From £1.50 to £16 each – massive fee increase for probate fees
In case anyone missed it – and it loomed up far too quickly…
Fees for official copies of a grant of probate have gone from £1.50 each to £16!
That’s a staggering increase and will fill up the government coffers nicely. Especially if you have lots of different bank accounts and shareholdings all over the place and no shares are under management…
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:
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.
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 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 | 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—
(b)the benefit conferred by any of those dispositions is disclaimed,
(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.
Finance Act 1986 Sch. 19, para. 24,with effect from 18March 1986.
In recent conversation with my colleague, we noted that few conveyancers [1] talk in any detail about whether a person has made a will or not. Few conveyancers actually talk about tenancy in common either. Of course it’s all there in the fine detail, somewhere in the terms of engagement, or in the closing letter that no-one really needs.
That makes sense – it’s stressful buying a house. Who needs to think about dying as well? And who can afford to make a will?
But hang on a minute – that house will be worth hundreds of thousands – the most valuable asset you own. And you either don’t know or don’t care what happens to its ownership when you die? Surely you should find out? Make a plan?
Well yes. And lets be honest, since there is no such thing as a common-law spouse, no such thing as automatically inheriting from your partner, or even automatic entitlement to all that your spouse (or civil partner) owned, it really should be looked into.
And second marriages with children on both sides? Yes! go make that will.
[1] (the sort of lawyer that deals with buying and selling houses here in the UK)
There’s a lot about this article that really rings true – and I don’t think that about most things that the DM publishes.
The terrible fact is that although most adults have home insurance and service their cars regularly, few have wills. And really, the cost of a will might be far less than a car service in the short term, let along the longer term.
I still find it hard to understand why people can get married (which costs usually several thousands of pounds even for more modest arrangements) and not spend a few hundred pounds on sorting out their financial futures, now they are legally bound to each other.
With all the costs of a new house or a new baby, I can see why you might not want to spare the budget for doing your will in the short term as well – but thinking about how much I pay in childcare costs for after school club now, a will is less. And there is absolutely nothing more important in my life than my child, whose future I want to take care of. As for the new house – well, the smallest fraction of the purchase price could be set aside for a quick brush up of your will.
So – moving house might mean moving jobs, perhaps half way across the country, far away from your previous home and associates – meaning that the likelihood of your will being actually found diminishes, even if you made a will in the first place… a good reason to update it, and also to register it with a service like Certainty.
Why does it have to be so much harder if a person dies without a will? When it costs so little (compared to a night out in London, a car service, a new igadget,) to make it straightforward?
Applying Pitt v Holt – Unilateral transaction — life death litigation.
I can’t find a publicly downloadable account of the judgment in this case, and this report does quote some of the detail.
The lesson being highlighted for practitioners is that the gift of something must be certain.
I wonder whether there was adequate advice on the part of the advisor assisting them with setting up an intervivos trust. Perhaps it might have been part of the advisor’s targets to sell this sort of structure.
Perhaps even, there were detailed attendance notes of what was said when, and whether it appeared as if the clients understood that they could not have the income from what was given away, that a valuable source of income on a daily basis would be removed. Hindsight has a terrible clarity, but surely that is the basis of any advice about giving up assets. A clarity that this money is no longer yours, but you can watch over it. With perhaps more care than you have done with your own assets, precisely because it belongs to another
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.
In my family, where there are important gifts to be made, gift giving is noted formally, and full notes are kept. For this purpose, when I’m talking about gifts, I mean a gift of money or items that have a resale value that is relatively substantial – and which has a meaning for Inheritance Tax – since the particular giver (aka donor) is someone who might be expected to have an estate that would suffer inheritance tax on death.
In my own circumstances, where there are children who share one parent, but not both, recording gifts has also been a way of making sure that the pattern of giving is fair.
Fair is a subjective term – of course it is. Children born earlier may be fully “paid for” by the time a person dies. Children (and of course grandchildren) born later may not be so. To keep things fair is a difficult subject. What is fair to one might not be to another. What makes judging these things so hard is that usually, no records are kept.
Not in my particular family – largely because my father is very familiar with family disputes and inheritance tax law, having been a succession and tax lawyer for many decades.
Being a person who likes to understand the principle of equity and to practice what he preaches, he has devised a way of making sure that all his children understand the impact of the gifts that have been given over the years and the exemptions that cover each gift, so that in the event of his death, his executors have an easier time of it, and that if there are any disputes (polite or otherwise) between his heirs, at least there are some documents to back up the process. On the basis that knowledge can give you truth, if not happiness.
If the role of being a child is to learn from a parent, then this is something that I hope to be able to use – in the role of a lawyer learning from another in the same field, I would also like to take this on board.
And tribute? That’s the way the family choose to look at an enforced gift – one that has to be made, for social or other purposes. Like gifts for a wedding… or gifts on the occasion of an event that is made popular by greetings card manufacturers. It does have the feel of an individual approaching a tribal leader, laden down with gold and silver, spices and fine goods, to impress or placate. On reflection, that is rather like the wedding gift table.
Wills and the rest 