Tag: IHT

Why d’you have to make things complicated?

Types of Trust (UK specific) explained, and why they are used

Trusts are something that people often get worried about – they think it’s all too complex and not for them.  But basically it’s about putting a defined amount of money (or other assets) under someone else’s control for the benefit of defined group of people (and you choose who those people are).  The person who is listed as the owner is not necessarily entitled to the money themselves, but is looking after it for others.  They are entrusted with its care. 

This is written about UK trusts, but they can exist in other forms in other countries in the world. The choice of trust is important, as there can be adverse tax consequences if you are using the wrong type for the task in hand. This short post is not a substitute for specialist legal advice tailored to your circumstances.

Why would I need one?   

You might be using a trust structure without realizing it – now!  If you and your partner own a house together, then you might both be listed on the deeds.  When you sell, do you each get half of what is left over after expenses?  If you died, would you want your partner to automatically have all the value in the house?  How have you decided the terms of your house ownership with each other? 

If you have a child who is under the age of 18 when you die – who will look after the assets you have on their behalf until they are old enough?  Is 18 old enough to inherit what you have?  Do you have a child who has additional needs?  Do you want them to have all your money when their needs might be lifelong, and they might not be able to manage money well? 

Do you worry about what might happen if your partner meets someone new and forgets about how much they have inherited from you – and spends it on them?  Or if they get into debt, and it eats up not only all their share, but yours as well?  A trust can be a good way of letting your partner have some of the benefit of what you have, but keeping a bit of security, so they don’t spend it (or have it spent for them) 

Are they expensive? 

There will be a cost for setting up your trust.  Running a trust can cost, but then again, if you choose non-lawyers or non-accountants to be your trustees, the cost may be minor, being limited to out of pocket expenses.  Looking after a million pounds means more work to do than if you were being asked to look after a thousand pounds, and you might need professional help.   

Apart from working out what sort of trust suits you and getting the right sort of trust in the beginning, making it work will require some effort, just like running a car or getting a regular haircut. 

Will I need a lawyer all the time? 

Probably not, if you still have an idea of what the responsibilities of a trustee can be.  However, if you are worried, then legal advice is available, if your trustees want to know more.  It can be necessary to have an independent person as a trustee – a friend or someone outside your closest family. 

You mean there are different sorts of trusts? 

Yes – there used to be many more types of trusts – and confusingly, not everyone talks about them using the same labels.  Basically, trusts now can be broken down into four types: 

  1. The bare trust 
  1. The Interest in possession trust 
  1. The discretionary trust 
  1. The charitable trust. 

A bare trust is similar to a nominee – you decide that someone is to own the asset in name only.  But you expect that the proceeds of sale will not go to the person who appears to own it, but to your choice of recipients 

An Interest in possession is where a named person is entitled to receive the income (or to live rent free) in an asset.  The capital remains safeguarded.  Some sub-types of this sort of trust can also be chosen.  These are usually set up in a will, to take effect after death, for tax reasons. 

A discretionary trust is one where you place the most trust – because it is the most flexible arrangement.  You give your assets to your trustees, identify the people who you want to benefit, and then leave the management of the trust, including how and when people benefit to your trustees.  It is helpful to leave them some written guidance, so that they know what you have in mind – but ultimately, you give them the authority to do the “right thing” with your assets, for the benefit of those whom you have chosen.   

So, a bare trust is quite simple? 

Yes – it’s the sort of thing you have if you purchase a house for a person under 18 – when they turn 18, they can force the trustee to hand it over.  You find this sort of thing when administering an estate – an executor, once they have paid debts, can say that they are holding assets for your benefit – and sell on your behalf, at your direction.   

Interest in Possession sounds really weird… 

This is one of the sorts of trusts that ends up with lots of different names, because the technical name is not really all that catchy.  Sometimes it’s called a property trust – because it’s often used to safeguard a share of the house for the benefit of the surviving member of a couple, so they can continue to live in a house rent free, but without being able to spend it on someone new.  Other names can be “Life Interest Trust”, “home trust” and so on – sometimes there are advisers that use this structure and want to brand it specifically so that it has more appeal.   

Discretionary Trusts sound so complicated.  Why would anyone want them? 

These are the most flexible sort.  If you have a person with a learning disability, they may need money throughout their lives, but may not be able to make significant financial decisions either now or in the future.  They may be able to live independently, but be easily swayed by people who want to take advantage.  They might have a physical disability that could need more and more care as time goes on.  Choosing a discretionary trust structure allows those in charge of it (trustees) all the power they need not only to invest according to the needs of those who benefit, but also to pay out in all sorts of different ways – as and when needed.   

