Inheritance Tax Planning & Trusts
Inheritance Tax Planning & Trusts discussed by Hayvenhursts Accountancy Services
What is Inheritance Tax?
Inheritance Tax is a tax payable on the property, money and possessions which is known as the estate of someone who has passed away.
Inheritance Tax is paid at 40% on anything above the threshold, however, there is a reduced rate of 36% if the person leaves more than 10% of their estate to charity.
Inheritance Tax can also apply when you’re alive if you transfer some of your estate into a trust.
When do you pay Inheritance Tax?
If the value of the estate is below the £325,000 threshold then there is normally no Inheritance Tax to pay.
If you leave everything above the £325,00 threshold in regards to your estate to your spouse, civil partner, a charity or a community amateur sports club then there is normally no Inheritance Tax to pay.
If the estate’s total value is below the £325,000 threshold then you still need to report it to HMRC, however, normally there will be no Inheritance Tax to pay.
If you are giving your home to your children (including adopted, foster or stepchildren) or grandchildren then the Inheritance Tax your threshold can increase to £500,000.
If you are married or in a civil partnership and your estate is less than your Inheritance Tax threshold then any unused threshold can be added to your partner’s threshold when you die. This can result in their threshold being up to £1 million.
What is a Trust?
Your assets which includes; money, investments, land or buildings is a way of managing it by way of a trust. There are various types of trusts and all are taxed differently.
Trusts involve the following:
- the ‘settlor’ is the person who puts assets into a trust
- the ‘trustee’ is the person who manages the trust
- the ‘beneficiary’ is the person who benefits from the trust
Why would you set up a trust?
- They are a way of controlling and protecting family assets
- They are used if someone is too young to handle their assets which have been passed down to them
- If someone is unable to handle their affairs because they are incapacitated by way of health
- They are a way to pass on assets when you are still alive
- They are a way to pass on assets when you pass away which is a ‘will trust’
- They are used under the rules of inheritance if someone dies without a will (in England and Wales)
How do Inheritance Tax Planning and Trusts Link
Trusts can be used as a way of minimisingInheritance Tax if you are above the UK thresholds. It is a complicated process so you should always use an experienced company like Hayvenhursts Accountancy services who will advise you depending on your individual circumstances and estate.
What should I do when thinking about Inheritance Tax and Trust planning?
Inheritance tax law, and inheritance tax reliefs and exemptions are complex and you should seek advice from an experienced business like Hayvenhursts when you are thinking about the best way to plan your estate. If you own a business or have assets abroad then it can be even more complex so using an expert is essential to ensure that you minimise the inheritance tax that is paid on your estate and it is paid in a compliant manner.
The following information is sourced from here and we can support and guide you through your Inheritance Tax Planning & Trusts as we understand how complex the rules and guidelines are: https://www.gov.uk/guidance/trusts-and-inheritance-tax
Inheritance Tax and settled property
The act of putting an asset – such as money, land or buildings – into a trust is often known as ‘making a settlement’ or ‘settling property’.
For Inheritance Tax purposes, each asset has its own separate identity. This means, for example, that one asset within a trust may be for the trustees to use at their discretion and therefore treated like a discretionary trust. Another item within the same trust may be set aside for a disabled person and treated like a trust for a disabled person. In this case, there will be different Inheritance Tax rules for each asset.
Even though different assets may receive different tax treatment, it is always the total value of all the assets in a trust that is used to work out whether a trust exceeds the Inheritance Tax threshold and whether Inheritance Tax is due. There are different rules for different types of trust.
Inheritance Tax and excluded property
Some assets are classed as ‘excluded property’ and Inheritance Tax is not paid on them. However, the value of the assets may be brought in to calculate the rate of tax on certain exit charges and 10 year anniversary charges. Types of excluded property can include:
property situated outside the UK – that is owned by trustees and settled by someone who was permanently living outside the UK at the time of making the settlement
government securities – known as FOTRA (free of tax to residents abroad)
The rules governing excluded property can be complicated.
