Will Trusts / Capital Gains - Help please!

Cat1

Hiya

This is an area of tax I know almost next to nothing about. I have trawled through the HMRC website but I'm getting confused. I would really appreciate some basic guidance or pointing in the right direction.

Sadly, my grandfather died recently. My father is the executor and is keen to get Grandads affairs in order, he is keen to minimise solicitors fees and keep it all as simple as possible.

Background: My grandmother died in 1987. She soley owned the family home. In her Will she left the house to my Dad and his sister - however she wanted Grandad to be able to live in it until his death. I believe at this point a Trust was formed.

Grandad remained in the house for another 13 years until it became too much for him to cope with. The house was sold and a flat was purchased with the proceeds. The surplus money was put into the Trust where half the money was put into a fund for growth and the other half put into a fund for income (I am just repeating what I've been told here-can find out more if needed!) Grandad lived in this property for 10 years until he sadly passed away. He had a monthly income from the trust- I believe it was interest rather than capital.

The situation as it is now... Mum & Dad are the trustees of my Grandmothers Will Trust and also the executors of Grandads Will. Dad and his sister are the sole beneficaries of my Grandmothers Will Trust, a 50/50 split as I understand it. As this Will Trust now consists of a property (1 bed flat probably worth 120k?) and a unknown amount of money in the 2 funds, however I have been told that it won't touch the inheritance tax threshold.

Mum & Dad is keen to sell the flat and release the money from the two funds to be distrubuted between himself and his sister. He knows this may take some time but he does not want to complicate matters further by letting the flat to tenants etc.

The big question is, will there be a CGT liability on the sale of the house? (seeing as it's in Trust) Who would be liable for it? It has not been properly valued yet but it was bought in 2000 for 52k.

Would really really appreciate any answers or pointers. If there is any further info required please tell me!

Thanks in advance

getmore4less

Who has been dealing with the grandmother will trust up to now.

I think there would have been the need for some tax returns since the sale of the first property.

Have they contacted HMRC they are very helpfull when it comes to dealing with this sort of thing.

Cat1

Hiya Getmoreforless

Thanks for your reply. With regards to Gran's will trust, it was set up by her solicitors and my mum and dad have always been the trustees. I will double check but I am pretty sure that no trust tax returns have been completed. I know that Grandad had the interest from the two funds in the trust to live on. Not sure if this is relevant but when completing one of my fathers tax returns he had a dividend voucher from the Trust for approx £20 net.

I think the best thing I can do is request sight of any paperwork, parents are rather cagey when it comes to money and papers.

John_Pierpoint

I think it probable that your grandmother was a woman of foresight;) It sounds very much as though she has created an interest-in-possession trust (aka life-interest or fixed interest trust).
The assets in such a trust are treated as though they belong to the beneficiary, but the beneficiary cannot "spend" (waste) the capital.
(ie grand-dad could not remarry and leave the dosh to his new wife).

What is more grand-dad should qualify for the surviving spouse, up to double IHT tax free limit, of £325K plus X% of a second £325K, where X would be 100% if grandmother left him all of her net wealth.
So it depends on who got what in addition to the house that went to Grandad.

There could be some ifs and buts if there are other trusts involved of if grand-dad was a foreigner or other people have a claim on the assets of grandmother or grandfather etc etc.
Generally speaking you pay IHT or CGT but not both at the same time.

Now turning to grand-dad's income from the nest egg, created when he downsized: Here we might be getting into a trickier situation, as the trustees should have been paying out the interest, net of basic rate tax, to grandfather (other things being equal).
The danger is that some lawyer might have tried to get too clever with the wording of grandmother's will and created a "discretionary trust"; ie the trustees have the discretion not to do exactly what the will tells them to do.
Discretionary trusts can rumble on for up to 124 years; obviously the tax man is not going to sit on his hands for that long, so discretionary trusts tend to get treated as though they are rich individuals. They pay an income tax rate of 50% and get assessed regularly for another dose of Inheritance Tax - a sort of constant wealth tax.

Assuming we really are talking about an interest in possession trust,
and grandfather has been getting a cheque each year complete with an R185 tax deduction form; then grandfather should have been reporting this income as part of his tax return.

What tax return, you may well ask, well it only becomes significant if it turns out grandfather was "fiddling" his 30% income tax band or was avoiding being pushed into the 40% additional rate band by "forgetting" this source of income.

http://www.hmrc.gov.uk/rates/it.htm

This is where the 30% band starts:
Income limit for age-related allowances
£22,900 09/10
£22,900 10/11
£24,000 11/12
And the 40% band starts at these figures (after the zero rate allowances have been taken off to leave "taxable income")
Higher rate: 40%
Over £37,400 09/10
£37,401-£150,000 10/11
£35,001-£150,000 11/12

I think that is about as far as any of us can go without hard numerical information: capital and income values now. What happened when grandmother died. Exact wording and subsequent administration of the trust. Income tax situation at time of death eg PAYE notice of coding for Grandfather's pension provider etc. etc.