It is true to say that Discretionary Trusts are used in times of uncertainty, for those who are wealthy and who want to pass on money for tax reasons, perhaps for their children not to receive the money too soon, if at all.  Or for business owners who want there to be only a few people that own a block of shares, rather than lots of minor shareholders clamouring for power.  But essentially the structure is the same – two trustees who look after something for the benefit of a range of people.   

You left out charities!

Well, there are not many people who want to set up charities – usually there is a charity to suit every need in existence already.  Sometimes using an existing charity presents the best value for money for those who are in need – saving on set up costs and running costs.  Charities can be made using trust documents, setting out their objectives and who is proposed to benefit.  Similarly, pension fund trusts are less often the creation of an individual – and pension fund trustees have wide powers over what they do to invest, and distribute. 

What else do I need to think about? 

Taxation is something that can come into your decision making process.  If you give a property away, there might be a Capital Gains Tax bill – but your advisers might have a way of postponing this.  If you have a fund larger than £325,000 initially, then there are other considerations for Inheritance Tax.  Inheritance Tax capital gifts also have fairly strict allowances – otherwise they might be a gift that you need to survive by a period of years (7 years to a maximum 14 years from trust gift). As with all Inheritance Tax gifts, you cannot benefit from what you have put into your discretionary trust, or it will not work (1)

During the lifetime of the trust, the size of the fund and how it is invested can be important – because it means there will need to be more financial housekeeping.  This can be a relevant consideration in many cases.   

What do you recommend? 

It depends on what matters the most to you – behind every choice there is a risk and benefit.  There is not really a one-size-fits-all solution for every circumstance, and that is where the advice from your solicitor (or accountant) about a trust can be so beneficial.  For more in –depth analysis of the structures you would like to use, and their implications for your own financial situation, you should consider this general note with tailored advice to suit you. 

(1) There are exceptions to this rule, but only very few. Tread carefully, with advice.

Day -v- Harris [2013], Curnock v IRC, Phizackerley

Just a quick reminder to myself that these are the current cases concerned the ability of attorneys to make valid gifts, and the interaction with IHT.

Day -v- Harris 2013 Day v Harris and others Same v Royal College of Music and another (Arnold and another, interpleader claimants) [2013] EWCA Civ 191; [2013] WLR (D) 112 and PDF of judgment concerns a registered EPA – and gifts made by the attorney (who was also a joint holder of a bank account) and whether the gifts that he had made were as attorney for the donor, or in another capacity as being access to the joint bank account as was his right as a joint bank account signatory

In my judgment, it remained open to Mr Day to operate the bank account after registration of the EPA as he had done before such registration. He could not use it to benefit himself without the full, free and informed consent of Sir Malcolm but, if he had that consent, as the judge held he did, gifts made by drawing cheques on the joint account were not invalidated by the effect of section 7(1)(c) of the Act even though made after registration of the EPA.

Had the gifts not been validly made, then they were still part of the donor’s estate for IHT purposes – on the basis of Curnock v IRC, Curnock v IRC [2003] SWTI 1053 where a cheque was not encashed prior to the death of the donor – and therefore the gift was not complete by the time of death.  This could also be seen in conjunction with Phizackerley, Personal Representatives of Phizackerley v HMRC [2007] SpC 591

An earlier version of Day -v- Harris, in 2010 concerned the nature of the accounting to be made for the researches of the executor into the amount of the gifts that were made and how far back the executor should go in attempting to ascertain what gifts had been made, and whether the expenses of the executor in doing so were reasonable.

Residential Nil Rate Band – downsizing calculations

PDF The draft clauses dealing with the downsizing element of the new RNRB are out today.

The RNRB is available from 6 April 2017 and the relief for downsizing or disposals will apply for deaths after that date where the disposal occurred on or after 8 July 2015.

So, working out, with the aid of a cold towel, what the calculations might actually mean is going to be important – particularly if this is potentially an area where not only the estate planning department need to know what they are talking about, but need to find a way of recording the information through the conveyancing department for most residential property sales that took place since the summer, where it is anticipated that the clients have a total estate value exceeding £650,000 (or £325,000 for non married persons).

I hope Professor Lesley King will do another talk with worked examples – that would help.

Budget 2015 and initial thoughts.

Budget statement in pdf from Inland Revenue

Some of the things I think this means.

Terms:

Although this refers to a “main residence nil rate band” the personal representatives can elect for any property owned and lived in by the deceased to count as the residence for this purpose.  The term is not related to the main residence or Principal Private Residence.  Potentially, each spouse could have a separate private residence, therefore.

