New Inheritance Tax threshold for couples

hardpressed

roddydogs wrote: »

What life insurance is this that covers IHT?

I have a life insurance that will pay out to my dependents so it will not be part of my estate and they can use it to pay IHT.

Willman_Rodders

Picking up on Jamessd's point a couple of posts ago ...

Yes there are potentially significant tax savings available if the IHT NRB allowance is used on first death (over carrying forward and 'uplifting' the 1st-to-die IHT allowance to the surviving spouse) but only if:

1. the rate of return on the capital retained [within the trust or gifted away on first death] is greater than the growth in the IHT NRB allowance; and
2. the joint estate is worth more than two NRB allowances added together i.e. presently £600,000.

Where the estate is less than 2 x NRB factors (such as rate of return, duration, and size of the estate) need to be factored in. As an example, using Jamessd's growth rates of 12% for the capital, 6% for the IHT NRB allowance increase, and a period of 10 years then the breakeven point is an initial estate size of £345,963. If the estate was larger than this at the time of first death then gifting away the allowance at first death would prove [marginally] more tax efficient. Change the parameters to 6% capital growth, 3% IHT allowance growth, and 10 years duration and the 'breakeven' figure rises to £450,261.

If the estate is more than 2 x NRB allowance at time of first death then for each 1% the capital outperforms/exceeds the increase in the NRB allowance there is a potential initial tax saving of £13,000+. So if the capital growth rate was 2%, and the IHT allowance rate was 1% p.a. the potential tax saving would be £13,725 - according to my calculations.

If the rates were 12% capital growth, and 11% IHT growth (i.e. still retaining a 1% difference but higher rates overall) with a term of 10 years the saving is projected at £31,971.

Where the spread of rates widens so to does the potential tax saving. Using Jamessd's original figures the potential identified savings a re £157,800 if the NRB allowance was used on 1st death.

So in conclusion:
1. the potential savings increases as the growth rates/rates of return increase; and
2. as the difference between the capital growth and IHT NRB allowance increases.

The above however is only a mathematical calculation. These figures do not take into account taxation, charges, attitude to risk, the risk that Customs and Revenue may reject any trust as a sham, the cost of professional advice etc. As localhero states - all these need to be considered by the testator before making a decision as to which route is best - the professional will-writer will/should explore these with their client.

And now, just to add to the options. Let's suppose that rather than use the NRB allowance on 1st death we ensure everything is passed to the surviving spouse on 1st death. Then, shortly after, he/she gives away £160,000 to his/her children. After 7 years the gift falls outside of the widow/er's estate for IHT purposes, and yet the widow/er have still retained the unused former spouse's NRB allowance. The end result is that they have saved more in potential tax than Jamessd's example and not had to rely upon achieving a 12% growth rate on their capital to achieve it.

Food for thought?

The dabate continues ... but hopefully the above demonstrates the need to seek professional advice.


Roddydogs; you asked what type of life cover covers IHT. The plans are simple life policies that are designed, when set up, to cover your projected IHT liability. So they may be :

1. a whole-of-life plan where a client has an ongoing projected IHT liability; or
2. fixed for a set period when further estate planning is projected to take place that will remove the need for the plan;
3. fixed for 7 years where a person has given away a sizeable asset; or
4. where the asset given away exceeeds the NRB and taper relief applies then a plan for 7 years but the value of the plan reduces inline with the taper relief available.


In all cases the policy must not pay the proceeds into your estate.

Goosander99

localhero wrote: »

Hi Bristolpilot,

Assuming your dad had not used any of his nil rate band allowance, then yes your mother would have twice the prevailing nil rate band at her disposal when she dies.

Since the trust has been in operation a while, I don't think it's possible for the two allowances to be used in the same way - though I may be wrong.

What is clear, is that if the trust had been in existence for less than 2 years and the trustees had made an outright gift of the whole sum to your mother, then it would have been regarded as if your dad had gifted it to her himself. In which case she would have the double allowance.

I'm sorry that your tax planning has been scuppered and I can't give you a more positive answer.

My Mother is in the same situation as Bristol Pilot. Dad died in 2000, with NRBDT. However this was made up of house and furniture. My Mother has lived in house and used furniture since (but the trustees have not officially distributed these assetts to her). We had been concerned that this tax planning had failed as she has not paid rent for the house, nor is there a debt scheme in operation. Nothing has been changed at Land registry, and no tax returns for trust or any other paperwork has been completed. Can we now use what was before to our disadvantage to our advantage - say trust distibuted to my mother within 2 years, and therefore she can claim double nil rate band, plus we avoid CGT and 10 year charge etc. Or are we going to have worst case situation where they say Dads NRB was used, but now all assetts are my mothers so will be part of her estate.

Thank you for your help

localhero

Hi Goosander 99,

In order for your mother to claim the 100% uplift of her NRB, your dad must not have used any of his nil rate band by making gifts to non exempt beneficiaries (ie to others apart from his spouse or charity).

Where he has a NRBDT in place that will utilise his nil rate band & so will leave your mum with a single NRB to use.

The exception is where within 2 years of the first spouse dying the trustees give the assets to the spouse.

What the trustees are expected to do is notify the Revenue at the outset and thereafter hold an annual meeting to decide what to do with the assets - ie loan them to spouse in exchange for an iou or charge/give assets to other beneficiaries/call in the loan from the spouse. The trustees must keep minutes of these decisions.

As the trustees haven't loaned the assets to the spouse, this might have caused a problem on the death of your mum with Revenue and Customs. The issue of IHT has to some extent been nullified with the recent changes, but the trustees must make a decision soon otherwise the issue will become complicated to sort out when your mother dies. Particularly as the Revenue will want to see your dad's Will.

A possible course of action is for the trustees is to request an IOU from your mother in exchange for the trust funds. (It is not essential to transfer the house.) There will be no CGT issues as your mother will have full principal residence relief. If the value of the trust fund increases beyond the nil rate band there will be 10 yearly charges and an exit charge. On the assets you've described, I don't think a tax return is required in any case.

The advantage to doing this is if your mother requires long term care, your dad's estate (ie the trust fund) is safeguarded. But your mother's share of the property won't be - unless she has certain other dependants living with her if/when she requires care. In addition if she remarries, the trust fund will be safegaurded in the same way for the other beneficiaries.

I don't really see many advantages to gifting outright the trust fund to her at this stage, particularly as it will be hard to prove it was done within 2 years.

In my humble opinion, I feel that it might be best to keep with the trust fund, just get the paperwork in order. Perhaps contact someone at the Society of Trusts and Estate Practitioners for some professional advice.

Dustykitten

localhero wrote: »

Hi Bristolpilot,

Assuming your dad had not used any of his nil rate band allowance, then yes your mother would have twice the prevailing nil rate band at her disposal when she dies.

Since the trust has been in operation a while, I don't think it's possible for the two allowances to be used in the same way - though I may be wrong.

What is clear, is that if the trust had been in existence for less than 2 years and the trustees had made an outright gift of the whole sum to your mother, then it would have been regarded as if your dad had gifted it to her himself. In which case she would have the double allowance.

I'm sorry that your tax planning has been scuppered and I can't give you a more positive answer.

Hi all we are in the same postion as Bristolpiolt with a DT which has been in place for just over 2 years. I understand that it is just bad luck that the tax situation has changed and acknowledge that you can only act in what you think is the best way at the time.

Can somebody please tell me where to find out about how the capital is taxed on a trust if it is distributed. At present we only take the interest out each year with a tax pool and then mum can reclaim the difference between the 40% and 22% on her tax retunn.