inheratance tax advice sought

sanfly

My O.H and i have just been discussing IHT and would like some advice, we have just taken early retirement and with our property have assets of approximately £476K, we understand that IHT is not payable between spouses, but if heaven forbid we both went together,then our 2 sons would be liable for IHT of £70400 from the estate, we have read the forum about trusts etc, this prompts the following questions. should we be seeking advice now and if so from a solicitor, IFA, or will writer?, can you take advantage of Trusts etc after one of you has passed away, or should you do it while you are both here? How effective are they as it seems the chancellor plugs the holes every now and then?

CLAPTON

its best to start planning now and determine what you are comfortable with. as you rightly say the government has a habit of moving the goal posts.
I would suggest you google things like 'discretionary trusts' and 'Inheritance tax' and start reading up before seeking any formal advice.

Murdina

it is a lot better to try and do something now although you can do deeds of variation once one of you dies. If your main asset is your house your options are not that flexible and HMRC is constantly attacking arrangements here. I would recommend once you have read round you try a solicitor or a tax adviser/accountant. A will writer will do just that and may not be qualified to give IHT advice. IFA may been keen to sell you an insurance related product which may suit your needs or it may not - a solicitor or accountant would likely point you in this direction if it were appropriate but would also consider eg trusts. Bear in mind too if you go down trust route that they are a separate legal entity - what if the law changes (as it has done recently in a major way) or your situation changes - may not be so easy to get the assets out again. In our family we ended up undoing all the tax planning by deed of variation following one death, in part because the deceased did not grasp that once having gone down this route you need to keep reviewing your planning every few years. Incidentally you can write a will such that if you died within say 30 days of each other money goes to children not to each other and this would go some way to mitigate the IHT hit if you did both die together (since you would get 2 nil rate bands that way - which is what IHT planning for spouses is usually trying to achieve.) Hope that is some more help.

Willman_Rodders

Hi sanfly,

You asked ...

can you take advantage of Trusts etc after one of you has passed away, or should you do it while you are both here?

Tax planning within your will uses two features:-
1. We each have an individual allowance, presently £300,000, that we can give away free of inheritance tax. This is often referred to as the Nil-Rate Band allowance, or NRB for short; and
2. Transfers of assets between spouses are exempt from IHT.

Most married couples set their wills up so that on the first death everything goes to the surviving spouse. Then on the second death all goes to the children. This arrangement fails to make use of the 1st-to-die's personal allowance; in effect it has lost a potential to save up to £120,000 of IHT.

Ideally, on first death you should arrange for up to the NRB to be given away to the children, thus making use of this available allowance. However for most couples, where their asset is their property, this is impractical - to gift away £300,000 would create hardship for the surviving spouse.

One solution is to create a discretionary trust on first death that places up to the NRB into the trust, the beneficiaries being the surviving spouse, and children.

You can see from the mechanics therefore that to be effective you must both be alive when the trusts are included in your will; after 1st death this option is lost.

You asked ...
How effective are these trusts?

If setup correctly these trusts have been effective in the past. But, as you point out, the goal posts are being continually moved, so you cannot be sure when you die that the trusts you place in your will today will be effective in the future. Indeed, recently there has been a well publicised case where this type of trust failed; the underlying decision upon which the case was decided is widely expected to be overturned on appeal - but it does show how the authorites will pursue potential lost income.

You also need to be aware of the risks of including these trusts in your will. A trust, by its very nature, means the surviving spouse will not have 100% control on the house. You need to trust your trustees explicitly - I occassionally hear of horror stories where trustees have come to a decision that has detrimentally affected the surviving spouse - but as a discretionary trust the trustees are the people who make the decision; the surviving spouse [often] has no input into (or control over) the decision. There are additional costs incurred (e.g. annual tax returns for the trust).

If you are aware of all the risks you can make a decision as to whether the benefits (the tax saving) outweigh those risks.


you asked ...
Should we be seeking advice now and if so from a solicitor, IFA, or will writer?