Assets in a trust such as money, shares, houses or land are known as ‘relevant property’. Most property held in trusts counts as relevant property. Inheritance Tax may be due on the assets held within a trust when:
- they are transferred out of a trust (exit charges)
- a 10 year anniversary occurs
The only exceptions to this rule are when the asset is:
- in an interest in possession trust and it was put there before 22 March 2006
- subject to a ‘transitional serial interest’ made between 22 March 2006 and 5 October 2008
- put into an interest in possession trust by the terms of a will or the rules of intestacy
- set aside for a disabled person
- set aside for a bereaved minor
- put into an age ‘18 to 25 trust’
Transfers into trust
A transfer of assets into a trust can include buildings, land or money and can be either of the following:
- a gift made during a person’s life
- a transfer or transaction that reduces the value of the settlor’s estate (for example an asset is sold to trustees at less than its market value) – the loss to the person’s estate is considered a gift or transfer
Work out if Inheritance Tax is due
For most types of trust Inheritance Tax is due when you make transfers that total more than the Inheritance Tax threshold of £325,000. You work this out by adding up the value of any transfers (based on the loss in value to the settlor’s estate) and any chargeable gifts made in the previous 7 years by the settlor. Inheritance Tax is due on everything above the threshold.
If the trustees pay, the rate of tax is 20%. If the settlor pays the Inheritance Tax instead of the trustee, this means there will be an increased loss from the settlor’s estate. The amount of tax due will therefore increase. These calculations are complex.
Death within 7 years of making a transfer
If you die within 7 years of making a transfer into a trust your estate will have to pay Inheritance Tax at the full amount of 40%. This is instead of the reduced amount of 20% which is payable when the payment is made during your lifetime.
In this case your personal representative – who manages your estate when you die – will have to pay a further 20% out of your estate based on the value of the original transfer.
If no Inheritance Tax was due when you made the transfer, the value of the transfer is added to your estate when working out whether any Inheritance Tax is due.
If you make a gift into any type of trust but continue to benefit from the gift – for example, you give away your house but continue to live in it – you will pay 20% on the transfer and the gift will still count as part of your estate. These are known as gifts ‘with reservation of benefit’. Find out more about passing on property.
This creates a situation where there are 2 possible Inheritance Tax charges if you die:
- a charge when you transfer the gift into a trust
- a charge to your estate when you die – because the asset is still considered part of your estate
To avoid double taxation, only the higher of these charges is applied – in other words you will never pay more than 40% Inheritance Tax.
Gifts into a trust for someone who is disabled
You do not have to pay Inheritance Tax immediately if you make a gift to a trust for someone who is disabled but Inheritance Tax may still be due when you die.
Find out more about how Inheritance Tax applies to trusts for someone who is disabled.
The Inheritance Tax exit charge
Inheritance Tax is charged up to a maximum of 6% on assets – such as money, land or buildings – transferred out of a trust. This is known as an ‘exit charge’ and it’s charged on all transfers of relevant property.
Transfers out of trust
A transfer out of trust can occur when:
- the trust comes to an end
- some of the assets within the trust are distributed to beneficiaries
- a beneficiary becomes ‘absolutely entitled’ to enjoy an asset
- an asset becomes part of a ‘special trust’ (for example a charitable trust or trust for a disabled person) and it ceases to be ‘relevant property’
- the trustees enter into a non-commercial transaction that reduces the value of the trust fund
When there is no Inheritance Tax exit charge
There are some occasions when there’s no Inheritance Tax exit charge – these apply even where the trust is a ‘relevant property’ trust. For instance, it is not charged:
- on payments by trustees of costs or expenses incurred on assets held as relevant property
- on some payments of capital to the beneficiary where Income Tax will be due
- when the asset is transferred out of the trust within 3 months of setting up a trust, or within 3 months following a 10 year anniversary
- when assets are ‘excluded property’ – some foreign property is excluded property
Calculating the Inheritance Tax exit charge
The calculations for the Inheritance Tax exit charge are complicated. You will need the following information before you can begin:
- the value – before any reliefs – of all the assets transferred into the trust in question, valued at the dates of transfer
- the value of all other transfers into other trusts made by the settlor on the same day as the trust in question was set up, valued at the date they were added
- the value of all transfers chargeable to Inheritance Tax that the settlor made in the 7 years before the trust in question was set up, valued at the date they were made
Once you have this information there will be a different calculation depending on whether the:
- transfer out of the trust occurs during the first 10 years of a trust’s life
- transfer out occurs after the first 10 years
- trust is an ‘18 to 25 trust’
The 10 year anniversary charge
As a trustee, you will have to pay a charge on every 10 year anniversary of the date your trust was set up if your trust contains relevant property with a value above the Inheritance Tax threshold.
Work out the Inheritance Tax
Inheritance Tax is charged at each 10 year anniversary of the trust. It is charged on the net value of any relevant property in the trust on the day before that anniversary. Net value is the value after deducting any debts and reliefs such as Business or Agricultural Relief. There are different rules if the trust was set up before 27 March 1974.
