Discretionary Trusts and Increased IHT Thresholds

saver84_2

I am trying to advise my mother on a difficult situation. My father died in January, and under his will 51% of the family home (of which they were tenants in common) is now owned by my mother, and 49% in a discretionary trust split between 5 children. The trust arrangement was only inserted into the will a few years ago, as my parents were concerned that the value of the estate would exceed the then IHT threshold and were advised that a discretionary trust would be a good way to avoid this.

However, given the recent news about inheritance tax thresholds increases for couples (which would operate retrospectively), we believe that the trust is no longer the best option. My mother has tried to get advice from the solicitor who helped write the will, however he has been far from helpful and has failed to provide clear advice, not even being aware that the increased threshold will (under current plans) operate retrospectively.

I am not 100% clear on the potential pitfalls of the trust – I had heard that Gordon Brown introduced a ‘stealth tax’ to punish couples who tried to avoid IHT with discretionary trusts of this type – and that on my mother’s death all of the children would have to pay tax on some notional value of the property. In addition, there has been some mention of my mother potentially having to pay a notional rent for continuing to occupy a property which she does not have sole beneficial ownership of – I have come across the concept of “Gift without reservation of benefit” but am not entirely clear how this operates. These two outcomes are something which my father would have done anything to avoid at all costs.

Given these potential problems, it would seem that the best way forward would be for all 5 children to sign a deed of variation, dispensing with the trust, so that my mother owns the whole property. Under the proposed IHT legislation, this could then pass to the children on her death without giving rise to IHT (the house is only worth about 350,000).

However – I am aware that I am not fully informed, and feel confused after trying to make sense of the numerous articles I have been trawling through – some of which I am sure are out of date! Any advice on the situation would be much appreciated.

RayWolfe

saver84 wrote: »

I am not 100% clear on the potential pitfalls of the trust – I had heard that Gordon Brown introduced a ‘stealth tax’ to punish couples who tried to avoid IHT with discretionary trusts of this type

I'm not sure that closing tax loopholes has ever been described as a "stealth tax" ... however it seems that in most cases the need for discretionary trust has been made unnecessary. Is that a "stealth tax refund"?

saver84_2

That was actually how my mother described it - possibly not 100% accurate but understandably she is distressed at the situation.

elliebean_2

saver84 wrote: »

Given these potential problems, it would seem that the best way forward would be for all 5 children to sign a deed of variation, dispensing with the trust, so that my mother owns the whole property. Under the proposed IHT legislation, this could then pass to the children on her death without giving rise to IHT (the house is only worth about 350,000).

However – I am aware that I am not fully informed, and feel confused after trying to make sense of the numerous articles I have been trawling through – some of which I am sure are out of date! Any advice on the situation would be much appreciated.

Certainly in terms of saving IHT the Deed of Variation route giving the whole property to your mother would be simpler. However, if your mother owns the property solely and needs long term care in the future, the value of the whole house could then be at risk.

EdInvestor

elliebean wrote: »

However, if your mother owns the property solely and needs long term care in the future, the value of the whole house could then be at risk.

It may be sensible to research the question of long term care funding, particularly the use of immediate need (care) annuities.


https://www.hsbcpensions.co.uk/nhfa/pdfs/is6.pdf