Inheritance Tax: Save £100,000s with simple advanced planning Article Discussion

Dave-Geo

localhero

Thank you very much for your replies, they have helped a lot in trying to get a clear idea of the situation.

I have checked with the stamp duty helpline and they have confirmed that this will be exempt both for the property transfer and the new build, That is good news :-)

When the final details of the project are worked out I will post a further reply to let you know what has happened.

Thanks again,

Dave

localhero

Hi ian2deep

ian2deep wrote:

My mother died in January 2007 leaving my 87 year old father a widower. The Expression of Wishes with her Will stated that her estate should be put into a NRB trust with my father as main beneficiary for the rest of his life. The house was owned by them as Tenants in Common and the total of my mother’s estate (including half the house value) came in below the £285k IHT threshold current at the time.

I have drawn all the assets together into one high-interest savings account (paying interest into my father’s bank account to supplement his income) with the intention of setting up the trust.

A financial adviser I know previously advised me that the if the trust included half of the house with my mother’s savings, then the Social Services would have difficulty selling the house to pay nursing home fees – should this situation ever occur.

As the dust now seems to have settled after the changes to IHT in the Finance Act, can you tell me if it is still worth setting up the trust or would it be more beneficial to have my mother’s allowance added to my father’s when the time comes?

If the Trust is now not suitable, does the Will need to be altered by Deed of Variation to remove my mother’s wish?

Does the arrangement of paying interest into my father’s account leave him liable for paying any extra tax?

If appropriate, how do I set up the Trust?

localhero wrote:

1) What is the current value of the trust fund?
2) What is the total value of your father's assets and what do they consist of?
3) What is your father's state of health?
4) If he required care later on, would you like your mother's estate (ie the assets in the trust fund) safeguarded from the liability to care fees.
5) Would you like to safeguard your mother's estate from your father remarrying or frittering it away?

ian2deep wrote:

1) Current value of the "trust fund" is £207k which includes half value of house at mum's probate (£140k) + £67k savings.
2) Total value of father's assets is £385k -half value of house (£140k) + £245k savings.
3) Apart from general creakiness, dad's health is not bad.
4) Difficult question. Yes, although with so much in his own savings, we are almost of a mind to pay the fees out of interest from all the savings accounts he (and mum's estate) have and ignore Social Services. We have only bad feelings about them!
5) We think dad is very unlikely to remarry and he is of the generation who keep saving for that rainy day -although I have alerted him to having too much money above the IHT threshold.

One further question. If we formed a Trust, can my father put money into it -if he wanted- so that the value is increased to say £280k ? He would of course be benefiting as he receives the income.

First of all for inheritance tax purposes, if you ended the discretionary trust and appointed the assets to your father - if done within 2 years of your mother's death (ie before Jan 09), then it will count as though she had left her estate to your father in the first place.

He would then have the benefit of 2 nil rate band allowances when he dies (currently £624,000). Therefore the combined estate worth £592,000 is just beneath it. The combined threshold will be worth £650,000 from next April and then £700,000 from 2010.

So from that perspective it may be worth considering.

Since your dad has got assets worth £385,000, in the event of him requiring long term care, it is likely he would have enough assets to be self funding without having to use up your mother's assets. (Though theoretically these assets may be at risk.)

There is currently a trust however, and first of all the trustees should notify Revenue & Customs of its existence. The trustees must meet at least once a year and must consider whether to give any of the beneficiaries any income or capital. They must also decide whether to loan any assets to the surviving spouse (ie the half of the house) or indeed whether to ask the spouse to repay the loan. Minutes must be kept of the meetings.

If the trust property receives income (such as in your case) then special rules apply. The rules are quite complicated and the trustees must fill in a tax return and pay any additional tax on the income. This will vary depending on the type of income (ie dividend or interest etc) and how much.

Where income is then paid to a beneficiary (ie your father), then depending on his status as a tax payer, any surplus tax paid by the trust must be reclaimed.

Though it's not impossible to do this yourself, all of this usually requires the payment of fees to a professional.

By this point you may be feeling inclined to end the trust. However there are some potential advantages in retaining it. They are:
1) your mother's property is safeguarded from your father remarrying or frittering it away;
2) if the value in the fund surpasses the nil rate band (unlikely in your case) then you potentially could save IHT in the long run;
3) care fees mitigation (as discussed above)
4) If any of the beneficiaries are involved in rocky marriages or risky business ventures;
5) rules could change again under a successive government, making the inclusion of a trust a valuable advantage;
6) If you or your siblings are wealthy, then discretion to pass down to grandchildren (if grandchildren are themselves potential beneficiaries).