The calculation for the 10 yearly charge is complicated. Before you can begin, you’ll need the following information:
- the value of the relevant property in the trust on the day before the 10 year anniversary
- the value – at the date it entered the trust – of any trust property that has not been relevant property at any time while in this trust
- the value of any property in any other trust (except wholly charitable trusts) that the settlor set up on the same date as this trust – use the value from the date it was set up
- the value of any transfers subject to Inheritance Tax (whether into trusts or not) that the settlor made in the 7 years before this trust was set up – use the value at the date of transfer
- the value of any transfers – at the date they were transferred – of relevant property out of the trust within the last 10 years
- whether any of the relevant property was relevant property in the trust for less than the last
- 10 years
Dealing with a trust when someone dies
When someone dies, the job of managing their estate may involve dealing with trusts.
The person that is died may have wanted their assets put into trust when they die, or part of their estate may have already been held in trust.
The executor or administrator of the person’s estate – known as the ‘personal representative’ – must find out the type of trust involved.
Inheritance Tax is due on everything above the Inheritance Tax threshold (£325,000 for the tax year 2019 to 2020). This can become more complicated when a trust is involved.
If a home is held in a trust or transferred to a trust when a person dies, the availability of the additional threshold will depend on the type of trust. This is because the type of trust will affect whether HM Revenue and Customs (HMRC) treat:
- the home as part of a person’s estate
- that person’s direct descendants as inheriting the home
When a home is held in a trust or transferred to a trust, you should discuss how the additional threshold applies with a solicitor or other professional adviser who knows about trust law.
There are 3 main ways that the deceased’s personal representative may have to deal with a trust when working out whether Inheritance Tax is due.
1. When the deceased was the beneficiary of a trust
Some trusts are set up so that the beneficiary has ownership or a legal right to the income or assets in the trust. This will affect what is included in the estate of the beneficiary when they die.
A bare trust is one where the beneficiary is entitled to both the income and the assets in the trust. Therefore, when they die, both income and assets are considered part of their estate. The personal representative needs to work out whether there is any Inheritance Tax to pay and include the deceased’s interest in the bare trust, on form IHT400 Inheritance Tax Account.
An interest in possession trust is one where the beneficiary is entitled to only the income from a trust. When they die, there are certain circumstances where the value of this ‘interest in possession’ is calculated as part of their estate. These include when the trust was set up:
before 22 March 2006
after 22 March 2006 and was either an ‘immediate post death interest’, a ‘disabled person’s interest’ or a ‘transitional serial interest’ trust
If you are the personal representative you will need to work out the value of an ‘interest in possession’ and complete questions 45 and 75 on form IHT400. You’ll need to liaise with the trustees to get this information. It is the trustees’ duty to complete an IHT100 Inheritance Tax Account form. This form must also be completed when an interest in possession trust comes to an end.
A home is included in a person’s estate if it is either held in:
a bare trust
an interest in possession trust so that they had the right to use or occupy the property
This can happen when a person is given a right to live in the family home following the death of their spouse. The home is held in trust for the lifetime of the beneficiary.
When the beneficiary dies, the estate will be eligible for the additional threshold as long as their direct descendants then inherit their home.
If the home is held in a discretionary trust, it would not normally be included in the beneficiary’s estate. When the beneficiary dies, their estate will not be eligible for the additional threshold even if the home goes to the beneficiary’s direct descendants.
2. When the deceased transferred assets into a trust before they died
There may have been an Inheritance Tax charge of 20% when assets were transferred into a discretionary trust. If you are the personal representative you must find out whether the deceased made any transfers into a trust in the 7 years before they died. If they did, and they paid Inheritance Tax at that time, the tax will be recalculated at 40% and a credit allowed for the tax paid when the trust was set up. The trustees will be liable to pay the extra tax. You must show this on form IHT400 at question 28.
Even if no Inheritance Tax is due on the transfer you may need to add its value to the deceased’s estate when you are working out the value for Inheritance Tax purposes.
The additional threshold will not apply to transfers of a home or any other assets to a discretionary trust before a person died. This applies even if the beneficiary is a direct descendant or if they are entitled to the assets in the trust.
3. When a trust is set up by a will
Someone might ask in their will that some or all of their assets are placed in a trust. A trust set up under these circumstances is known as a ‘will trust’. The personal representative must then make sure that the trust is set up properly and all taxes are paid on assets going into it.
If a home is put into an interest in possession trust at the time someone dies, the additional threshold will available for their estate if the person who benefits from the trust is their direct descendant.
If the beneficiary is not a direct descendant, the estate will not qualify for the additional threshold. In that case the unused additional threshold would be available to transfer to a surviving spouse or civil partner’s estate.
