Opinion on IOU Clause

SeniorSam

I would like to guage the opinion of the professionals on the present inclussion of the IOU clause in a Will to satisfy the nil rate band.

As I understand, the normal wording used has been either 'the nil rate band allwance' or. ' up to the nil rate band allwoance' , but just thinking aloud about this with the following idea.

The adoption of the IOU has been to shelter the allowable rate, but in the past, with the disadvantage that 100% of the allowance has been used and any future increases that may be sanctioned in the future would be lost.

Would it be possible to change the clause to 'up to the nil rate band allowance at the time of my wife/husband's death if she/he has not predeceased me', which may then alloow for increases.

.................Or am I being too hopeful that the Revenue would allow this?

Sam

G6JNS

For the benefit of those who are not familiar with the IOU procedure please could post an explanation? I can't see why the clause you suggest should not be acceptable.

getmore4less

Around the time of the transferable nil rate bands IOU indexing was discused not sure on the tax treatment.

May be relevent to what you are trying to do

SeniorSam

For those who are unaware of how an IOU clause can work to save the nil rate band allowance when the first spouse dies, this is an explanation.

Wills can be written to automatically set up a discretionary trust on first death, (no paperwork to do), so that the nil rate band, ( £325,000 at present), can be allocated to the Trust and become 'ring-fenced' and protected. However, allocating that much to the Trust at that time may restrict the survivor in doing what they would wish, even with the consent of the Trustees to make loans or gifts, which they would have in the Will.

By using an I.O.U. Promissory note that the survivor would give to the Trustees, who in turn legally register that against the property in the Land Registry, the survivor has total control of all assets until they die, when the nil rate sum would be paid to the Trustees.

Before the tax changes in 2007, this was common practice to ensure saving of the nil rate band of the first to die, but the changes then allowed the nil rate band allowance to be carried forward and if all assets were passed to the spouse on the first death, then the final allowance would be both nil rate bands (£650,000 as it is at present).

Using the IOU clause in Wills after that change could lead to the final allowance being lowered because if the allowances increased in latter years, the first to die had already used 100% of their allowance and could not benefit from any increases. Only the increases for the last to die would be increased.

Each person must make their own minds up about using the IOU clause or not, but personally, I feel that it would be better if my wife died first, that she has total control of all assets and can continue investing in the same way to be comfortable and not worry if she will need to ask Trustees for loans from a Trust.

Alternatively, after the Promissory note has been registered, if there were a surplus of capital in the survivors possession that was not needed, say from the moving to smaller property, capital can be repaid to the Trust to reduce the debt. Even then, the Trustees have the power to gift or loan capital or income from the Trust to the spouse if needed.

All growth of assets within the Trust do not add to the value of the estate of the spouse, so there is benefit in using the Trust. If assets or investments in the Trust are 'income producing, then income tax will need to be accounted for by the Trustees, but if the assets just have growth, then only Capital Gains tax may apply after allowances.

The earlier post was to solicit opinion from professionls, who may feel that the allowance could be increased using the IOU route.

Sam

ferger

I'm slightly confused as to what value the IOU process has, now that the nil-rate band can be transferred?

SeniorSam

Reason given above, which you have obviously not understood. In what way are you still confused?

ferger

I didn't say I was still confused, I said I was confused. Perhaps because I am a bit dim (although all other indicators would suggest otherwise) or perhaps because your explanation isn't particularly clear. There's no reason to be so pompously obnoxious in your response.

Your 'explanation' says:

Para 1-3 this is how it works
Para 4 this is why it, apparently, lost its point in 2007
Para 5 this is why it may not be great after the 2007 changes
Para 6 'each person needs to make up their own mind' (leaving me wondering why they would choose to do it, given what's gone before)
Para 7-9 tax pontification about your proposed change

I think it's when you write things like 'Only the increases for the last to die would be increased' that I conclude that it's confused...

SeniorSam

'Only the increasees for the last to die would be increased' means that if there were increases in the nil rate band allowance after the IOU clause has been used in a Trust, that would take up 100% of the allowance. That may then reduce the overall allowance with the second to die having a larger allowance.

The original post was to ask if it seemed plausable to change the wording to perhaps get the higher allowance.

Only trying to be helpful .............

Sam

ferger

But I don't understand what the value is post-2007, as the surviving partner gets double the allowance if all the assets have passed to spouse anyway. I don't see anything in your explanation that tells me that either.

getmore4less

The main reasons for the trust are ring fenced assets

They grow reduced tax liability(IHT tends to be more than CGT).
No claim for care fees from the assets.

The IOU bit just means there is a debt to the trust.

getmore4less

The issue for the question asked is how much can you increase the return to the trust without HMRC deciding it is IHT dodge.
Having the asset inthe trust grow is fine but loaned out it gets more complicated.