Inheritance tax and Trust question.

elsien

86-year-old single (divorced)  parent in good health, no current signs of needing any sort of care.
For the avoidance of doubt this is absolutely not a question about avoiding paying care fees in the future.

Complicated by the fact that I don’t know what parents assets are. House worth maybe 300 to 350 K. Pension and investments that she draws down income from - no idea of the value, and she probably doesn’t either as she leaves it to someone to manage for her.
Her hope is to stay in the property until carried out feet first. 

She’s been talking to friends who’ve told her that if she puts things into a trust, it will avoid some inheritance tax. 
Self and siblings would be beneficiaries. They are higher rate taxpayers, I am not.

As someone  who knows !!!!!! all about this, what does she need to know as a starting point and what information does she need to gather? 

My concern is actually to make sure that she can release her assets to pay for care if she needs to and I don’t want trying to lock it away to affect that.

But tax planning is obviously a good thing so wondering where we start. And for the avoidance of doubt, there is an LPA in place if needed. 

Keep_pedalling

This is the danger of talking to friends, most of them no BA about taxation..

All her pensions are already held in trust and are not subject to IHT although this is changing with certain types of pension. At her age any company pensions are likely to be defined benefit ones which end on her death, the same will apply if she has an annuity pension. If she has pensions with pots of money to drawdown, such as SIPPs then anything left in those pots on her death maybe subject to IHT when the rules change.

Her major asset would seem to be her home, but putting that into trust would not save on IHT as presumably she would want to carry on living there so it would be classed as a gift with reservation of benefit and therefore it won’t fall outside of her estate for IHT purposes even if she lives for over 7 years after doing it. There are people out there who would sell her a trust for a big fat fee, but they are the only ones who would benefit, the trust would only add complications and expense if for some reason she need to move in the future.

if she is dependant on income from her investments then the same applies, but if she in not then it would be better to to make outright gifts rather than set up complicated trusts, or alternatively gift all excess income to prevent her estate increasing deeper into IHT territory. 

With her NRB and residential NRB she can leave her children £500k IHT free, so if her non pension assets are below this level then IHT is not an issue. She might like to have a discussion with her financial adviser about this ( hopefully it is an IFA) rather than listen to her freind on this subject. 

HappyHarry

Putting assets in a trust is no different from gifting assets directly to beneficiaries as far as inheritance tax is concerned. It still starts the seven year clock ticking. The advantage of a trust is that the beneficiaries cannot immediately access the assets. The settlor cannot be a beneficiary, else the assets have not been given away and the seven year clock does not start.

Some higher value trust arrangements mean that 20% tax is paid immediately and so is actually worse than gifting directly to beneficiaries.

elsien

Thanks both.
There won’t be a DB/company pension because that came out years ago when she set up her business. A lot of misogyny in the banking industry back then and a reluctance to lend to women who didn’t “have their husband’s permission.”

Not sure if the current investments are in a SIPP or some other investment vehicle. Unfortunately no IFA, an ex accountant who I think is tied somewhere along the line. No point making any suggestions on that front, they won’t be listened to. 

GDB2222

It’s entirely possible to set up a trust arrangement that increases tax, rather than reducing it.

For example, there is a capital gains exemption on the private residence. By sticking it in a trust, that exemption can be lost. At the same time, if there’s a gift with reservation, the trust won’t be effective for inheritance tax purposes. 

madbadrob

Just to clarify one point made above.  Gifting or putting in to a trust the property does start the 7 year rule but would require your mother to pay a fair market rent on that property.  However IHT starts at an estate valued over 325k and is charged at 40% of the moniea over that threshold.  Your tax level and that of your siblilngs is irrelevant.  So the house sells for 350k.  You dont say what savings she has so for now we shall assume none.  The pensions will cease on her death.  So in reality the only tax being paid would be 40% of 25k (assuming the assets realise 350k)  that is £10000 in total.  However the funeral costs and any debts would also come off that 350k first as well so the final amount could even be less.  

Regarding trusts etc I would consider seeking advice from  solicitor as there are many hurdles that could come to trip you all up if you dont get proper advice.  DO NOT USE advice from a will writer

Rob

poseidon1

elsien said:

86-year-old single (divorced)  parent in good health, no current signs of needing any sort of care.
For the avoidance of doubt this is absolutely not a question about avoiding paying care fees in the future.