Mr H died in the tax year 2017 to 2018. He left a house worth £350,000 to his wife in a trust, for her benefit whilst she’s alive.
His will directed that the house will go to their children when his wife dies.
The additional threshold for Mr H’s estate is nil because he left the house to his wife. The threshold available for transfer is 100% because none has been used.
When Mrs H dies in tax year 2020 to 2021, the house, now worth £400,000, passes to their children.
A claim is made to transfer any unused additional threshold from Mr H’s estate.
You work out the additional threshold available on Mrs H’s estate as follows:
Mrs H’s own additional threshold £175,000 (maximum additional threshold in tax year 2020 to 2021)
plus transferred additional threshold £175,000 (100% x £175,000)
maximum additional threshold for Mrs H’s estate £350,000
As the home passing to Mrs H’s children is worth more than the maximum available additional threshold of £350,000, Mrs H’s estate qualifies for the full £350,000 additional threshold.
If a home is put into a discretionary trust on death, the deceased’s estate will not qualify for the additional threshold even if the beneficiaries are direct descendants of the deceased. Whether the beneficiaries are entitled to use the home is at the discretion of the trustees, so the home will not form part of any beneficiary’s estate and they will not be treated as inheriting the home.
The estate may still qualify for the additional threshold if the trust meets certain conditions. For example, if the trust has been set up for:
- a disabled beneficiary
- orphaned children under 18
- any children under 25
You should discuss how the additional threshold applies in these situations with a solicitor or other professional adviser.
Once it is set up, it’s the trustees’ duty to make sure Inheritance Tax is paid on any further transfers into or out of the trust. They do this by completing the IHT100 Inheritance Tax Account form.
Telling HMRC about charges
If Inheritance Tax is due on assets in a trust you will need to fill in form IHT100 and the relevant event form – IHT100a to IHT100g.
Some trusts do not have to send in an IHT100 form as long as they meet the rules for excepted transfers and settlements – usually trusts with a low value.
Doing the exit charge calculation yourself
If you want to do the calculations yourself you need to enter your figures into sections G and H on form IHT100.
You can download a worksheet and guidance notes to help you work out how much Inheritance Tax you will need to pay.
To calculate the charge, you will also need to use section B of Inheritance Tax worksheet IHT100WS. You can get further help filling in this section of the worksheet with part B of the guide IHT113.
If you are calculating the 10 year anniversary charge and some of the assets in a trust have not been relevant property for all of the 10 years, the tax may be reduced by the number of quarters that the asset was not relevant property. You can use the Inheritance Tax quarters calculator to help you work this out.
You can also use this example of how to calculate the 10 yearly charge to help you.
Getting HMRC to do the calculation for you
If you want HMRC to work out the charges for you, fill in form IHT100 leaving sections G and H blank. You will still need to complete the relevant event form. You need to return the form to HMRC in good time for the calculation to be worked out – otherwise you may be charged a penalty or interest on the Inheritance Tax due.
Deadlines, penalties and payments
If the chargeable event occurred on or after 6 April 2014, trustees must pay Inheritance Tax by the end of the sixth month after the event. The trustee must also report the event to HMRC, using form IHT 100, by the end of the sixth month after it happened.
If the chargeable event occurred before 6 April 2014, trustees must pay Inheritance Tax by the end of the sixth month after the event. The trustee must report the event to HMRC, using form IHT 100, within a year of the event happening.
HMRC will charge interest on payments received after the due date.
The following information is sourced from here and we can support and guide you through your Inheritance Tax Planning & Trusts as we understand how complex the rules and guidelines are: https://www.gov.uk/trusts-taxes/trusts-and-inheritance-tax
Trusts and Inheritance Tax
Inheritance Tax may have to be paid on a person’s estate (their money and possessions) when they die.
Inheritance Tax is due at 40% on anything above the threshold – but there’s a reduced rate of 36% if the person’s will leaves more than 10% of their estate to charity.
Inheritance Tax can also apply when you’re alive if you transfer some of your estate into a trust.
When Inheritance Tax is due
The main situations when Inheritance Tax is due are:
- when assets are transferred into a trust
- when a trust reaches a 10-year anniversary of when it was set up (there are 10-yearly Inheritance Tax charges)
- when assets are transferred out of a trust (known as ‘exit charges’) or the trust ends
- when someone dies and a trust is involved when sorting out their estate
What you pay Inheritance Tax on
You pay Inheritance Tax on ‘relevant property’ – assets like money, shares, houses or land. This includes the assets in most trusts.
There are some occasions where you may not have to pay Inheritance Tax – for example where the trust contains excluded property.
Some types of trust are treated differently for Inheritance Tax purposes.
