Tax on estate Interest

jmsuch

Help me if you can oh wise members!

I am dealing with an estate and need some tax guidance. My mum died in 2005 and left half of the house in trust to the beneficiaries on the condition that my father could live there until he died. he has now passed away and the estate is being sorted. as part of the setup interest was charged at BOE base rate. As such there is the original estate of £200k and interest is around £26k. I have been told that there is no tax on the principle inheritance but tax on the interest charged. I am a higher rate tax payer and think that I will be stung for 40% on the interest.

Does anyone know of any relief I can claim over the eight year period? and if I can consider the effects of inflation on this?

Cheers

Savvy_Sue

Someone might be able to answer in general terms, if you are an executor then it seems to me that you'd benefit from some professional advice (which the estate could be charged for) from a STEP professional. I believe there's a Which Guide to wills and trusts which might be a good starting point as well - make sure you have a recent edition.

John_Pierpoint

I am struggling a little to understand what has happened.
so let us analyse the situation in its individual parts.

Mum died in 2005
The executor of her will was ?
Her estate was in the main made up of 100% of a plot of land on which stands the family home!
Plus its contents?
There were also cash savings of ?
These savings were invested as follows: ?
Her husband who survived her was given the use of the land and house and contents (?) for the rest of his life.
Everything else was payable to mum's child/children?
There was no requirement upon the estate to pay her husband any income or to pay the expenses of the house, such as the council tax?
The husband has now died and the executor is now holding the real estate plus the savings plus 7 years of accumulated interest, as bare trustee for the child/children?

Husband also inherited x% (?) of mum's nil rate band for any inheritance tax (IHT) payable on his estate.

The sole asset (the house) of husband's interest in possession trust has now been sold (?) / is being held on a bare trust for the residual beneficiaries ?

The value of the house has gone up? down? sideways? in the last 7 years.

Seven years of accumulated interest amounts to £26k (gross or after tax at 20%?).
Paying out 7 years of interest as a lump lump sum will impose upon the beneficiaries a marginal rate of tax of 40% (?) (a further 20% ?)

Is there any legal way of mimimising this income tax charge?

Can you clarify the question by filling in the gaps identified by "?"

jmsuch

I am struggling a little to understand what has happened.
so let us analyse the situation in its individual parts.

Short introduction, mum and dad had placed the property in two halves (tenants in common). Mum left her half to the family and dad did not. I am dealing with Mums element alone.

Mum died in 2005 Correct
The executor of her will was ?Myself
Her estate was in the main made up of 100% of a plot of land on which stands the family home!
Plus its contents?Negligable
There were also cash savings of ? Negligable
These savings were invested as follows: ? They were distributed to the beneficiaries
Her husband who survived her was given the use of the land and house and contents (?) for the rest of his life. Correct
Everything else was payable to mum's child/children? Correct
There was no requirement upon the estate to pay her husband any income or to pay the expenses of the house, such as the council tax? No an agreement was drawn up that my father could live in the house for the remainder of his life and that he was required to maintain it. within the agreement the house was valued (£400k) and the executors could charge interest on mums half at BOE base rate until the debt was called in.
The husband has now died and the executor is now holding the real estate plus the savings plus 7 years of accumulated interest, as bare trustee for the child/children? Correct (Cap Sum & Interest)

Husband also inherited x% (?) of mum's nil rate band for any inheritance tax (IHT) payable on his estate. None?

The sole asset (the house) of husband's interest in possession trust has now been sold (?) / is being held on a bare trust for the residual beneficiaries ? The house is being marketed and an offer has been accepted. as such there is a charge against the 'estate' prior to the distribution of his assets

The value of the house has gone up? down? sideways? in the last 7 years. Down by 15%

Seven years of accumulated interest amounts to £26k (gross or after tax at 20%?). Gross although the legal document was not explicit.
Paying out 7 years of interest as a lump lump sum will impose upon the beneficiaries a marginal rate of tax of 40% (?) (a further 20% ?) Thats my concern

Is there any legal way of mimimising this income tax charge? Correct

Can you clarify the question by filling in the gaps identified by "?"

antrobus

The charge paid by the husband/father to the estate in respect of the wife/mother's share would be rent not interest. (Not that I can think of a reason why that should matter much.)

