Trust and IHT question

Gizmow

My father died in 2015 leaving all his estate solely to his wife (my mother) including property. 

My mother subsequently died in 2023, leaving 50% of residual estate to myself and the other 
50% to my daughter (who at the time was 21), who would receive it when she attained the age of 25, or if she died it would go to her children.  (Value £170,000 each)    Probate sorted.

Myself and a member of the solicitor's firm who drew up the will were listed as both Executors and Trustees.

In the will it states that The Trustees to have following powers:
To be able to apply capital for the benefit of any beneficiary under 25 years old as if the Trustee Act 1925 Clause 32 applied to the whole of the beneficiary's contingent presumptive or vested interest

To invest freely as if they were beneficially entitled

To exercise the power of appropriation Section 41 of the Administration of Estates Act 1925 without obtaining any of the required consents

Sections 11 and 19 if the of the Trusts of Land and Appointment of Trustees Act 1996 shall not apply.

My mothers will was dated February 2001.

Can you please advise the type of Trust that this makes?
 Due to the current age of my daughter (23) and the short length of time until she is due to inherit (25), is there anything that can be done to not have to go to the expense of setting up a Trust fund.

I look forward to any advise you can give

poseidon1

You really need to be guided by your professional trustee here.

 Although Section 32 of the Trustee Act 1925 has been amended to permit the whole of your daughter's contingent capital entitlement to be distributed early, there is the technical hindrance of her own child ( if she has one ), or any potential unborn before your daughter attains 25, being deprived if your daughter dies before the contingency age.

Your professional trustee could take the view that such technicality could be ignored on the basis any child of your daughter is likely to benefit from her premature death ( either by will or intestacy) but this assumes she has no husband ( now ) or prior to attaining age 25. Your professional trustee would be required to draft an appropriate deed terminating the trust having  such issues in mind,

Incidentally, this trust would be considered a 'relevant property trust' in the eyes of HMRC. Such trusts have their own tax regime for Income, CGT and IHT purposes. The inception date of the trust for IHT purposes is the date of your mother's death and the potential  for IHT exits charges maybe in point on eventual termination ( whenever that occurs).

As for income tax and CGT , tax compliance arises on the date estate administration is deemed complete (likely  at some point after probate obtained). The trust income is thereafter taxable at the trust rate of 45% ( wholly or partially recoverable by your daughter depending on her marginal rate of tax), whilst any trust gains are taxable at 20% subject to a trustee CGT exemption which is 50% of the full allowance ( £1,500). However in view of her current age, would seem appropriate to retain her trust fund as cash, assuming you can find a bank/ building society prepared to take it on. 

Understandably, the complexity of operating this trust for such a relatively short period is clearly unattractive, but your professional trustee has to decide if early termination can be safely achieved in view of the technicalities.

Gizmow

Thank you for your advise, which leads me to a couple more question, which I would appreciate any advise on 

There was no IHT to be paid on my mothers estate.

My mother's property has subsequently been sold, so my daughter's 50% is in cash. There was no CGT gain on the sale of the property.

Most of the 'big' banks aren't interested, due to the shortness of time before she inherits.  Currently Skipton Building Society will take on.  My daughter would be 25 in 2026, and I calculate that roughly the building society would pay around £5,000 gross in interest per year, meaning that she would receive around £185,000 in total.

I'm a little confused about the calculation of IHT chargable on her exiting the trust and if so, on what amount would it be calculated? 
The only gain would be the interest on the cash of around £15,000 in total, but would this then be trust income,
taxed at 45%, OR trust gain taxed at 20%, with a CGT allowance claimable of £1500.

Also, would income tax on the gross interest need to be paid to HMRC annually or at the end of the trust in 2026?

Many thanks for any advise you can give.

Keep_pedalling

What is the exact wording with regard to her children inheriting if she dies? Depending on how it is worded it could have been a clause to cover the event your daughter died before your mother in which case we are talking about a discretionary trust, but if it was conditional on her obtaining the age of 25 then the first reply covers it. Does she actually have any children?

Could you confirm the date of your mother’s will? If it was 2001 your daughter was not even born when it was written. 

poseidon1

Gizmow said:

Thank you for your advise, which leads me to a couple more question, which I would appreciate any advise on 

There was no IHT to be paid on my mothers estate.

My mother's property has subsequently been sold, so my daughter's 50% is in cash. There was no CGT gain on the sale of the property.

Most of the 'big' banks aren't interested, due to the shortness of time before she inherits.  Currently Skipton Building Society will take on.  My daughter would be 25 in 2026, and I calculate that roughly the building society would pay around £5,000 gross in interest per year, meaning that she would receive around £185,000 in total.

