Inheritance Tax And Trusts

Inheritance Tax

Inheritance Tax is a big revenue generator for the UK treasury. Receipts for HMRC are currently ( 2023-24) at over £6billion a year. Strangely though, in 2023-24 it is likely that only about 5% of estates will be liable for this tax. It is evident however, that this may well increase, due to ‘Fiscal Drag’.- the means by which the nil-rate band thresholds are staying the same till 2028. As more estates exceed the nil-rate band thresholds. This is a significant factor in today’s world of increasing asset and property values.

It therefore makes good sense to get Professional help, with Wills and Estate Planning, so that you are taking the best possible steps to reduce any liability on your estate. IPW members can help you with these areas.

Inheritance Tax is the tax applied in the UK, to the estate of someone who has died. The deceased’s Executors (if the deceased made a Will) or ‘Personal Representatives’ (if the deceased didn’t make a Will) are responsible for assessing the Tax liability and making sure it’s paid to HMRC within just over 6 months of the date of death.

How much?
Inheritance Tax is chargeable at 40% of the chargeable excess. The excess is the amount of the deceased’s net estate that is greater than their combined allowed ‘nil-rate bands, reliefs and exemptions’ at the date of their death.

Just supposed the deceased’s net estate is valued at £600,000 ( they have no main residence property) Just suppose their available basic nil-rate band was £325,000 ( the current basic nil-rate band) Their chargeable excess would be £600,000-£325,000 = £275,000 The Tax due would be £275,000 x 40% = £110,000!

Mitigations
There are 2 main types of nil-rate bands, these are: Basic Nil-Rate Band: £325,000 Main Residence Nil-Rate Band: up to £175,000 (only if the deceased wholly owned their main residence property worth more than £175,000, or the deceased’s share of their main residence property is worth more than £175,000). There are no major changes to these in Rachel Reeves budget of 2024.

There are various other reliefs available, and certain allowable exemptions to help reduce the excess. It is wise to obtain advice from a Professional Willwriter who can help you review the situation and look at ways of mitigating, if possible.

Where would advice be needed?

Married Couple (or in a Civil Partnership)
Both types of Nil-rate bands can be transferred between spouses, (depending on the situation) giving a potential combined nil-rate band of £1,000,000. This will depend on various factors, including their residential Property value and how their Wills are configured. Advice should be sought to make sure things are done properly.

Unmarried couples
Unmarried couples ( or ‘common-law’ couples’ do not have the same ‘Combined Nil-Rate Band’ advantages as married couples. Therefore, it's vital that unmarried couples get appropriate help in maximising their available nil-rate bands, exemptions and reliefs where possible. This is especially important where either they own their property together, or only one of them owns their home. Again, advice is vitally important.

Single with dependants
Where a person’s wealth is over the applicable ‘nil-rate bands’ they need to be aware of the implications especially if they have dependants (e.g. children and/or a partner) and there is property involved. There may be situations where Trusts are needed. Again, advice is vitally important.

People with businesses / business interests / farms

Rachel Reeves budget in 2024 introduced some significant changes to Inheritance Tax which will affect these areas, some significantly.

People with shares in private Ltd companies, interests in partnerships and ‘sole traders’ may have certain reliefs against Inheritance Tax for their business plus any personal assets used by the business. It is vitally important to consider what happens on death and who might take over or run the business, and who to pass it to. A Trust might be needed. Large values of business holdings might also affect the availability of main residence nil-rate bands. Again, advice is vitally important.

There are many other situations where Inheritance Tax will influence the decisions and how a person’s Will and Estate Planning needs to be constructed/considered.

Trusts

‘Trusts’ go back to the times of the Crusades, when wealthy Crusaders left their lands in the hand of ‘Trustees’ to look after until they (hopefully) returned alive. If they did not return, the Trustees would be responsible for administering and looking after the lands and passing them to ‘Beneficiaries (e.g. the Crusader’s children.)

So in essence a Trust is where a Person (called a ‘Settlor’) gives assets/property/capital (either on their death or during their life ) to ‘Trustees’ to hold for the benefit of ‘Beneficiaries’.

Here are a few examples of where Trusts are used:

Life Interest Trust for a Property
On a person’s death, to give a right to someone (e.g. a dependant) to live in the deceased’s property (or share of a property) for a certain time or period, or until the dependant’s death

Discretionary Trust for Capital
On a person’s death, for Trustees to hold the deceased’s capital ‘on trust’ for the eventual benefits of certain Beneficiaries, and for the Trustees to decide who will benefit, when, and how much by.

Lifetime Trust for a Main Residence Property
A Person, whilst they are alive to place their property into a Trust- i.e. give their property to ‘Trustees’ who will then hold the property till the person dies. After their death the Trustees can transfer full ownership to Beneficiaries.

Trusts in Wills
These trusts only come into force on death where the deceased has a valid Will, and the Trust can be created.

Lifetime Trusts
These trusts come into force when the property/assets/capital is transferred to the Trustees. There are advantages and disadvantages, and Tax implications for Trusts, so it is vitally important to obtain Professional advice before acting , and choosing persons to be Trustees and Beneficiaries.

To find your local IPW Professional to help you please click here.

Transferring the ownership of your home to your children- a ‘Transfer of Value’ for Inheritance Tax purposes

This is not without significant risks. Some of the risks are:

1) A local authority could ignore the transaction, without limit of time, if they consider that a significant reason for doing it was to avoid paying long term care fees – why else would you give your house to your children and continue to live in it?

2) The value of the house will be added back into your estate for Inheritance Tax, it does not ‘avoid it’. This will be the case unless Income Tax is paid on the rental value of your home - even if you are not actually paying rent to your children.

3) Unless your children live with you, the house will be subject to Capital Gains Tax on its increased value from the date of the transfer.

4) If your children become involved in a marital dispute or financial difficulties, your home may be considered to be part of their assets and could form part of any settlement that they have to make. This may affect things dramatically.