The residence nil rate band (which if someone else has not already labelled it thus, I shall call it the “RNRB”) can be transferred to a spouse and remain intact.  This applies no matter when the first death occurs, so long as the second death occurs after the start of the tax year 2017-18.

The RNRB might end up, therefore, also being called the TRNRB when claimed on the death of the second spouse. There will be new additional forms to complete in addition to the IHT402 and the IHT217.  There will need to be new evidential burdens to show that a recipient falls within the class of acceptable beneficiaries called “descendants”.

The NRB as we know and love it applies at the current rate until the tax year 2021-2 commences.  It applies to all transfers whether intervivos or on death.

The RNRB applies only where there is a residential property in which the deceased has resided (or the spouse of the deceased???) and where the “proceeds of sale of that property” or the property itself pass to a linear descendant of the deceased (or of the deceased’s former spouse??).  The bits in brackets are where I am less certain of the detail.  One thing is clear – the definition of what is considered “linear descendants” is different from the standard definition of “issue” or “bloodline” since it includes not only the usual adopted children and children of the bloodline but also step children and foster children.

Things I am not sure about:

I don’t understand quite how you can quantify the foster children – but perhaps it is possible to prove that an individual is a foster child or has been one at any date.  Similarly, step children.  But then again, this gives an allowance for those children, rather than penalising them or giving them an entitlement.

I am not sure about the “proceeds of sale” aspect of things.  The Inland Revenue states that identifying what has been the proceeds of sale of a family home and making sure that there is a credit for this will be something that will be the subject of a consultation paper shortly.  Presumably, there is some paperwork required for Inheritance Tax purposes on the sale of a family home – so where downsizing from any home worth less than £2,400,000 is potentially eligible for this – so as to preserve the relief on this home.  This will be something that all conveyancing solicitors will need to know about as well, since otherwise it would not be something that would be mentioned to the client.  Few clients associate the sale of their home with the need to consider how it fits in with estate planning.

Does this now mean that flexible life interest trusts now need to be altered so as to take account of this potential future relief?  A “FLIT” by which I mean a discretionary trust, subject to a prior life interest.  I think it does.  Because the whole flexibility of these relies on the discretionary trust *not* being an individual or descendant.  Time to review these I think, and adjust expectations and drafting accordingly.

I think the new legislation means that (at least initially) if you are worth £2.4 million or more, then this RNRB is useless to you.

I also think this means that if you are selling up so that you can free up capital to make potentially exempt transfers, then you have to weigh up carefully whether doing so means that you will lose out on the RNRB.  The RNRB *only* applies on death, and does not apply to PETS that become chargeable.  Worst case scenario is that you free up funds, give some away to your children and do not survive the seven years.  When I say “some”, I mean if you give away more than one Nil Rate Band’s worth of gifts.  So – PETs will have to be limited to below £325,000 for each individual donor if they are within 7 years of death, or statistically likely to be so.  Or in other words, there is no such limitation, but without advice on the pros and cons, the decision should not be taken without, for example, more seriously considering term life insurance, in the very least.

 

In conclusion:

Possibilities of legal involvement in people’s affairs seem to have increased.  And in a way that doesn’t seem right – why should the taxpayer be hemmed in at every turn?  Why not just increase the whole of the NRB to £500,000 each – and not have this extra complication?  What about those childless couples who want to leave their money to nieces and nephews?  Why is this budget not making it easier for the rich to pay tax, rather than harder for the middle income people to manage the burden of it?  This extra complexity just means more work for the civil servants, more bad luck for the childless, more work for lawyers, more fees for professional advice.   And the extra complexity is not actually needed – it doesn’t close any major loopholes or planning issues where “clever lawyers/accountants” have been finding “loopholes”.

Deed of Variation – getting it wrong, (S142 IHTA)

Deed of Variation – getting it wrong | Withersworldwide.

Referring to the recent case of Vaughan-Jones v Vaughan-Jones, where a deed of variation was effected in the estate of the husband.  The will of the husband had left assets both to the wife and also to the children.  The amounts left to the children exceeded the Nil Rate Band, and therefore an immediate IHT liability arose on the death.  The deed of variation was completed less than a week before the deadline (before the 2nd anniversary of death) but most importantly, failed to contain the election for Inheritance Tax which arguably was the whole point of the document.

The election for Inheritance Tax is the part of the document that enables, for Inheritance Tax purposes, the deed to be considered as if it was the wish of the deceased, rather than the wish of those who actually inherit.  To fail to include that election makes the document pretty useless – “ineffective”.  The reported case permitted the court to rectify this omission.

