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

Annie_48

Hi,

I am a single with 2 teenage kids.
I have 2 properties valued at approx. £155 each and with life insurance policy etc, my estate will be around the £350k mark.
I'll be leaving a property each to kid, (when 16 - in Scotland)
but what can I do re saving tax on the balance of £25k?
One child is 15, the other 16.

What's a trust?
How do trusts save on IHT?


I thought it was a simple matter but the more I read on it, the complicated it gets!

Hope someone can help.

Annie

holly_hobby

Hi Annie,

There are various ways to mitigate IHT if your NET estate (ie its value after discharge of all debts and liabilities) is likely to exceed your nil rate exemption threshold (including basic writing of any life assurance under trust which means its sum is excluded from the valuation of the estate).

HMRC have several guidance pages on IHT, beginning at the basics, and discussing exempt tsfs, allowances, workings etc. Here is a link with basic advice to the salient areas such as allowances, exemptions (inc qualifying gifts), and how on death IHT is applied. http://www.hmrc.gov.uk/inheritancetax/

With regards to planning inc the use of trusts this can be complex, and is a specilist area of advice, getting it OR the effected trust wrong can be catastrophic.

Accordingly it would be foolish to base your actions on any forum advice, and I would recommend speaking to a qualified IHT practioner in your area. Whom yes will have a fee, but this will be outweighed by their assistance in examining your financial circs, and appropriate advice inc the establishment of any trust(s) for your assets (nb - a property can not be placed into trust whilst mortgaged), which they consider appropriate and beneficial to your needs, circs and requirements .

Hope this helps ...

Holly x

John_Pierpoint

Annie_48 wrote: »

Hi,

I am a single with 2 teenage kids.
I have 2 properties valued at approx. £155 each and with life insurance policy etc, my estate will be around the £350k mark.
I'll be leaving a property each to kid, (when 16 - in Scotland)
but what can I do re saving tax on the balance of £25k?
One child is 15, the other 16.

What's a trust?
How do trusts save on IHT?


I thought it was a simple matter but the more I read on it, the complicated it gets!

Hope someone can help.

Annie

The best thing you can possibly do for your kids is encourage then to be self reliant, develop a wide ranging set of interests and encourage them to plan for pushing themselves off on a gap year when they are 18.

Fiddling about with £25k in fiat currency is a very minor concern, when compared to developing a sense of person and purpose in their lives.

http://www.amazon.co.uk/Giving-Inheriting-Which-Essential-Guides/dp/1844901181

The simplest form of trust is a "nil rate band trust", where the government allows the creation of a money box worth up to the nil rate band for Inheritance Tax (£325k at present). but it requires looking after like the financial affairs of an elderly relative and it is definitely not worth doing with only £25k at risk of 40% tax. .
Presumably with teenage children, you are not likely to die in the next few years?
Currently you need a simple will to appoint someone to be guarding of the children and their inheritance until they are 18 (Scottish rules might vary?!). Then you will enter the uncertain zone where you fear they will make "unsuitable" relationships and/or "go off the rails" - but if they have inner resilience, that should not be too much of a risk.

You obviously have great faith in your children "in Scotland at age 16" - I had some misgiving with mine aged 19 and will never forgive Gordon Brown for reducing the 25 age limit for accumulation and maintenance trusts to 18, the last thing the country needs is irresponsible 18 year old "trustafarians" buying motorbikes on which to kill themselves.

batgirl21

Hoping for a answer, believe it to be a quick question

My MIL has a house valued around £150000 and possibley upto £200000 with her contents. If she passes away am I right in assuming from this my husband will have no tax to pay on her assets atall and our only costs will be related to her funeral and coveyancing if we should sell her house?
Thank you

John_Pierpoint

The executor of her will pays the costs of the funeral and gathering in the assets from the substance of the estate. From the facts given it would appear that the estate is below the IHT threshold so the expenses gathering it in and distributimg it should be along the lines you have suggested.
Is there likely to be a will or could the estate be intestate?

http://www.adviceguide.org.uk/england/relationships_e/relationships_death_and_wills_e/who_can_inherit_if_there_is_no_will___the_rules_of_intestacy.htm

Note the little interactive map for the rules in different jurisdictions.

holly_hobby

Current nil rate band is 325k per person (upto 650k if there is a decd spouse whom had not used any or all of their own nil rate band). So with a total estate of circa 200k there is no IHT liabiity on her estate.

The executor or administrator (if she dies intestate ie with no valid will), has a legal obligation to settle all outstanding debts of the decds estate.

They are settled in strict order of mortgages and secured loans, funeral costs, proceeded as a whole by credit cards, personal loans and utility bills etc - until all are discharged (repaid) OR the monies from the estate and disposable assets is exhausted (which you should note may mean selling the proprety to settle any outstanding liabilities).

