Inheritance Tax and Trusts

Carlisle1967

Hi all,

Just a few quick questions without going into massive amounts of detail.

Following a death of someone who was a tenant in common, and has left their money and share of property in a trust for their children.

Would this be subject to inheritance tax?

Property share is £350K and approx £150k in money.

Trust states that the surviving partner has a life interest in the property and the money can be used if needed to improve their quality of life.

I think this has been done to protect against any possible future care home costs.

 

RAS

It helps to keep all your queries in one thread, as this answers your other query.

There is no IHT to pay on assets transferred to the second spouse and the whole estate is under the IHT limit anyway.

You don't need to see a solicitor about setting up the trust. You might want to post up the exact wording minus identifiers as that details the terms of the trust.

The executors do need to register the trust with the HMRC within 2 years of the death.

poppystar

RAS said:

It helps to keep all your queries in one thread, as this answers your other query.

There is no IHT to pay on assets transferred to the second spouse and the whole estate is under the IHT limit anyway.

Assuming the tenants in common were married of course. The term ‘partner’ could mean they aren’t? 

Carlisle1967

Hi sorry should have done one thread.

Yes they were married.

The situation is that a trust was set up, I assume,  to protect from future care home costs but everything should be able to benefit the other partner should they need it.

Is the fact that it is in a trust fund mean that it is still under the IHT threshold as the other spouse has a life interest in it?

Keep_pedalling

Carlisle1967 said:

Hi sorry should have done one thread.

Yes they were married.

The situation is that a trust was set up, I assume,  to protect from future care home costs but everything should be able to benefit the other partner should they need it.

Is the fact that it is in a trust fund mean that it is still under the IHT threshold as the other spouse has a life interest in it?

The surviving spouse is the beneficial owner of the assets in the trust and was subject to spousal exemption on the first death. For IHT purposes the trust forms part of the survivors estate but the transferable NRB and transferable RNRB will be able to be claimed if needed. 

Carlisle1967

Thank you again.

This is what I have been trying to explain to the other trustee who has dismissed this and was adamant that IHT needed to be paid therefore 26k has been paid to HMRC.

If this is in error is there anyway to reclaim this or is it too late as probate has been granted?

Its getting into a bit of a tricky situation as the other trustee is the one who is taking the lead and filling all the forms applying for things with limited input from me, I know that this is my problem to address and going forward I am adamant this will change no matter how uncomfortable our relationship becomes.

Keep_pedalling

I think the two of you need to sit down with an accountant as it appears your sibling has made a right hash of this. 

Carlisle1967

I couldn't agree more.

I am not a sibling to the other trustee and it is their parent that has passed away so maybe I have been not as proactive up to this point.

Even now they will not entertain the fact that the IHT was wrong, I suggested that the solicitor who drafted the will could deal with the probate and set up the trust but they were adamant that this could be done by us.

I am not a direct beneficiary of the will, and it clearly states how they wanted things divided up between their children, however the other trustee thinks that this is unfair and I don't want to be put in a situation where i have no control over things and they do as they please.

What would be the way forward if my input is dismissed?

Could I go to a solicitor or accountant on my own?

Keep_pedalling

Carlisle1967 said:

I couldn't agree more.

I am not a sibling to the other trustee and it is their parent that has passed away so maybe I have been not as proactive up to this point.

Even now they will not entertain the fact that the IHT was wrong, I suggested that the solicitor who drafted the will could deal with the probate and set up the trust but they were adamant that this could be done by us.

I am not a direct beneficiary of the will, and it clearly states how they wanted things divided up between their children, however the other trustee thinks that this is unfair and I don't want to be put in a situation where i have no control over things and they do as they please.

What would be the way forward if my input is dismissed?

Could I go to a solicitor or accountant on my own?

Ouch! I bet you wished you had renounced now. In your situation now that probate has been obtained I would have nothing more to do with it and resign as a trustee. 

Carlisle1967

Its not so much the IHT part, I have a feeling that if I resign then I would have no input in regards to the wishes in the will.

poseidon1

Your co- trustee has made a right royal hash of things by not obtaining professional advice, and may continue down the road of outright negligence if you don't rein them in.

It is evident that property and cash are held in a life interest trust for the surviving partner, with power to appoint capital cash to that partner should the need arise.

In the meantime and depending on the age of the partner, trust law dictates that the £150k cash amount should be invested by the trustees to provide an income for the partner. Age and state of health  is a factor here, if the survivor has every prospect of a decent lifespan, the trustees also have a duty to have regard to the longterm expectations of the remaindermen ( the children ), to ensure the capital cash does not dwindle away by the ravages of inflation by retention in cash form, therefore a duty to invest with a view also to capital appreciation.

Income, generated on the cash invested is taxable on the trustees in the first instance ( at basic rate) by virtue of submission of an  annual trustees' tax return with income after tax passed to the life interest beneficiary with a 20% tax credit. This can potentially be circumvented by mandating income direct to the beneficiary, who would then be personally responsible for dealing with any income tax thereon.

Any capital gains made by the trustees in excess of the trustees' cgt allowance is taxable on the trustees.

Generally, the trustees are also  required to prepare annual Trust accounts (balance sheet, capital and income account), to demonstrate proper Stewardship of the trust funds.

The above is bit of a thumbnail sketch of how the future trust administration should proceed, if negligence is to be avoided, but hopefully suffices to show the importance of seeking  appropriate specialist advice asap.  Since annual accounts and tax returns are in point, might make sense to approach a specialist trust accountant rather than solicitor.

Incidentally, the children ( ultimately entitled to capital) together with the life tenant  are perfectly entitled to sue the errant trustee for wrongfully paying iht , if indeed this was an error.