The Wither’s article reveals, however, that in the process of arguing the case, it was revealed that the deed of variation was not entered into freely – that the widow (to whom all was transferred so as to secure the 100% spousal relief) and children had participated in the deed in order that the widow would later give the assets back to the children.

A key part of the legistation permitting the election is that it cannot apply where there is any associated financial bargain (or “consideration”) with the election:

142Alteration of dispositions taking effect on death.

(1)Where within the period of two years after a person’s death—

(a)any of the dipositions (whether effected by will, under the law relating to intestacy or otherwise) of the property comprised in his estate immediately before his death are varied, or

(b)the benefit conferred by any of those dispositions is disclaimed,

by an instrument in writing made by the persons or any of the persons who benefit or would benefit under the dispositions, this Act shall apply as if the variation had been effected by the deceased or, as the case may be, the disclaimed benefit had never been conferred.

[F1(2)Subsection (1) above shall not apply to a variation unless the instrument contains a statement, made by all the relevant persons, to the effect that they intend the subsection to apply to the variation.

(2A)For the purposes of subsection (2) above the relevant persons are—

(a)the person or persons making the instrument, and

(b)where the variation results in additional tax being payable, the personal representatives.

Personal representatives may decline to make a statement under subsection (2) above only if no, or no sufficient, assets are held by them in that capacity for discharging the additional tax.]

(3)Subsection (1) above shall not apply to a variation or disclaimer made for any consideration in money or money’s worth other than consideration consisting of the making, in respect of another of the dispositions, of a variation or disclaimer to which that subsection applies.

(4)Where a variation to which subsection (1) above applies results in property being held in trust for a person for a period which ends not more than two years after the death, this Act shall apply as if the disposition of the property that takes effect at the end of the period had had effect from the beginning of the period; but this subsection shall not affect the application of this Act in relation to any distribution or application of property occurring before that disposition takes effect.

(5)For the purposes of subsection (1) above the property comprised in a person’s estate includes any excluded property but not any property to which he is treated as entitled by virtue of section 49(1) above [F2or section 102 of the Finance Act 1986].

(6)Subsection (1) above applies whether or not the administration of the estate is complete or the property concerned has been distributed in accordance with the original dispositions.

(7)In the application of subsection (4) above to Scotland, property which is subject to a proper liferent shall be deemed to be held in trust for the liferenter.

Annotations: Help about Annotation

Amendments (Textual)

F2

Finance Act 1986 Sch. 19, para. 24,with effect from 18March 1986. 

Word of the Day

decennial

(dɪˈsɛnɪəl)

adj

1. (Units) lasting for ten years
2. (Units) occurring every ten years
n

3. a tenth anniversary or its celebration

deˈcenniallyadv

Collins English Dictionary – Complete and Unabridged © HarperCollins Publishers 1991, 1994, 1998, 2000, 2003

suggested usage:”Should the value of the Trust Fund be close to the Nil Rate Threshold, Mr and Mrs Client should consider whether it is possible to appoint out of the fund (probably not possible) and prepare for recording the amount in the Trust Fund prior to calculating the decennial charge”

Budget 2015 – Deeds of Variation Warning

Taken together, all the new measures against tax avoidance and evasion will raise £3.1 billion over the forecast period.

I can also tell the House that we will conduct a review on the avoidance of inheritance tax through the use of deeds of variation. It will report by the autumn.

We will seek a wide range of views.

Mr Deputy Speaker, my RHF the Chief Secretary will tomorrow publish further details of our comprehensive plans for new criminal offences for tax evasion and new penalties for those professionals who assist them.

Let the message go out: this country’s tolerance for those who will not pay their fair share of taxes has come to an end.

So – fair warning that deeds of variation are scheduled for revision.  It’s one of those things that is constantly under threat – but now seems to be very definitely a target.

So, all estates currently in administration should endeavour to get variations completed before election day, to be on the safe side,,,

And those affluent children with elderly parents really need to encourage them to think about changing their wills, now more so than ever before.

Give Generously: why leave it to the taxman?

It is a truth universally acknowledged that a person with fortune must give some of that wealth to the government of the day.  But it is not necessary to do so with every appearance of enjoyment, and it is not a moral obligation, but a legal one.

Death and Taxation are two of the great certainties.  In the UK, we have a wealth tax that is calculated on the amount a person leaves when they die (Inheritance Tax).  This is in addition to the wealth tax that a person pays when they dispose of an asset that has increased in value (Capital Gains Tax) the wealth tax that a person is in the process of acquiring (Income Tax) and the wealth tax paid on the transfer of a property (Stamp Duty).

It might almost seem as if the money that a person makes, saves, invests and then finally dies owning has been taxed two or three times over before it can be passed on to one’s family.  The moral certainty about paying one’s fair dues can wear a little thin, in the circumstances.

