I'm trying to understand how Inheritance Tax is affected by trust wills - can anyone help please?

Emanef

We're doing our wills and have been advised to consider doing trust wills so that when one of us kicks the bucket a trust is created with the surviving spouse the main beneficiary but providing a level of protection for our young daughter to ensure she gets a decent inheritance, but I'm struggling to get my head around how putting an estate into trust affects the inheritance tax allowances and the protections a spouse usually gets. 

What I understand is that usually when someone dies, their spouse (married or civil partner) - if it's all left to them - they inherit everything without having to pay any inheritance tax? And then, because the first deceased's IHT allowance (£325k + £175k if includes home?) has not been used that also gets passed to the surviving spouse (unless it's been used by the first to die leaving something to anyone else on the first death), so when the second person dies there is 2 x (£325k+£175k) allowance from IHT on their estate - ie £1,000,000 allowance before any IHT? 

Am I understanding that correctly for a normal situation? 

So when there is a trust involved, when the first person dies and their estate (eg 50% of the house and their share of capital) goes into trust, does that still get the same exemption from IHT as a spouse would normally get? Or is that first deceased's estate now liable to IHT (presumably after the £325k+£175k allowance? 

In our situation, we've been advised to do it so that when one of us dies, that person's estate goes into trust with the main beneficiary of the surviving person. We'll change our house ownership to tenants in common so we own 50% each so, if, for example, I die first, my 50% of the house plus any savings, shares, etc I have would go into a trust of which my wife plus a chosen person would be the trustees. When she then dies a new trust is created for our daughter with it all in. 
If my estate is put into trust when I die, would my wife still get that spousal exemption, even though it's gone to a trust (with her as the main beneficiary) and not directly to her? Or would it mean that she does not get that exemption? And the trust would be liable to pay IHT on anything above the £500k on my half of the estate? 
It's so confusing! I've trying googling but can't quite seem to get the answer I'm looking for as results are either about the exemption in general or about setting up trusts, but not how IHT affects in this way! 
We're lucky that house prices are so high that we'll have a good amount to inherit, but it means that we need to be more thoughtful about it all!
Thanks (hope I explained that ok.... my brain is aching!) 

Marcon

Emanef said:

We're doing our wills and have been advised to consider doing trust wills so that when one of us kicks the bucket a trust is created with the surviving spouse the main beneficiary but providing a level of protection for our young daughter to ensure she gets a decent inheritance, but I'm struggling to get my head around how putting an estate into trust affects the inheritance tax allowances and the protections a spouse usually gets. 

What I understand is that usually when someone dies, their spouse (married or civil partner) - if it's all left to them - they inherit everything without having to pay any inheritance tax? And then, because the first deceased's IHT allowance (£325k + £175k if includes home?) has not been used that also gets passed to the surviving spouse (unless it's been used by the first to die leaving something to anyone else on the first death), so when the second person dies there is 2 x (£325k+£175k) allowance from IHT on their estate - ie £1,000,000 allowance before any IHT? 

Am I understanding that correctly for a normal situation? 

So when there is a trust involved, when the first person dies and their estate (eg 50% of the house and their share of capital) goes into trust, does that still get the same exemption from IHT as a spouse would normally get? Or is that first deceased's estate now liable to IHT (presumably after the £325k+£175k allowance? 

In our situation, we've been advised to do it so that when one of us dies, that person's estate goes into trust with the main beneficiary of the surviving person. We'll change our house ownership to tenants in common so we own 50% each so, if, for example, I die first, my 50% of the house plus any savings, shares, etc I have would go into a trust of which my wife plus a chosen person would be the trustees. When she then dies a new trust is created for our daughter with it all in. 
If my estate is put into trust when I die, would my wife still get that spousal exemption, even though it's gone to a trust (with her as the main beneficiary) and not directly to her? Or would it mean that she does not get that exemption? And the trust would be liable to pay IHT on anything above the £500k on my half of the estate? 
It's so confusing! I've trying googling but can't quite seem to get the answer I'm looking for as results are either about the exemption in general or about setting up trusts, but not how IHT affects in this way! 
We're lucky that house prices are so high that we'll have a good amount to inherit, but it means that we need to be more thoughtful about it all!
Thanks (hope I explained that ok.... my brain is aching!) 

The most worrying thing about your post is that you feel the need to come onto a public forum and ask a random bunch of strangers to explain something which the person/firm advising you (who are doubtless being paid handsomely) has apparently failed to help you understand.

Go back to them and ensure they can deliver clear, compelling guidance before you go any further down this primrose path.

Hopefully you are using a STEP solicitor...?

Emanef

Thanks for your prompt and helpful reply.

I've spoken to them a few times and they've been helpful, but I'm still not 100% myself and I wanted to do research and get it clearer in my head before I go back and have another discussion with them, that seems a fairly reasonable thing to do. 

It's a complex subject and there are a number of things to think about and understand, and there are thousands of people on here, some of those random bunch of strangers might be able to give me useful help so that when I do go back to them I have the all the right questions. I don't think that worrying at all, and I've hardly given any identifying information out. 

Malthusian

No IHT arises on the first death under the spousal exemption.

On the second death the value of the trust is treated as if it is part of the survivor's estate, and the IHT charge on the estate is apportioned between the trust's assets and the survivor's own assets. 