These are where the assets in a trust are held in the name of a trustee but go directly to the beneficiary, who has a right to both the assets and income of the trust.
Transfers into a bare trust may also be exempt from Inheritance Tax, as long as the person making the transfer survives for 7 years after making the transfer.
Interest in possession trusts
These are trusts where the beneficiary is entitled to trust income as it’s produced – this is called their ‘interest in possession’.
On assets transferred into this type of trust before 22 March 2006, there’s no Inheritance Tax to pay.
On assets transferred on or after 22 March 2006, the 10-yearly Inheritance Tax charge may be due.
During the life of the trust there’s no Inheritance Tax to pay as long as the asset stays in the trust and remains the ‘interest’ of the beneficiary.
Between 22 March 2006 and 5 October 2008:
- beneficiaries of an interest in possession trust could pass on their interest in possession to other beneficiaries, like their children
- this was called making a ‘transitional serial interest’
- there’s no Inheritance Tax to pay in this situation
From 5 October 2008:
- beneficiaries of an interest in possession trust cannot pass their interest on as a transitional serial interest
- if an interest is transferred after this date there may be a charge of 20% and a 10-yearly
Inheritance Tax charge will be payable unless it’s a disabled trust
If you inherit an interest in possession trust from someone who has died, there’s no Inheritance Tax at the 10-year anniversary. Instead, 40% tax will be due when you die.
If the trust is set up by a will
Someone might ask that some or all of their assets are put into a trust. This is called a ‘will trust’.
The personal representative of the deceased person has to make sure that the trust is properly set up with all taxes paid, and the trustees make sure that Inheritance Tax is paid on any future charges.
If the deceased transferred assets into a trust before they died
If you’re valuing the estate of someone who has died, you’ll need to find out whether they made any transfers in the 7 years before they died. If they did, and they paid 20% Inheritance Tax, you’ll need to pay an extra 20% from the estate.
Even if no Inheritance Tax was due on the transfer, you still have to add its value to the person’s estate when you’re valuing it for Inheritance Tax purposes.
Trusts for bereaved minors
A bereaved minor is a person under 18 who has lost at least one parent or step-parent. Where a trust is set up for a bereaved minor, there are no Inheritance Tax charges if:
- the assets in the trust are set aside just for bereaved minor
- they become fully entitled to the assets by the age of 18
A trust for a bereaved young person can also be set up as an 18 to 25 trust – the 10-yearly charges do not apply. However, the main differences are:
- the beneficiary must become fully entitled to the assets in the trust by the age of 25
- when the beneficiary is aged between 18 and 25, Inheritance Tax exit charges may apply
Trusts for disabled beneficiaries
There’s no 10-yearly charge or exit charge on this type of trust as long as the asset stays in the trust and remains the ‘interest’ of the beneficiary.
You also do not have to pay Inheritance Tax on the transfer of assets into a trust for a disabled person as long as the person making the transfer survives for 7 years after making the transfer.
Paying Inheritance Tax
You pay Inheritance Tax using form IHT100.
If you’re valuing the estate of someone who’s died, you may have to value other assets apart from trusts to see if Inheritance Tax is due.
When you own your own business you need to think carefully and use our expert advice to ensure whoever you pass it down to doesn’t pay any unnecessary tax. There are different ways to ensure you structure your affairs and get relief from inheritance tax when it comes to your business which minimise the taxable value of a business asset. You should always use an expert like Hayvenhursts who will not only advise on the setting up and running of trusts but can also deal with all trust accounting and tax matters on your behalf. We will guide you through this complex process and guidelines to ensure you do the right thing which is specific to your circumstances.
About Hayvenhursts Inheritance Tax Planning & Trusts
It is worth noting that trusts aren’t just for the very wealthy and can be used as part of a wealth protection strategy to protect assets as well as tax planning vehicles, particularly as part of inheritance tax planning.
At Hayvenhursts we can advise on the setting up and running of:
- Discretionary trusts
- Accumulation and maintenance trusts for children
- Interest in possession trusts
We can deal with all trust accounting and tax matters on your behalf and will guide you through this complex process and guidelines to ensure you do the right thing which is specific to your circumstances.
We are a well-established and trusted five partner accountancy firm that offer a wide variety of accountancy services which suit your business and individual needs.
Our service includes us getting to know and understand your business or circumstances, understanding your aims and aspirations and working alongside you identify how you will do this whilst identifying savings, tax breaks, improved cash flow and business efficiencies for you helping you to achieve your aims and increase your profits. We use a team of highly trained, qualified and experienced staff to ensure we understand your business sector and your individual business.
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