Passing savings to children to minimise Inheritance Tax

GeorgeDoors

Malthusian wrote: »

So not a nice way then, not when it is fairly easy to pass capital to your children with 0% tax applying.



It also means the child (and their spouse) might never see a penny if the trustees don't think they deserve it. Who are they preserving it for? A grandchild who statistically will probably also get divorced at some point?

What do the trustees do if the child spends the loaned money or gives it away? Most people want to leave assets to their kids when they die, not debts.

The trustees would have absolute discretion yes. However any adviser worth their salt would make sure they completed a 'Letter of Wishes' and reviewed it regularly during the settlors lifetime. They (trustees) have to comply with the trustees act, most carry out whats in the Letter of Wishes unless there is a very good reason not to (gambling / drug problem where passing large sums of money might be problematic etc) This is another very good reason to appoint a professional trustee service and not use lay people (spouse, kids, friends etc) as personal opinions and family politics can cloud matters.

Your comment regarding the divorce scenario leads me to beleive you assume the assets will be assigned or appointed out. Its about more than putting a tick in the box at 7yrs and saving 40% IHT. This should be about protecting wealth and inter-generational tax planning. Selecting the correct trust for the client circumstances, setting it up correctly (joint or single settlor considerations) then deciding what is the best investment to hold within the trust (its very likley the beneficiaries will be income tax payers, but most would use an income tax assesable bond, why?) and then making sure the trust has a loan facility. The loan facility is probably the single most important feature in a trust. Its a massive oversight by many sadly.

Anyway, back to the point. When thetime comes, the adviser should consider what method would be best to get the trust assets to the beneficiary. The loan facility, IMO, should be considered the default option (for all the planning opportunities it offers the family) if there is a good reason not to use the loan facility, and its well documented by the adviser (it could come back to haunt them if they dont) then assigning or appointing out the assets may be appropriate. However, the assets have exited the trust and now sit in the beneficiaries estate, may have created an IHT liability for them or more likely made an existing one worse, also subject to social impacts like divorce, and of couse could be subject to IHT / care fees of the benefieicary in later life. A conversation needs to be had in the round with the family, end to end, and not just about saving IHT at year 7. Do advisers cover that and document why they have discounted the loan, and confirm the route they are going down and the potential implications? I guess many dont...

Loans - a loan agreement is signed, its a debt agaisnt the beneficiaries estate (its how you protect money from divorce etc, its not theirs it belongs to the trust) typically, the trustee would consider the circumstances, how many beneficiaries, size of loan requested against value of trust, and if need be use a charge (typically against a property) to protect the assets for other / future beneficaries. On death of the beneficiary the loan will get repaid, and available again for the next generations, and so on. Never paying any further IHT as it passes down the various generations.

Again, im guessing here that options on passing trust assets are generally not discussed with settlors when setting up or beneficiaries once the settlor has died. Thats probably why most asstes are either assigned or appointed out without paying any lip-service what so ever to any of the other options. Anyone looking to use trusts should seek advice from someone active in this area. The devil is always in the detail.

Malthusian

adonis10 wrote: »

Her grandmother has assets of circa £850k which includes part ownership of a house (her share is currently worth in the region of £150k at today's MV of the house) and she is trying to help with IHT planning. Her GM lost her spouse 2 years ago and so has taken on his £325k allowance giving her £650k and whatever is available via RNRB. Her will is solely going to her daughter (one of the other part owners of the house - bought in when her spouse died as needs some care which daughter provides) - would this impact the amount of RNRB available? Would it be pro rated because she only owns 1/3 of the house?

[STRIKE]Unless she can claim downsizing allowance she gets £150k of RNRB. The rest is wasted.

Arguably her daughter should sell her the part-share in the house back and take some of the mother's liquid assets in return, in order to increase the amount covered by the RNRB. If it was sold on commercial terms the 7-year rule wouldn't apply.

That said, I can easily see it being more trouble than it's worth and other IHT planning to deal with the £50k over the combined nil rate bands could make more sense. [/STRIKE] *edit* - Subsequently proved wrong due to new information.

adonis10

Tom99 wrote: »

No. Assuming the spouse did not use his RNRB then GM would have £350k RNRB from April but it would be limited to the £150k value of GM's interest in the house.
When did she sell the other half to daughter? Not sure if that would count as 'downsizing' if the sale was within the time limits which it looks like it was.

Thanks. No, he did not use his RNRB - whatever he had simply passed to his wife (they jointly owned their house).


She didn't sell to her daughter. What happened was she didn't want to live in the home she owned with her husband so sold it for circa £390k and bought into her daughter and son in law's house (was initially going to buy a flat but did not want to be alone) by effectively paying off their mortgage and thus owning whatever % that equated to (roughly 1/3) as she a) wanted to still 'own' something and b) it made sense from a care perspective.


Would that change anything?

Tom99

What date did she sell the house for 390k on?

adonis10

Tom99 wrote: »

What date did she sell the house for 390k on?

I’m not sure exactly when but fairly sure it was in the first half of 2018.

Sold before buying into the house.

bostonerimus

harrypeters wrote: »

I'm not worried about the house (at least for IHT purposes - care home fees are another story). It's the other savings that are the 'problem' (though I fully admit it's a nice problem to have) and at least these are easier to give away than property, with fewer complications.

I think the house is a major IHT/lifestyle issue if it is almost half of your estate's value as it locks up capital that you might need to live. If we simply have the goal to get the estate below 1M then down sizing to a home worth the combined RNRB would free up 350k for you to gift and if you gift another 150k from investments your estate is now worth 1M and you have 650k liquid to live on. If you need money for care it looks like you won't necessarily lose the RNRB if you sell the house and move into care.

Tom99

adonis10 wrote: »

I’m not sure exactly when but fairly sure it was in the first half of 2018.
Sold before buying into the house.

I think that will count as downsizing, so £390k of her current assets can be counted as residential property meaning the full £350k RNRB could be claimed from April in addition to the £650k NRB.

Malthusian

I agree with Tom, based on the new information that we've now been permitted, and this would seem a good time for everyone to review post #7 again.