Its only after all debts have been provided for and/or paid that the residual estate may be distributed as per the deceads will or in accordance with the laws of intestacy.

Hope this helps

Holly

Ifinancialnumpty

We have been in touch with an asset protection company who advised us to split our joint assets including the house, set up two 'Will Trusts', one for each of us. On the death of the first spouse that portion of the assets goes into the trust which means that the surviving spouse does not inherit, but will have the benefit of the Trust assets. We are given to understand that doing so should help us by:
1. ensuring that our joint assets which will just breach the current tax threshold are split, therefore nullifying the tax burden on the death of the first spouse.
2. offer, (currently), protection against care fees as each will own half of the formally joint assets including the house. On the first death that half of the assets goes into the Trust rendering the house unsalable as the trustees will not agree to the sale. this will only protect half the assets but also introduces a third party into any negotiations with councils regarding top up fees for better accommodation should the surviving spouse need care.
3. ensures that our children, will have the benefit of any funds left on the death of the surviving spouse. and that they can take those assets as a lifetime loan from the Trust rather than perhaps being subject to inheritance tax on the estate.
I had never heard of this option until a few weeks ago and have asked around those of our friends whom we thought financially savvy but none had heard of it which makes me slightly anxious. fees for this are £1380.
does anyone have any knowledge of this type of trust?

jamesd

A will can create many types of trust, including one automatically except in Scotland if a minor inherits something.

You should ensure that you understand the tax treatment of a trust before thinking that not paying inheritance tax is a benefit. Likely to be higher rate tax for the life of the trust and that can prove very expensive for basic rate tax payers.

Reason 1 appears to be bogus. The nil rate band is now transferable between spouses so after the first death the limit is now two £650,000, not just £325,000. But if remarriage happens it's possible to use a trust to get up to four nil rate bands and for estates well in excess of £650,000 that can be useful.

Reason 2 has some merit but there are other approaches like leaving part of the property to children on the first death. One disadvantage of direct leaving is that it is then owned by that person and their creditors could seek it if they became insolvent, even if they can be trusted not to seek a sale just to get at the money. A way to address this is to establish a life interest trust that gives the surviving spouse a life interest to live in the portion of the house while the children then get the capital after the second death.

Reason 3 has tax consequences that may turn out not to be beneficial if the children are not higher rate tax payers.

If your estate is only a bit over £650,000 there are probably simpler methods available to you, like:

1. regular gifts out of income that can prevent the estate from growing in value.
2. gifts out of capital that will be free of inheritance tax if you die more than seven years later.
3. paying the premiums of a life assurance policy with the children as the beneficiaries. The insurance payout is outside the estate and tax free.

I wonder whether your estate really is so far over £650,000 in value that it's worth this sort of planning? It seems that a little planning with a normal solicitor could take care of things quite comprehensively without going to a firm that offers a narrowly focused choice and which appears to be possibly not mentioning the transferable nil rate band.

While it is true that a trust can prevent a property from being owned there are three significant considerations around this:

1. Whether it is desirable to be involuntarily placed in the cheapest home the local council can find or whether it would be better to have the choice that being a self-payer brings.
2. The proposal to cap the cost of the non-residential part of care costs and to make it mandatory for councils to offer loans until death that mean that the costs can come out of the whole estate, not potentially force sale of a house while still alive.
3. How much above income the costs of care are and what resources are available to pay those costs. If the income is say £30,000 and an estate has a few hundred thousand Pounds of assets its entirely possible that the estate can easily fund the cost of care for the two to four years during which it is most likely to be needed. Most with a need to consider the nil rate band issues is quite likely to have an estate that can pay these costs.

You should also consider whether pension income for anyone with a personal pension is at least £20,000 from guaranteed sources like the state pensions, work defined benefit pensions and annuities. Someone who has that much income can take all of their pension pot at any time, with the income above the 25% tax free lump sum added to their taxable income in the year(s) in which it is taken. This can allow efficient moving of money from a pension into a pension for a spouse that can be inherited by children tax free provided no benefits (income or lump sum) have been taken from it. The money can't be paid into a pension in the name of the first person because the act of using flexible drawdown effectively bars future pension contributions in that name.

batgirl21

Thank you very much there is a wil lin place and no partner so will just be debts to be paid.

Really appreciate your help

GemQuin

Hello,

I wonder if anyone can help. Hope this is the right thread.

I own the house my Mum lives in (mortgaged with my partner– about £140K owing) and she owns the house I live in outright.

We want to swap the deeds around to avoid any confusion if any of us die. Is this possible? I can’t port my mortgage at the moment because I am currently working as a freelancer and Santander will not lend me the money without a permanent job (I was full time when I took out the mortgage 4 years ago).

To complicate matters myself and my partner now have a child, but we are unmarried.

So my question is how can I simplify this situation without losing out financially on IHT and being legally covered if any of us were to die?

Many Thanks for your advice.