I'm a little confused about the calculation of IHT chargable on her exiting the trust and if so, on what amount would it be calculated? 
The only gain would be the interest on the cash of around £15,000 in total, but would this then be trust income,
taxed at 45%, OR trust gain taxed at 20%, with a CGT allowance claimable of £1500.

Also, would income tax on the gross interest need to be paid to HMRC annually or at the end of the trust in 2026?

Many thanks for any advise you can give.

Bearing in mind if the trust is allowed to run to age 25 ( ie you do not ask your co- trustee to explore early termination), the trust will have to be placed on HMRC's trust register and a trust UTR number allocated for the purposes of future income tax returns compliance.

 On the Skipton interest you forecast, income tax at 45% will be chargeable . Your co- trustee can advise whether you have discretion to distribute annual net trust income to your daughter to enable her to recover all or part of the 45% tax paid, sooner rather than later.

As for a potential IHT exit, on  the information you have provided it is unlikely an actual charge will arise ( no IHT was levied on the estate and the trust fund value is  well within its own attributed nil rate band of  £325k).

However, if you yourself are not familiar with self assessment you may encounter difficulty in navigating the complexities of trust income tax reporting and the eventual requirement to seek clearances ( for IHT purposes), when the Trust comes to an end.

With all the above in mind, I am a little surprised that your professional co trustee has not already been proactive in advising you on  how matters should proceed going forward. Is there any reason why the solicitor/co trustee and yourself  have not already had a conversation on these issues?

Gizmow

Thank you both for your replies

Regarding the type of trust, the actual wording in the will says

After debts and IHT are paid 

To divide the residual of her estate

Clause 1. One half to myself absolutely but if I die before her the said half share shall be held under Clause 2.

Clause 2.  As to the other half to my grand daughter upon attaining the age of 25 BUT if she dies before me or before attaining the age of 25 leaving children then those children shall take equally the share which their parent would have taken.

Apologies, the date of the will was 2007.

My daughter does not have any children.

In respect of the Professionals's advice, it's 'way over my head' and not in plain English which has confused me. I would like to know, for my own piece of mind that I'll do the correct thing, and that I actually understand correctly what I believe are my options and to work out the cost of having the Trust as opposed to any other option, but in plain English.

Your help is appreciated.

Savvy_Sue

Gizmow said:

In respect of the Professionals's advice, it's 'way over my head' and not in plain English which has confused me. I would like to know, for my own piece of mind that I'll do the correct thing, and that I actually understand correctly what I believe are my options and to work out the cost of having the Trust as opposed to any other option, but in plain English.

Your help is appreciated.

You're saying that the Professional advice is 'way over your head', or that the professional has said 'that's way over my head'? 

If it's the former, I'd suggest that you go back and say that you would like an explanation in terms you can understand: you could set out what you THINK has been said and ask if that is correct (using some of our suggestions here), or ask them to start again from the beginning. 

If it's over THEIR head, then you need a new professional: a STEP qualified solicitor or accountant ... and I'd expect them to recommend one!

poseidon1

Gizmow said:

Thank you both for your replies

Regarding the type of trust, the actual wording in the will says

After debts and IHT are paid 

To divide the residual of her estate

Clause 1. One half to myself absolutely but if I die before her the said half share shall be held under Clause 2.

Clause 2.  As to the other half to my grand daughter upon attaining the age of 25 BUT if she dies before me or before attaining the age of 25 leaving children then those children shall take equally the share which their parent would have taken.

Apologies, the date of the will was 2007.

My daughter does not have any children.

In respect of the Professionals's advice, it's 'way over my head' and not in plain English which has confused me. I would like to know, for my own piece of mind that I'll do the correct thing, and that I actually understand correctly what I believe are my options and to work out the cost of having the Trust as opposed to any other option, but in plain English.

Your help is appreciated.

It would have helpful from the outset of your post to have shared that you have had professional advice, and if possible, shared its contents. Even if you do not understand it, it may have given us a better steer on your options. 

So, from the advice you were given does the solicitor believe he/she can use the amended Section 32 of Trustee Act 1925  to advance the entirety of the trust fund to your daughter thereby bringing the trust to an early end and giving your daughter personal control of the monies?  If so can we see the solicitor's advice on this point.

It seems to me, given your clearly apparent reservations to admininister the trust until its natural conclusion ( at age 25), that would certainly be your best option, although whether your daughter is sufficiently mature to handle so much cash at the present time, only you will know.  