If you are an individual and have assets exceeding £325,000, then there is a real possibility that you will be giving the taxman a large chunk of what you have worked hard for – everything over this amount will be taxed at 40%, unless it goes to an exempt person.  The figure of £325,000 is not an arbitrary sum – it is the amount that an individual can leave at 0% tax, and has been set for the next three tax years.

Happily, there are some ways of lowering an inheritance tax bill. Essentially, the basic way to reduce the tax is to be poorer by the time you die.  To spend so that there is less money, or give money whilst you still have many years to live, when your children can appreciate it.  By the time you die, your children might be well into middle age, and perhaps may have got past the difficult years.

The very basic patterns for giving are permitted by legislation – an annual amount per donor of £3000, together with small gifts that can be given, and gifts out of surplus income.  The one that people know best is the Potentially Exempt Transfer – this is where you give something away (completely, and do not keep any benefit from it) and if you survive that gift, it is out of your estate.  You are thus poorer when you die.  A direct gift is a potentially exempt transfer.

My uncle, now in his seventies, made a trust for the benefit of his children and grandchildren.  That trust fund was set up a few years ago, and is the means of providing for not only his daughter (who is not quite married but not quite divorced), his disabled granddaughter but also his able sons and grandsons.    By using the trust, he can retain control of the assets, to a certain extent, and make sure that the money is used in a way that truly benefits his grandchildren, rather than giving them too much money too young.  This also indirectly benefits his adult children, who have their lives lifted slightly, by knowing that there are some reserves for school expenses when times are tough.  And best of all, with luck, in a few more years, the amount put into the trust will have ceased to be counted as part of his estate planning strategy.  This latter sort of giving is not potentially exempt – but if kept within a single 0% band, is effectively without any lifetime Inheritance Tax to pay.

This is not a complete list of all the ways in which you can reduce your inheritance tax liability, and if you are planning to give away a substantial sum to lessen the inheritance tax burden, you are best advised by a professional, to make sure that your objective is achieved.  Your own situation is the most important to bear in mind, when giving, and your legal adviser can give a particular view based on your particular circumstances.

 

Auth comment:  yes, this was written to be a small article.  Now I look at it, I know it is not really a blog post.   Soz.

What is a grant of probate?

A grant of probate is the word used to describe the process of confirming the right of named individuals to deal lawfully with the estate of a person who has died.

If a person has died leaving a will, then the people who are named as executors are those people entitled to take out the grant of probate. The authority of an executor to act stems from the will itself, and is confirmed by the grant of probate.

If the person has died without leaving a will, or has died leaving a will, but the executors have predeceased, then there is a statutory order of who is entitled to take out the grant of letters of administration. The authority of the administrators stems from the grant of letters of administration itself.

In order to pass through the process of the court, the executors, or prospective administrators must complete an oath, whereby they swear the extent of the estate, the full name and address of the person who has died, details of the deceased’s birth and death and age at death, together with any other names by which the deceased was known. The Personal Representatives also swear that the deceased was domiciled in England and Wales and that the will attached was the last known will of the deceased.

In addition to citing the basic facts, the PRs also state that the estate was of a certain value. They then go on to promise that they will deliver up to the court accounts of the estate if requested, will gather in and distribute the assets and pay the liabilities lawfully.

If the assets are relatively few, and Inheritance Tax does not need to be paid (and there are no complicating features of the estate), then the probate registry will accept a short Inland Revenue form citing the values of the items in the estate. If the value of the estate is high (or if there are complicating features) then the longer form needs to be filled in. This long form asks more detailed questions, but both documents need to be completed with a care for the detail that is appropriate – it is not enough to make an estimate of value if you are not making an effort – if in doubt, employ someone who can tell you how much that Meissen china or that Georgian silverware is worth. If your dad was into antiques, then get a valuation – if it is all reproduction, then perhaps it might not be a high value after all. If you are claiming a transferrable tax band, then you will also need to be able to show this on the relevant form – whether it is a short form that is appropriate or a long form.

So – you tell the Inland Revenue what the estate is worth, and pay the tax (or a proportion of the tax). You take the oath and swear (on the Bible, Koran, other religious text, or solemnly affirm) the oath saying you will do the right thing. And then submit the documents to the probate registry, who, in due course, send a grant of probate. Congratulations – the will has been proved, is now a document of public record, against which you can be held to account. You may now collect in the assets, pay debts, and deal with the estate according to the law. In the case of there being no will – your authority starts now, and you may collect in assets and enter into contracts on behalf of the estate (as opposed to in your own name).