IHT guidance

Cyclist123

I've been following this thread for a while and would appreciate some help pls.

My wife recently passed away.  We both have mirror wills with everything left to me.

However, my wife did make a couple of gifts in the past few years and I'm trying to figure out if tax is due:

1. Property gift to our children.  Value £300k.  She passed away 2 days before the 7 years of the gift.

2. Property gift into a trust.  Value £300k.  This was made 2 years ago.


I'm not sure how much tax will be liable?

Thank you.

Keep_pedalling

Sorry for your loss. 

The gifts have exceeded her NRB by £275k and because this was only exceeded 2 years ago taper relief does not apply so it looks like the estate faces a tax bill of £110k   

poseidon1

Cyclist123 said:

I've been following this thread for a while and would appreciate some help pls.

My wife recently passed away.  We both have mirror wills with everything left to me.

However, my wife did make a couple of gifts in the past few years and I'm trying to figure out if tax is due:

1. Property gift to our children.  Value £300k.  She passed away 2 days before the 7 years of the gift.

2. Property gift into a trust.  Value £300k.  This was made 2 years ago.


I'm not sure how much tax will be liable?

Thank you.

On the  incomplete information provided, the first IHT liability could have arisen when the trust was set up 2 years prior.  Gifts into some trusts can give rise to a 20% lifetime iht rate, where the value exceeds the available NRB (unless the assets enjoyed an exemption such as  a portfolio of AIM shares).

From what you say, £300k had already been used by the property gift 5 years prior, so only £25k of the NRB was available for the later trust.  On this basis a residual £275k value for the trust became liable to 20% iht ie £55k, with a due payment date of around 6 months to a year after depending on date assets were transferred in.  So interest for late payment of that lifetime iht liability may already be running - incidentally the primary liability is that of the trustees, not the settlor.

Your wife's death 2 years afterward would trigger a further 20% liability (£55k) , but payable by her estate.

If your wife had taken professional legal advice before settling the trust, and the nature of the trust or underlying assets attracted the 20% IHT lifetime rate without her warned of the risk, this would on the face of things  suggest prima facie professional negligence. 

Perhaps you could elaborate on the form of trust created and assets settled therein?

Cyclist123

thank you for responses.

It was a discretionary trust.  50% share in property gifted.   No were not told about any immediate charge, and yes all done via solicitors.

poseidon1

Cyclist123 said:

thank you for responses.

It was a discretionary trust.  50% share in property gifted.   No were not told about any immediate charge, and yes all done via solicitors.

Sadly, based on this additional information, the solicitor erred in the sequence of gifts.

Conventional wisdom amongst more aware private client lawyers is to make the chargeable gift first ( the gift into discretionary trust) thereby accessing the nil rate band first, followed by the Potentially exempt transfer ( the outright gift of the property ).

If executed in this order, there would still be an IHT charge on the failed PET,  ie (£300k - £25k ) x 40% but at least this would wholly occur at death, rather than the situation you have at present.

If you were not advised of this lifetime charge when the trust was created, the situation worsens because the asset gifted was illiquid property meaning the trustees do not have immediate funds to pay the £55k charge themselves. 

In passing, I would add if your wife had not been using her £3,000 annual gifts exemptions  at all  over the period of both gifts , 2 years worth ( £ 6,000) would be available to reduce the 1st gift, and similarly £6,000 against the 2nd ( the rules allow unused annual gifts exemptions to be carried forward 1 year). This could save a total of £4,800 against the current IHT exposure.

Going forward, the trust is also subject to potential 10 year charges @6% on the decennial anniversary of its creation, but subject to its own nil rate band at that time. So if the NRB remains at £325k 10 years on from the creation of the trust, and the value of the 50% share of property were to exceed the NRB then the trustees would face a 6% liability on the excess.

However if the discretionary trust were to be terminated prior to its first 10 year anniversary, an IHT exit charge would be avoided. So this should certainly be explored.

Since property is involved here, there is also the question of capital gains tax.

If the property gifted outright and into trust was a 2nd property ( ie not the main residence of you and wife), was there a gain between original purchase price and market values at the dates of each gift? If gains arose in each case, did your wife pay CGT on the deemed gain 7 years ago? With regard to the gift into discretionary, was the gain at that time 'held over ' into the hands of the trustees ( ie trustees deemed to have acquired their 50% at the original purchase price of your wife? ). 

I am afraid CGT when gifting assets can be a  additional tax complication, and hopefully this was not also overlooked by the solicitor, thereby compounding the apparent  IHT negligence.

Needless to say, if action is to be taken to wind up the trust sooner rather than later then the issue of ensuring the trustees do not face a cgt charge on wind up also has to be addressed . Thankfully there is a technique to deal with this.

If none of the above tax points were covered by the solicitor on both occasions, I would suggest you consult a specialist STEP ( Society of Trust and Estates Practitioners ) solicitor or indeed accountant ( there are specialist accountants who handle theses matters as well ),  either of whom should have the competency to review the events of the last 7 years, identify the relevant tax issues that may still need to be addressed and of course determine the extent of any recourse you may have against the firm that put these strategies into play, possibly without due consideration of all the tax implications.

Finally the trust should have been registered with HMRC when it was created, so ( and to add insult to injury !) if the solicitors did not arrange for this to be done ( within 90 days ), HMRC has powers to levy a fine of £5,000 against the errant trustees, such fine to be paid by them personally  and not from trust funds. That said, your trustees would have a valid  plea for mitigation of such failure due to  not having been advised by the solicitor concerned.

For your information see below a useful  commentary by M & G wealth advisers covering some points made above. 

https://www.mandg.com/wealth/adviser-services/tech-matters/iht-and-estate-planning/trust-taxation/discretionary-trust-taxation#:~:text=into the trust.-,Settlor's death within 7 Years,full death rate of 40%