I echo Savvy_Sue's observation that if the solicitor lacked clarity in the advice given ( especially with regard to early trust termination), then perhaps you may need to go elsewhere. STEP by way is the Society of Trust and Estate Practitioners and its members are the 'gold standard' in Trust and Probate work having undertaken additional specialist training in that field. If your solicitor is not a STEP member that could be part of the problem.

However, before you go down the road of seeking alternative professional advice ( and incurring a new lot of fees), it would make sense for us to see the contents of the advice you have already had   (assuming it was given in writing). What might be impenetrable for you to grasp, might make more sense to us.

Finally, you should note that seeking alternative professional  advice elsewhere would likely mean you asking your professional  co-trustee to resign their trusteeship leaving you as sole trustee going forward. It would be pointless them continuing in that role under those circumstances.

Gizmow

Good Morning to you all, many thanks for your comments.

I don't have anything in writing. So far, I don't recall any mention being made of early termination/advancing the trust, although I had asked if it could be used to buy her a property as she wants to get on the property ladder, I was informed no and that she could be allowed funds to cover school/university fees or a car, not the bulk of the trust.

No mention of whether it was a relevant property or discretionary trust was mentioned.

poseidon1

Gizmow said:

Good Morning to you all, many thanks for your comments.

I don't have anything in writing. So far, I don't recall any mention being made of early termination/advancing the trust, although I had asked if it could be used to buy her a property as she wants to get on the property ladder, I was informed no and that she could be allowed funds to cover school/university fees or a car, not the bulk of the trust.

No mention of whether it was a relevant property or discretionary trust was mentioned.

If you did not broach the subject of winding up the trust prematurely, it appears the solicitor has assumed it will run its natural course until the termination age.  You now need to specifically raise the issue rather than passively accept the solicitors assumptions in this regard, since no doubt they are looking forward to fees they can earn for the continued administration of the trust. Their response to this question may dictate what you do next.

Personally, I am surprised the solicitor has pooh poohed the idea of using trust monies to buy or contribute towards the purchase of a property, since I personally know this is something that trustees can and have done on behalf of beneficiaries. 

Suggest you establish whether or not your solicitor is a member of STEP ( their website profile should indicate this).

 If they are not, then it is likely they lack the deeper understanding of what can be done either to terminate the trust early, or as a fall back position, to use the funds to invest in property.

As suggested you must be prepared to access the STEP directory to find an appropriate trust specialist to consult on  these issues. This would  also mean confronting the solicitor to request their resignation since by seeking advice elsewhere you will be demonstrating you lack confidence in the advice they are giving. 

It's a tough call, but you are looking for your child to substantially benefit from the trust sooner rather than later, and from what you have said your professional co trustee maybe a hindrance in this regard.

poseidon1

poseidon1 said:

Gizmow said:

Good Morning to you all, many thanks for your comments.

I don't have anything in writing. So far, I don't recall any mention being made of early termination/advancing the trust, although I had asked if it could be used to buy her a property as she wants to get on the property ladder, I was informed no and that she could be allowed funds to cover school/university fees or a car, not the bulk of the trust.

No mention of whether it was a relevant property or discretionary trust was mentioned.

If you did not broach the subject of winding up the trust prematurely, it appears the solicitor has assumed it will run its natural course until the termination age.  You now need to specifically raise the issue rather than passively accept the solicitors assumptions in this regard, since no doubt they are looking forward to fees they can earn for the continued administration of the trust. Their response to this question may dictate what you do next.

Personally, I am surprised the solicitor has pooh poohed the idea of using trust monies to buy or contribute towards the purchase of a property, since I personally know this is something that trustees can and have done on behalf of beneficiaries. 

Suggest you establish whether or not your solicitor is a member of STEP ( their website profile should indicate this).

 If they are not, then it is likely they lack the deeper understanding of what can be done either to terminate the trust early, or as a fall back position, to use the funds to invest in property.

As suggested you must be prepared to access the STEP directory to find an appropriate trust specialist to consult on  these issues. This would  also mean confronting the solicitor to request their resignation since by seeking advice elsewhere you will be demonstrating you lack confidence in the advice they are giving. 

It's a tough call, but you are looking for your child to substantially benefit from the trust sooner rather than later, and from what you have said your professional co trustee maybe a hindrance in this regard.

Ps, get the solicitor to advise in writing going forward.  I find it entirely unacceptable this has been handled by off record conversations between you.  You require a client paper trail, especially if you end up having to seek advice elsewhere.