Good luck,

John.

PS
If grandfather lived north of the Scottish border, the situation could be different as there is a different legal system in Scotland.
I have absolutely no professional training, but I became a trustee aged 21 and six weeks, and I have been one ever since - perhaps I should put that on my bus pass.:D

John_Pierpoint

Cat1 wrote: »

Hiya Getmoreforless

I think the best thing I can do is request sight of any paperwork, parents are rather cagey when it comes to money and papers.

Wills are public documents, so anyone can go and have a nosey at them.
I think hanging onto the paperwork is partly a power thing - the mushroom theory of management.
What the children don't know cannot hurt them.:rotfl:

jimmo

Going along with John's thinking about an interest in possession trust, you might find HMRC's advice on them useful.
http://www.hmrc.gov.uk/trusts/types/iip.htm
I don't know enough about IHT to make a positive contribution here but, as I understand it, when your grandmother died the house passed into the trust as opposed to anything else that passed to your grandfather which would have have been not chargeable to IHT. It therefore formed part of her estate for IHT purposes.
I was aware of the 10 year anniversary rule for IHT but know no more than that. Somebody, the trustees or the solicitors acting, should obviously have reviewed the situation in 1997. Hopefully, that was done.
As far as I can tell, despite the fact that the flat was a trust asset, it will still form part of your grandfather's estate for Inheritance Tax purposes. Therefore the value of the flat at the date of your grandfather's death will be added to the value of everything else that your grandfather left. If the total is less than £325,000 there will be no IHT. If the total is more than £325,000 it will become more complicated.
Moving on to Capital Gains Tax this is where I claim to know a thing or two.
When the house was sold that was a chargeable occasion for Capital Gains Tax but the trustees were entitled to claim Private Residence Relief and would have been exempt from Capital Gains Tax.
http://www.hmrc.gov.uk/manuals/cgmanual/CG65400.htm
When your grandfather died it is very likely that the interest in possession trust died with him. In which case, the beneficial ownership will have passed from the trustees to the beneficiaries. That was a chargeable occasion for Capital Gains Tax but, just like the house, the trustees were entitled to Private Residence Relief and are exempt.
When the flat is sold, it will be sold by the beneficiaries and that will be a chargeable occasion for Capital Gains Tax but the measure of the Capital Gain will be any increase in the value of the flat from the date of their acquisition (the day your grandfather died) to the date of sale.
To summarise all that it seems most likely that the value of the flat will form part of your grandfather's estate for Inheritance Tax purposes but the beneficiaries will only become liable to Capital Gains Tax if they sell the flat for more than it was worth when your grandfather died.
For what it is worth, I think that John was wrong when he said "your grandmother was a woman of foresight." I rather fear that your grandmother was conned by a solicitor into making rather expensive arrangements that were well and truly excessive for the tax at stake.
But it all boils down to figures.
I sympathise with your dad in the sense that if your grandfather's estate, including the flat, was worth less than £325,000 then the creation of a trust was a nonsense .

John_Pierpoint

jimmo wrote: »

For what it is worth, I think that John was wrong when he said "your grandmother was a woman of foresight." I rather fear that your grandmother was conned by a solicitor into making rather expensive arrangements that were well and truly excessive for the tax at stake.
But it all boils down to figures.
I sympathise with your dad in the sense that if your grandfather's estate, including the flat, was worth less than £325,000 then the creation of a trust was a nonsense .

Thanks Jimmo for your help with the incompatible rules for the interplay of CGT IHT and IT (income tax) - and that is before we get tangled up in the taxation of trusts.

My comment about "foresight" was said with a little bit of tongue in cheek, in that grandmother obviously looked into her crystal ball and saw the changes that Gordon Brown was going to make, in a bit of a panic, in autumn 2007, when he introduced the transferable nil band percentage for IHT calculations, coming into effect when the second partner dies.

There could have been "personal" reasons for grandmother making sure that her (presumably) children would eventually get their share of the family home.

My father also showed amazing foresight by dying in his fifties, with out making a will and thus creating an interest in possession trust.
My mother did not like the situation much, but I think she was hoping to take the house with her.
As far as IHT went it was the cleverest thing my father did in his whole life, in that it saved a six figure amount of tax (sorry it would not work any more the tax rules have been changed for more recent deaths).
[I was hoping to get my expert in trusts - Alice in Wonderland - to come along to explain the ins and outs, but she tells me she is too busy at this time of the morning - doing something with a looking glass.]

Cat1

Wow thanks! Really appreciate your replies. Lots of food for thought there. Will go and re-read it several times and then ring the parents for more info!