This is not an easy question to answer. Solicitors have a reputation of being expensive, and because many do not draft wills as frequently as they would like you to believe they tend to be instruction takers i.e. they will fill in the application form from the answers you give, rather than helping you explore your options. Many solicitors will also exert pressure on you to appoint them as your executors - a very profitable line of business for them. But please note - not all solicitors fit into this stereotipical view; there are very good solicitors out there.

Will writers vary in quality almost as much as solicitors. Many are salespeople who will earn more money by pursuading you you should have an expensive trust; there is therefore a conflict between offering good advice and the temptation to pursuade you that you do need this or that trust. Will Writers will come to your home to explain your options - something few solicitors will do. When they call ask what qualifications, experience, and professional indemnity cover they have.

IFAs also differ in experience. Some will know of the options and possibilities with a will; others will only know in outline. (Be careful if an IFA offers to write you will for you; they may not have professional indemnity cover, and just be using this as an extra source of income.) I have business referred to me from well established IFAs; they focus on their areas of expertise whilst I focus and specialise on mine.

If you need to review your investments an IFA may be the first port of call. They will look and advise on your investments, and may well have a will-writer or solicitor they can recommend. If you don't have a need for an IFA then ask a round; personal recommendation from a trusted friend is often far better than any Yellow Pages advert. Ask for several providers to come and talk through your options before selecting who you think is best.


Clapton's advice to read up before calling in a specialist is sound advice. This will stop the 'wool being pulled over your eyes' by a willwriter who does our industry no good. You only need to know the basics, but it will help you spot the 'pressure' salesman, and potentially save you money.

And finally, don't be afraid to do tax planning in stages. Looking at your figures one option at this stage might be to
1. Split the tenancy of your property to tennants incommon; and
2 make mirror wills - which include the 30 day rule.

This simple arrangement should cost the fraction of the full NRB IHT trust, but provide protection from IHT if both you and your husband were to die together. Later, you can upgrade your wills to include the NRB IHT trusts if these are then felt to be appropriate.

PS I keep on seeing items 'quoted' in boxes. Can someone tell me how I can put quoted items into boxes. Thanks.

Bean_Counter

Willman_Rodders wrote: »

PS I keep on seeing items 'quoted' in boxes. Can someone tell me how I can put quoted items into boxes. Thanks.

I usually click on the quote button next to the thanks button, and then delete part of the entry if I don't want to quote the whole of the previous entry, as I did in this case.

moonrakerz

Willman_Rodders wrote: »

If setup correctly these trusts have been effective in the past. But, as you point out, the goal posts are being continually moved, so you cannot be sure when you die that the trusts you place in your will today will be effective in the future. Indeed, recently there has been a well publicised case where this type of trust failed; the underlying decision upon which the case was decided is widely expected to be overturned on appeal - but it does show how the authorites will pursue potential lost income.

The recent "Phizackerley" case referred to here was widely reported in the press- let me correct that - "widely mis-reported" in the press. (My solicitor said: "don't let the facts get in the way of a good story!")

The setting up of the trust failed because of the very unusual circumstances under which it was set up. When I read the full details I could see the tax man's argument and I could say probably the correct verdict was reached.
In short, the family were probably given poor advice when the trust was set up.
The family did say that they would not be appealing against the ruling.

This ruling will not affect the vast majority of trusts which were not set up under the unusual conditions of this one.

Murdina

Can I just add one thing on trusts? I was asked my opinion on a proposed deed of variation to set up a nil rate band discretionary trust where sadly husband died at a relatively early age. The solicitor quoted from memory £1,200 per annum for the admin of the trust tax returns etc - and of course this would increase year on year. The spouse was of an age when she could have lived another 40 years - making total admin cost £48,000 plus inflation. Weigh that against the IHT saving of £120,000 (£300,000 x 40%) and whilst you are still saving money it does not look quite so impressive. And doing trusts yourself is not really for the layman.