The personal representative (i.e executor in this case) is responsible for reporting any income received during the administration period of an estate to HMRC. You'd certainly need to contact HMRC and settle the income tax liability arising on the £26k of rent/interest income before the final distribution of the estate. Then you'd need to complete R185s for each beneficiary in respect of their share of the income. I don't think that a beneficiary has much option other than to report that as income to HMRC in the year of receipt.

xylophone

Your mother owned half a house. She left the house in trust to certain beneficiaries but they would not benefit until her husband died. The will created in "interest in possession" trust in favour of the husband.

The house ownership was reregistered to show Mr X and the Trustee of the Mrs X will trust as owners.

I am rather uncertain as to the precise nature of the money being paid by Mr X to the Trust.

Incidentally, was the existence of the Trust notified to HMRC and the income advised on an annual basis?

He can't have been regarded as "borrowing" the house so there was no loan - could he have been said to have been paying rent?

In your position I would be inclined to clarify matters with HMRC.

jmsuch

thanks,

the interest was an agreed amount which was only charged when the debt was called in. as such the interest earn was a charge against the asset and no physical income was recieved during the last eight years.

xylophone

debt

What debt?

dzug1

jmsuch wrote: »

Husband also inherited x% (?) of mum's nil rate band for any inheritance tax (IHT) payable on his estate. None?

Are you saying that your mum's estate used at least the then nil rate band on beneficiaries other than your father? That doesn't sound very likely based on what you have said. Any percentage of it not used at the time can be transferred now.

So if 10% of it was used on gifts to children, 90% of it remains now.

John_Pierpoint

Many thanks, I understand the situation better now.
My sister and I were left in almost exactly the same situation only we had a "penniless" widow to look after.
I can still visualise the revised minutes of the meeting, where it was highlighted that the son had agreed that no payment would be made by the widow for the children's half of the the house, as that would only result in taxes being payable to the Revenue.
I also had another estate to worry about at almost the same time that was grandmother's where a tenancy for life at £1 a year was left to a "great aunt".

In the latter case, I managed to agree with HMRC that the "penniless aunt" really had an interest in possession trust and so the house was liable to IHT not CGT upon her death. As the value of the house, plus the savings that "auntie" had accumulated from letting rooms, were a little over the IHT nil rate band a small payment of IHT was due.

The former case turned out to be the second most profitable single decision I have ever made, but the tax rules have been changed since.
From time to time the widow would complain about her reduced circumstances, then her hard hearted son would observe that the property could be divided into two flats.

Why was dad liable to make a payment for the use of the half of the house he did not own? This sound awfully like "rent" to me, which would make the children's half of the house liable for CGT ? Mind you of the house has gone down in value since 2005 that is not a problem.
Was this arrangement actually written into the mother's will?

In the heart of the dilemma, I get the impression that there has been a certain loss of love and trust in the family that has allowed the lawyers and the tax man to get in on the act?

What does dad's will say ? Has it gone to probate yet? Does dad's executor agree the liability?

On what date exactly did mum die (I am not being nosey, dad and the kids did have a two year window of opportunity in which to enact "an instrument of variation" to re-write mum's will ).

John_Pierpoint

dzug1 wrote: »

So if 10% of it was used on gifts to children, 90% of it remains now.

You have to remember that mum died before Gordon Brown brought in the transferable nil rate band, when Cameron proposed to raise the nil rate band to £1,000,000 :rotfl:.
Back in those days the standard advice was to leave the nil rate band to the kids if the widow/widower could afford to survive on what was left. If the survivor needed the money, then the nil rate band could be left to a discretionary trust and lent back to the survivor.