With regard to the original Will my grandmother left, I think she did posess a bit of foresight as my Grandfather actually remarried two years later. Had wifey no. 2 survived him should could have ended up inheriting the family home I think? My parents in their role of trustee had something added to the Trust to say that if wifey no. 2 outlived Grandad then she could remain in the original house til she died/ married or cohabited. It didn't come to that as she sadly passed away after they had been married 10 years - Grandad was the sole beneficiary of her estate too - she had sold a house in London to move down to Somerset with him. Figures should become available over the next couple of weeks as the solicitors plough through it all but I'm beginning to wonder about IHT.


With regard to the flat, it was purchased for 52k and looking on rightmove would probably be worth approx 120K now. So capital gains would be due on 72k- I assume there would be some taper relief or indexation available (it's been a long time and 2 babies since my AAT exams!!)

I am tempted to point the parents in the direction of a good chartered accountant once figures are known!! :rotfl:

John_Pierpoint

I think the following means that the transferable nil rate band is limited to only one extra nil rate band and that is the one ruling at the date of death of grandfather. ie a total of 650K maximum free of IHT on grandfather's estate. [STRIKE]applying when step mother/grandmother died:
[/STRIKE]
(c) Multiple spouses: limitation to double the NRB on the second death
Where a person dies having survived more than one spouse or civil partner (or dies having been married to, or the registered civil partner of, someone who had themselves survived one or more spouses or civil partners), the amount of additional NRB which can be accumulated by any one survivor will be limited to the NRB in force at the second death.

http://www.accountingweb.co.uk/topic/tax/transferable-iht-nil-rate-band-matthew-hutton

The actual tax situation very much relies on the nature of the trust after it had been changed - that sounds sort of "discretionary" to me, rather than one simple life interest belonging to a spouse of a probably similar age.
.
[The tax man is absolutely against rolling family wealth forwards through the generations untaxed].

Is there anyone in step grandmother's family who could feel aggrieved - it is too late legally for them to claim the right of support, at least in England and Wales, but "bad blood" in a family is a very sad situation.





? redderhs eht no nrut ot emiT

jimmo

Ah! the plot thickens. Granddad had a second wife and your parents apparently amended the trust. I didn't think trustees could do that, unless it is/was a discretionary trust but I am stepping on the edge of my comfort zone and it may be best if I leave the trust side of things to John and Alice.
Now, the big moan about Inheritance Tax is the trouble it causes when people die asset rich but cash poor. In a simple case if someone dies owning a house worth £500,000 and £20,000 in the bank the chances are that the family home will have to be sold to pay the Inheritance Tax. Its more complicated than that but I hope you get my drift.
In your granddad's case he died occupying a flat worth, according to you, £120,000.
The basic Inheritance Tax threshold is £325,000. Therefore granddad needed to be worth more than £205,000 (apart from the flat) if there are to be any Inheritance Tax concerns.
Just to emphasise that, if granddad had £100,000 in the bank, a car worth £10,000 and the contents of the flat worth another £10,000 then it would not matter whether the flat counts as part of his estate or not. There would be no Inheritance Tax to pay so why worry?
If granddad was worth more than £325,000 including the flat there are things to worry about, but, if you don't need to go there, don't go there.
I hope John will forgive me for this, but this thread rather reminds me of John's struggles with red tape a few years ago when, following advice he received from HMRC, he felt himself forced to get professional valuations in order to complete Tax Returns even though the Capital Gain was exempt. He could have declared an estimated Capital Gain of £10,000 or £10,000,000, it wouldn't have made any difference because the Capital gain was exempt and there was no way that HMRC would have challenged his estimates.
With a bit more knowledge, John could have saved himself a few hundred pounds but, on balance, my guess would be that the money he wasted on professional valuations was a lot less than what he would have had to spend getting professionals to act for him.
Coming back to Capital Gains Tax, your post at #8 suggest to me that you have not fully understood mine at #6. It is very important for you to understand that trustees and beneficiaries are, in law, separate persons having separate responsibilities and liabilities.
In very rough terms, when your mum and dad, as trustees "sold" the flat to your dad and his sister as beneficiaries they were exempt from Capital Gains Tax.
When your dad and his sister sell the flat their Capital Gain will not be based on the original cost. It will be based on their acquisition value at the date of your granddad's death.
You are not exactly a regular on the Tax Saving Forum so you may not realise that I claim to be a retired Inspector of Taxes and John_Pierpoint claims to be an amateur who has successfully bucked the system. There are quite a number of regular posters who claim to be accountants but not one of them has contributed to your thread.
It may be that trusts are governed by general law as opposed to tax law or accountancy principles. You have to decide whether to take this on yourself but if you need professional help I would be more inclined to go for a solicitor than an accountant.

John_Pierpoint

jimmo wrote: »

it may be best if I leave the trust side of things to John and Alice.