Complicated by the fact that I don’t know what parents assets are. House worth maybe 300 to 350 K. Pension and investments that she draws down income from - no idea of the value, and she probably doesn’t either as she leaves it to someone to manage for her.
Her hope is to stay in the property until carried out feet first. 

She’s been talking to friends who’ve told her that if she puts things into a trust, it will avoid some inheritance tax. 
Self and siblings would be beneficiaries. They are higher rate taxpayers, I am not.

As someone  who knows !!!!!! all about this, what does she need to know as a starting point and what information does she need to gather? 

My concern is actually to make sure that she can release her assets to pay for care if she needs to and I don’t want trying to lock it away to affect that.

But tax planning is obviously a good thing so wondering where we start. And for the avoidance of doubt, there is an LPA in place if needed. 

With all due respect to all concerned, you have too little hard data and therefore have given insufficient information for any meaningful view to be form with regard to whether trusts ( of any kind) would be appropriate to your mother's circumstances.

That is to say:

* You don't know what investments your mother has or their value, and according to you neither does she.

* You don't know the nature of her pension income ( Sipps, DB scheme, share of ex husband's pension on divorce  or a mix of all three). There might be a taxable pot on death, there might not be.

All you have given is an approx value for the house which at say £350k is very comfortably within her combined  £500k nil rate bands, assuming she is leaving her estate to you and your siblings.

May I suggest that since there is an LPA in place and assuming  it  extends to financial matters and is held by family members as attorneys,  then it is incumbent on one or other of you or your siblings to familiarise yourselves with the finer details of your mother's financial circumstances ( assuming she will let you), and then you have a basis to:

1) Determine if she will have sufficient for care home fees should the need ever arise.

2) Consider if she has a large enough taxable estate, to concern herself with any thought of IHT mitigation strategies.

Seems pointless even considering going forward with the thought of taking professional advice, without the necessary hard facts,

elsien

She is not going to let any of us be investigating her finances for her, as things stand. She is  perfectly capable of finding out the information for herself, so I will suggest a bit more detail would be helpful

I appreciate there is extremely limited information, but the starting point was “my friends have told me about a Trust.” 

Basic information as a starting point was what I was looking for. 

And it’s not going  be possible to say whether she has enough for care fees because that is very much how long is a piece of string. 

Notepad_Phil

[Deleted User] said:
...If you say:

And it’s not going  be possible to say whether she has enough for care fees because that is very much how long is a piece of string. 

Then to me that says that there are enought assets involved to make a trust worthwhile.

I think you may have meant to say "there are not enough assets involved to make a trust worthwhile."

poseidon1

[Deleted User] said:

elsien said:

She is not going to let any of us be investigating her finances for her, as things stand. She is  perfectly capable of finding out the information for herself, so I will suggest a bit more detail would be helpful

I appreciate there is extremely limited information, but the starting point was “my friends have told me about a Trust.” 

Basic information as a starting point was what I was looking for. 

And it’s not going  be possible to say whether she has enough for care fees because that is very much how long is a piece of string. 

I know it is very frustrating but if you had said "my friends told me about transport" you'd probably not be impressed by the answers.

There are lots of kinds of trusts and there is often a clear need for them (e.g. a charity, to help protect a disabled person, because you are a control freak and don't want your kids to have any pleasure, because the benefical owner of the money is a child, etc).  Presumably none of these apply?

Then you get "pub talk".  A long time ago it was "My mate got his bonus paid in fine wines and paid no tax", then "My neighbour got her bonus paid in platinum sponge and paid no tax", then "My uncles' second cousin's hairdresser got his bonus paid in hay and paid no tax" and so on.  As you get older it moves from "bonus" to "inheritance".  People see things in the Telegraph about the Duke of Watsitcalled having a trust to save IHT and so talk about it.  But the tax rules for trusts are way stricter these days and in almost all circumstances the tax treatment will be the same / worse than if you did nothing.  And they cost a lot to set up.  They also cost a lot to run if you do them properly (unless you are generally happy with legal stuff and happy to do the tax returns, etc yourself). 