If your instinct is to bring the trust to an end then you don't need to pay for a Deed of Variation (though you could if you wish). The trustees would simply need to have a meeting and decide to appoint the assets to your father.

There are pros and cons in ending the trust, but I hope that this will assist you in reaching an informed decision.

Incidentally your father could not put money into your mother's trust as the Will should stipulate that the assets forming the trust property will be from your mother's estate, but he could set up a new trust in his lifetime or in his will if he wanted.

ian2deep_2

localhero wrote: »

Hi ian2deep








First of all for inheritance tax purposes, if you ended the discretionary trust and appointed the assets to your father - if done within 2 years of your mother's death (ie before Jan 09), then it will count as though she had left her estate to your father in the first place.

He would then have the benefit of 2 nil rate band allowances when he dies (currently £624,000). Therefore the combined estate worth £592,000 is just beneath it. The combined threshold will be worth £650,000 from next April and then £700,000 from 2010.

So from that perspective it may be worth considering.

Since your dad has got assets worth £385,000, in the event of him requiring long term care, it is likely he would have enough assets to be self funding without having to use up your mother's assets. (Though theoretically these assets may be at risk.)

There is currently a trust however, and first of all the trustees should notify Revenue & Customs of its existence. The trustees must meet at least once a year and must consider whether to give any of the beneficiaries any income or capital. They must also decide whether to loan any assets to the surviving spouse (ie the half of the house) or indeed whether to ask the spouse to repay the loan. Minutes must be kept of the meetings.

If the trust property receives income (such as in your case) then special rules apply. The rules are quite complicated and the trustees must fill in a tax return and pay any additional tax on the income. This will vary depending on the type of income (ie dividend or interest etc) and how much.

Where income is then paid to a beneficiary (ie your father), then depending on his status as a tax payer, any surplus tax paid by the trust must be reclaimed.

Though it's not impossible to do this yourself, all of this usually requires the payment of fees to a professional.

By this point you may be feeling inclined to end the trust. However there are some potential advantages in retaining it. They are:
1) your mother's property is safeguarded from your father remarrying or frittering it away;
2) if the value in the fund surpasses the nil rate band (unlikely in your case) then you potentially could save IHT in the long run;
3) care fees mitigation (as discussed above)
4) If any of the beneficiaries are involved in rocky marriages or risky business ventures;
5) rules could change again under a successive government, making the inclusion of a trust a valuable advantage;
6) If you or your siblings are wealthy, then discretion to pass down to grandchildren (if grandchildren are themselves potential beneficiaries).

If your instinct is to bring the trust to an end then you don't need to pay for a Deed of Variation (though you could if you wish). The trustees would simply need to have a meeting and decide to appoint the assets to your father.

There are pros and cons in ending the trust, but I hope that this will assist you in reaching an informed decision.

Incidentally your father could not put money into your mother's trust as the Will should stipulate that the assets forming the trust property will be from your mother's estate, but he could set up a new trust in his lifetime or in his will if he wanted.

Hi LocalHero,
Grateful thanks for all the useful information. I think you are assuming that the Trust is in force, but it has never been registered with anyone -see my original post.

So to complete the picture I still have the following questions:-
1) As a formal Trust for my mother's estate is not in place, do I need to do anything if we (my sister and I) as Executors decide not to form/register the estate into a Trust? Other than of course to hold a properly recorded and minuted meeting as you said.
2) Conversely, if we decided to formalise the Trust, how do I set it up? Are there any forms and instructions I need to obtain?

I think given answers to the above and all you previous information, we should be able to make an informed decision.
Thanks once again.
Ian2deep

localhero

Ian2deep,

If your mother left her nil rate band into a discretionary trust in her Will, then the trust already exists.

The task of the trustees is to manage the trust. If you decide to end the trust by appointing the assets to your dad, then the trustees must hold a meeting and make a unanimous decision.

If you involve a solicitor, they will draft a 'Deed of Appointment'. You could use a less formal document, so long as it's clear.

Keep minutes of your decision (ideally with your dad's Will).

If you decide to stick with the trust then you will need to let HMRC know,by completing a 41G. HMRC will then send the trustees an annual return each year.

The Trustees will then need to meet once a year to decide what happens (if anything) to the trust fund.

Trust administration can be complex and so you may require professional assistance.

ian2deep_2

localhero wrote: »

Ian2deep,

If your mother left her nil rate band into a discretionary trust in her Will, then the trust already exists.