I think we will have to leave it to Alice.
If one has not absorbed the concepts of legal interests and equitable interests in land plus the concepts of one person having different legal and thus tax identities, depending on which "hat" they are wearing; a conversation with a trust lawyer, an accountant or a financial adviser, rapidly degenerates into Alice talking with Humpty Dumpty:

`When I use a word,' Humpty Dumpty said in rather a scornful tone, `it means just what I choose it to mean -- neither more nor less.'

`The question is,' said Alice, `whether you can make words mean so many different things.'

Eaglet
Speak English! I don't know the meaning of half those long words, and I don't believe you do either!

http://quotations.about.com/od/moretypes/a/alice1.htm

Here on MSE, we don't really have a poster experienced in the legal/taxation aspects of trusts - Senior Sam knows a thing or two - but I expect the real experts are busy arguing with senior officers in HMRC. The web site "Taxation web" has some (junior?) professionals arguing amongst themselves; but the underlying agenda is "pay me £200 an hour and I will read through your papers".

jimmo wrote: »

If granddad was worth more than £325,000 including the flat there are things to worry about, but, if you don't need to go there, don't go there.

HMRC call one of these small estates "an excepted estate" and there is a fast track procedure with simplified forms for getting such estates through inheritance tax (IHT) to obtain probate. It has recently been extended to allow through estates up to £650K, where the extra 325K is 100% of a transferable nil rate exemption.
[How this "get out" is policed, I don't know]

A discretionary trust is treated as though it is a very rich individual; however if it contains less than £325K it is know as "a nil rate band trust" and gets let off paying IHT - though it still could have a liability for Capital Gains Tax (CGT) and as a trust has only half the annual nil rate band of £10,400 that individuals get.

jimmo wrote: »

I hope John will forgive me for this, but this thread rather reminds me of John's struggles with red tape a few years ago when, following advice he received from HMRC, he felt himself forced to get professional valuations in order to complete the tax returns of his mother's two children

This was another "Alice in Wonderland" moment.
Let me set the scene: Back in the socialist Britain of the 1950's, we were a family of 4 living in a rented war damaged back street Victorian semi on the West side of London. Dad, back from 3 years "in the bag" (prison camp) was doing OK at work and unlike most of the rest of the street we had a car (well legally speaking half a car, as it was shared with dad's father)
http://www.motorbase.com/picture/by-id/938829084
(It was sold in 1959 for £15 and replaced with a Ford Anglia)

This car was used at the weekend for scouring what is now M25 territory and eventually dad found a plot of land measuring 80' x 180'; surrounded by Edwardian and 1920's houses on plots carved out of a Victorian country estate.
There were all sort of size restrictions and building material shortages as befits a near bankrupt socialist state (sound familiar with present troubles?).
He paid £1,000 for the land and on it he and a young architect. just out of college, built an out of place, ahead of its time a modest but bizarre 1960's house, costing £3,000.
This plot of land was resold in the 21st century for (let us pretend) £750,00.

Now under the rules of intestacy the widow gets "a life interest in half of the remainder" so my sister and I already were beneficial owners of half the house and had just inherited mum's half as remainder men of an interest in possession trust.

We were not absolutely sure we could claim the then exemption from CGT on our quarter shares of our widowed mother's home.

So we tried to take the approach that there were two taxes involved in our annual tax return - Income tax and CGT.
So we did the income tax return and wrote the same letter to our tax offices, explaining that we had disposed of an asset worth more than 4 times the annual nil rate band BUT there was no tax due as it had been used to house our widowed mother (exemption XYZ).
My sister heard nothing back but I got my tax return returned as an Xmas present, with instructions to RTFM and fill in the forms and do the CGT calculation.

So under the "reforms" that Margaret Thatcher introduced to CGT, I needed to know the value of the house and its plot in 1982.

http://www.hmrc.gov.uk/cgt/intro/record-keeping.htm

Me: Hullo is that ABC chartered surveyors? I need to know the value of 67 acacia avenue anytown in 1982 for tax purposes.

Helpful assistant: Yes sir I know that road - we have an extensive data base and we can probably give you a valuation without disturbing the present owner. If so the charge would be £350 + VAT.
Do you have the estate agent's details for the current sale?

Me: That is a bit of a difficulty - we sold it to a bloke we met via a web site called "plot finder" for a modest few thousand more than we declared for its probate value 18 months ago. There is only 1/3rd of a house there now in that the big three story replacement is still at ground floor level.

Helpful assistant: ???!!!@

So I packed a few sandwiches and a flask and spent the next day driving a 150 miles round trip, mostly on the M25:eek: and went boss eyed reading microfilm of the local paper in the library - to dream up an approximation to its surprisingly low 1982 value. Probably even lower as the house then was in divided ownership.

[Jimmo will be along in a minute demanding tax and penalties:o]