If you search through the forums you will see a lot of threads about trusts, hassle, inflexibility, poor advice and heartache.

Some of the trusts are proposed by competent professionals who have taken the time to understand their client's commercial needs (and are often members of STEP).  Others are "solutions" proposed by financial advisers (and others) getting commission.  Here's an article from the Daily Telegraph about a particular type of trust and the problems caused: https://archive.is/DjafH  But it could have been written about other types of trusts.

poseidon1 has a lot of professional experience of family trusts.  So it would be worth reading their posts (not just on this thread but others about trusts).  My experience of family trusts is very limited (I just see aggressive tax avoidance ones and so I am very cynical about the motives of most of those promoting them).  I would suggest that you be cynical about people promoting them too unless there has been a very comprehensive fact find from a reputable and competent tax/legal professional who is not trying to sell you a solution.

Personally, I'd suggest asking ChatGPT as you'll get a better quality of answer but some basic information on trusts that will be like a chocolate tea pot to you:

1. Trusts pay tax on their income and capital gains at the highest rates possible.  But in some cases the settlor and/or beneficiary pays the tax.
2. Trusts can sometimes have the same tax exemptions as an individual in a certain situation.  But often not, so that more tax is paid overall. 
3. Some trusts pay inheritance tax whenever value comes out of the trust and every ten years.  But not all do and the rules need more than a cold tea towel to understand.
4. Transfering value to a trust can bring forward the inheritance tax charge today, depending on the type of trust, the value of what has been transferred and other things.
5. There's lots of anti-avoidance rules that pretends that the value of assets held by some trusts still belongs to the transferor which makes the whole thing pointless from an IHT perspective.
6. A trust needs trustees who are trusted and won't die before you need to trust them.

But you want to know the amount of IHT saved so here is a quick headline for a typical family discretionary trust:

a. Transferor's own home put into trust and she continues to use it: None
b. Transferor's estate is less than £1m (assumptions lots, including owns a property and married at some stage): None
c. More than £325,000 put into trust: Immediate IHT cost of 25% of excess (with more due if dies within seven years, when value leaves the trust (up to 6% IHT rate), up to 6% every ten year anniversary, but I'd expect that the government might see this as an easy way of raising more cash in the future so who knows what they will be next year). 

If you say:

And it’s not going  be possible to say whether she has enough for care fees because that is very much how long is a piece of string. 

Then to me that says that there are not enough assets involved to make a trust worthwhile.

More_complicated_than_that,  I think I will have to remember your comprehensive post here, whenever  any similar vague  ' is a trust a good idea'    query comes along in future ( probably needs to be archived somewhere for quick easy access!).

Just a small correction, new lifetime trusts set up with values in excess of the NRB can attract an initial 20% lifetime charge on the excess and not 25%,. However I think by that point in your narrative and as an idle enquirer,  i would have  been well and truly put off the whole idea of trusts as a tax planning option.

poseidon1

[Deleted User] said:

poseidon1 said:

Just a small correction, new lifetime trusts set up with values in excess of the NRB can attract an initial 20% lifetime charge on the excess and not 25%,. 

I assumed that it was common for the transferor (rather than trustees) to pay the CLT IHT and so grossing up was required - s5(3) IHTA - and that this meant the effective tax rate increased from 20% to 25%.  I've never had anything to do with funding family discretionary trusts but I didn't think that the transferor typically putting extra cash into the trust so the trustees could pay the IHT.

Fair comment indeed.

However In practice trustees  (at least in my past experience ) often picked up the tab ( thereby reducing the net value of the gift in their hands) rather than the settlor. This is due to the risk of an even greater overall charge if settlor failed to survive up to 14 years when the gift into chargeable  lifetime discretionary trust was also combined with Potentially Exempt Transfers which tended to be the case with this kind of long term estate planning for the very wealthy. That said, strategies may well have changed since my time in the business, especially if PETs are now excluded from the planning.

This discourse, does serve to underline how discretionary trusts ( in particular) can contain  many traps for the unwary, and a real nightmare for families whose wealth levels and lack of professional support,  really do not warrant consideration of this option.