own it - so your bare trustee legally owns it and every year divi's up the rent amongst you.)

Other types of trust may well have their own tax identity, as would a company or a charity. The tax man tends to regard trusts as the money boxes of the rich and taxes them as higher rate tax payers.

You need to explain about "the trust" in more detail.

jonny2510

John_Pierpoint wrote: »

What sort of trust is it?

All hypothetical at the moment, but thanks anyway for the additional info

SeniorSam

Jonny 2510,

I may be on the wrong track completely, but on the basis that you, or a member of your family may be considering setting up a Trust, do take advice from a specialist in Trusts as the wrong type of Trust may cause more problems than it's worth.

If a Bare Trust is set up, ( rarely the best type of Trust in my opinion), the beneficiaries cannot be changed. With a Discetionary Trust, not only can beneficiaries be varied by Trustees if needed, but Trustees can also opt to make loans to 'whoever', which become repayable from the recipients estate, which can sometimes be useful in reducing IHT. Or they can make gifts.

A further benefit with Trusts is that the Trust assets can be accessible BEFORE Probate, which may be useful in helping to meet IHT rather than having to wait for Probate to be granted and selling assets to meet the tax liability before distribution to beneficiaries.

Another useful part of a Discretionary Trust is that it can be split into other Trusts and assigned to beneficiaries. This can be helpful where a beneficiary has a large estate already and adding to it's value may not be tax efficient. If the inheritance they are due is actually assigned to the beneficiary in another Trust, it will not form part of their estate. This process can go on for many years.

If a beneficiary receives an income from a Trust, then this needs to be declared as income, but gifts from the Trust not.

The other matter worth considering is that any income generated by Trust, is taxed at a higher rate and any Capital Gains made by the Trust only have half the normal CGT allowanace to offset against the gain.

Hope this helps, but seek help for best advice according to your own requirements.

Sam

jonny2510

SeniorSam wrote: »

Jonny 2510,
...
Hope this helps, but seek help for best advice according to your own requirements.

Sam

many thanks for that Sam. I know nothing about trusts, so it's interesting to get an idea of the possibilities. When you suggest specialist advice, do you mean an accountant, solicitor, IFA or someone even more specialist?

SeniorSam

Rarely would I consider an Accountant to have sufficiently knowledgeable for this, although some larger practices may have specialists. Sometimes an IFA, who specialises in the mitigation of Inheritance Tax, will have the answers you seek, but a Solicitor who is a member of STEP (Society of Trust & Estate Practitioners) will be able to guide you on Trusts, but not the investments that can be used within the Trust, which is the IFA.

Not all Solicitors have this qualification, so be selective, but Trusts are a great tool to use to mitigate taxes provided they are used efficiently. I have seen some Trusts set up that have far to many income producing assets and shares, which may not as tax efficient as growth producing, which are not taxed. However, the Trustees need to consider risk when investing.

Hope this helps

Sam

barak

SeniorSam wrote: »

.....The other matter worth considering is that any income generated by Trust, is taxed at a higher rate and any Capital Gains made by the Trust only have half the normal CGT allowance to offset against the gain.

As you imply, Trusts are complicated and need expert guidance. Perhaps worth mentioning that not all Trusts are taxed at a higher rate. "Interest in Possession Trusts" are not suitable for all circumstances but are generally taxed at 'personal' rates of 20% [savings etc.] and 10% [dividends] with - as you say - half the annual CGT allowance.

http://www.hmrc.gov.uk/trusts/types/IIP.htm

SeniorSam

barak,

Good, additional information, but in my opinion the worst part of the Interest In Possession Trust is the fact that when the beneficiary of the income dies, the whole value of the Trust fund is counted in their estate for IHT calculation purposes. This seems most unfair as the fund never was theirs, but as they have had the 'benefit' of it, it counts as part of their assets and may add considerably to the remaining beneficiaries IHT liability when they eventually die.

I'm not sure if many of these Trusts are recommended these days, as a Discretionary Trust is far more flexible and if the Settlor wishes to ensure that a certain person can be supported financially, the Trustees are at liberty to make gifts, or preferably, loans to that person.

My own Will sets up a Trust on this basis on my death, similarly with my wife and the Trustees, (our children and the survivor of the first to die), have been made aware of the most tax efficient way in which to handle the Trust.

We agree that Trusts are a complex tool, but a very useful one if the adviser/solicitor knows them well and is worth their salt!

Sam

John_Pierpoint

Interest in possession, when the beneficiary is the surviving partner (ie spouse usually), counts as leaving the estate to the partner for transferable nil rate IHT band purposes, on the second death.

However it prevents "the little woman" from losing her marbles and giving the (step?) kids' inheritance, to the toy boy or the cats' home?

John.

[I will now hide under a rock as the brick bats are thrown and point out that something similar happens if the first partner dies intestate; while we all wonder if we want serious amounts of national wealth in the hands of very old people]