The task of the trustees is to manage the trust. If you decide to end the trust by appointing the assets to your dad, then the trustees must hold a meeting and make a unanimous decision.

If you involve a solicitor, they will draft a 'Deed of Appointment'. you could use a less formal document, so long as its clear.

Keep minutes of your decision (ideally with your dad's Will).

If you decide to stick with the trust then you will need to let HMRC know,by completing a 41G. HMRC will then send the trustees an annual return each year.

The Trustees will then need to meet once a year to decide what happens (if anything) to the trust fund.

Trust administration can be complex and so you may require professional assistance.

Thankyou Localhero,
That's excellent help.
Best Regards
Ian2deep

Moneypenny100

Hi all,

Hope someone can point me in the right direction?????

For years my husband and I have talked about drawing up a Will but for too many reasons to list just never got round to. However a few months ago I sent off for a Will to be drawn up as part of a free Union membership.

The joint Will arrived this morning and having taken the time this evening to read the company drawing up the Will have advised that our request to give our 2 children equal share of inheriatance at the age of 21yrs would mean additional tax to be paid due to changes announced in Budget 2006???

I admit I am lost in the world of taxation and want to keep things as simple as possible. Our Will has been kept simple as neither my husband or I wish for it to be complicated. Whoever dies first the other party will receive total assets, in the event of us both dying the children will receive.

How can I ensure max inheritance is kept for the children as giving it to them at the standard age of 18yrs old we feel is too young. Should I seek to meet with an IFA to look at options or is there now way round this dilema??

Any advice welcome.

localhero

Hi Moneypenny100,

The IHT charge applies only where you and your husband die before your children have reached the age of 21.

The tax charge is based broadly on the amount above the nil rate band, charged pro-rata of 6% over 10 years (the same as a discretionary trust).

Therefore if you both die before your children have reached 18 and leave them £500,000, then when the fund is paid out at 21, the tax would be worked out roughly as follows: (assuming the nil rate band at the time is £350,000)

£150,000 (the amount over the nil rate band) x 1.8% (3 years @ 0.6% per year) = £2700.

If your children are older than 21 when the second of you dies, then there will be no additional tax.

This little wheeze was dreamt up by Gordon Brown and is the price you pay for the piece of mind in giving the money to your children at a (hopefully) more responsible age.

There is an example here which calculates it to the nearest quarter of a year, and therefore slightly more accurate than my own crude example.
http://www.hmrc.gov.uk/CTO/customerguide/customer-guide-11-4.htm
If you understand it then you have my admiration.

You could put a clause in your will allowing your trustees to appoint the capital earlier than at 21, but at their discretion, and so if appointed to your children at 18 would then escape this additional tax.

Moneypenny100

Thanks localhero. I've taken a look at the gov example and it's as clear as mud arrghh!

Just a after thought reading your response.......In my Will we haven't made finanical provisions for our children ie money for the guardians to fund their schooling - this is partly due to cultural reasons. Can we put something in place whereby we state the family home is rented out and funds from that are used for anything related to the kids education / wellbeing etc. Upon a specified age (youngest reaching 18yrs? 21yrs?) then the property can be used/sold/rented as the children wish. Would there be any IHT to consider by doing this? Dont want to leave either thekids or nominated guardian ££ diffculties.

Thanks

localhero

Moneypenny100,

This and the previous issue is all something that the Willwriter should have explained to you properly before asking you to sign the Will.

This is often the consequences of obtaining a 'cheap/free will' available through unions and banks etc - you get what you pay for.

That said, the law says that the trustees must provide money to the guardians for the 'education, maintenance and benefit' of any of your children under 18.

It may be an idea to write a separate letter to your trustees providing guidance as to what they should provide money for (ie continuing to pay for hobbies/sports etc for example, and perhaps whether private education should be paid for). You could also provide guidance regarding what should happen to the house - but I would advise against tying their hands too much by stipulating it in the Will.

There are other alternatives, but that would mean making a new Will in any case.

There may be IHT issues, depending on the size of the fund, and the exact circumstances.

BobHolm

Hi I wonder if anyone can help. My Father has recently passed away but made a new Will two weeks ago. We have met with the solicitors and they are quoting £3,000 Fee and 1% of his estate as executors. Is this appropriate? Also he had money in his name in the UK, although the vast majority was in bonds my Mothers name after the sale of property in the UK and then in Portugal. They also have a villa and car in Portugal. Will all of this be classed as his estate and subsequently liable to 1% to be taken by the solicitors? Many thanks in advance to anyone who can help.