Both nil rate bands should be available on the second death in the usual way. Including the residence nil rate band when the home is passed to a direct descendant on the second death.

The main question here is: why do you want to use a life interest trust? Is the risk that big that the surviving spouse will spend it all and/or disinherit their own child?

A life interest trust holding assets other than a home creates a conflict of interest between surviving parent and child. (The surviving spouse will want income as high as possible and the child would rather capital growth was prioritised over income.) The surviving spouse will not have the same security and freedom as if the inherited funds were fully in their ownership and control. It may also be less tax-efficient, e.g. because the surviving spouse cannot move the money into ISAs. 

They are more commonly used when you have children that are not the children of one of the spouses (as the stepparent would not be expected to leave funds to their stepchild).

When she then dies a new trust is created for our daughter with it all in. 

Until she is 18, presumably?

You didn't answer the question of whether you are using a solicitor; does that mean the answer is "no"?

Emanef

Malthusian said:

When she then dies a new trust is created for our daughter with it all in. 

Until she is 18, presumably?

You didn't answer the question of whether you are using a solicitor; does that mean the answer is "no"?

Until she's 25, but providing for education, living costs, etc until then. 

Yes, we're using a solicitor that specialises in wills, POAs, probate, trusts, estate planning, all fully insured and regulated. 

As I said, they've been very helpful, it's more than we've taken a long time between meetings and haven't fully understood and when we're looking back at our notes we've struggled to understand what they'd said. I need to go back to them, but I thought it better to try to get a better and clearer understanding before I do, other than keep going back with more questions (I can imagine even the most patient solicitors get fed up with people taking too long and keeping coming back with more questions they could have asked earlier). 

Thanks for your reply, I'll have a proper read through in the morning. 

Newly_retired

I am in the process, with my solicitor, of completing a Will Trust to transfer ( if that's the right word) the 50% of the property which my late husband owned as tenants-in-common, to Trustees- so that ultimately, his children will get his share when I die. This was all spelt out in his will. No other funds are involved as his adult children are adequately provided for in his will. This sounds to me much simpler and cheaper than what you appear to have been advised, if I have understood you correctly.
But I am not a lawyer.
I cannot comment on IHT.

RAS

Emanef said:

Malthusian said:

When she then dies a new trust is created for our daughter with it all in. 

Until she is 18, presumably?

You didn't answer the question of whether you are using a solicitor; does that mean the answer is "no"?

Until she's 25, but providing for education, living costs, etc until then. 

Yes, we're using a solicitor that specialises in wills, POAs, probate, trusts, estate planning, all fully insured and regulated. 

As I said, they've been very helpful, it's more than we've taken a long time between meetings and haven't fully understood and when we're looking back at our notes we've struggled to understand what they'd said. I need to go back to them, but I thought it better to try to get a better and clearer understanding before I do, other than keep going back with more questions (I can imagine even the most patient solicitors get fed up with people taking too long and keeping coming back with more questions they could have asked earlier). 

Thanks for your reply, I'll have a proper read through in the morning. 

I'm not an expert on trusts but there's a huge difference between severing the tenancy on a property and using an Immediate Post Death Interest trust to ensure that 50% of the house value is secured for the child(ren) of the marriage, and a trust including other assets and continuing until a beneficiary is aged 25. 

There's various threads on here about the massive fees charged to operate the latter and the onerous tax regime.

As an aside, you'd need to ensure there was decreasing life insurance to repay the whole mortgage to make an IPDI trust work if you still have a mortgage. 

Malthusian

Emanef said:

Until she's 25, but providing for education, living costs, etc until then. 

If, on the second death, there are no other potential beneficiaries of this trust, she will be able to wind up the trust and access the money from age 18 (16 in Scotland).

Emanef

Not sure I explained it properly. On the first death it goes into trust with the beneficiary being the surviving partner, and that person being a trustee along with another with the instruction that the surviving partner can live their live as before and the trustees (of which one is that person) should take a hands of approach. On the second death it goes into trust for our daughter, with family members being trustees and instructions on how to finance her until she's 25, etc. 

We're both quite old parents (50s) and our daughter is only 7, so the thinking is if one of us dies and the other remarries, having it in trust protects our some of our daughter's inheritance from any new spouse and their children, and also a certain amount of money if either of us goes into care after the other kicks the bucket. 

We're quite happy with the setup of the trust; that wasn't what I was looking for advice on. I just wanted clarification on the IHT allowance thing when it's going into a trust where the spouse is the beneficiary compared to when it just goes to them normally as I'm trying to get my head around it all before we go back to the solicitor and discuss further with them. 

RAS

Please read the post immediate above your own, and my previous one.

At the age of 18 years, your daughter can wind up the trust and access her inheritance whatever is in your wills. She's better with good godparents or relatives to help her if you both die young.

And if she doesn't wind up the trust, a professional trustee can charge high annual fees and there is a 40% tax on such Trusts. So more of your assets will go to the HMRC than through IHT.

Emanef

It will be relatives bringing her up if we die, and we've done the trust so it provides for supporting financial support to help them do that as well. 

I'm not sure what an Immediate Post Death Interest trust is, but the wording on ours says it's a flexible like interest trust.