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IHT on assets inherited from a Trust

including wills and probate
bruncher
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IHT on assets inherited from a Trust

#416361

Postby bruncher » May 31st, 2021, 12:43 pm

Parents set up Trusts - one each. The beneficiaries are:

1. Their two daughters who both get income from the investments.

2. The children of the two daughters inherit the capital assets on the death their mother.

So one of the daughters died and the Trusts were split and half the assets were distributed to the children of that daughter. When the second daughter died, the Trusts were wound up and remaining assets were similarly distributed.

My question is whether the fact that the assets were in a Trust, has any bearing on the application of IHT, or whether the setting up of the Trusts was purely a way of ensuring that grandchildren would inherit capital from their grandparents?

scrumpyjack
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Re: IHT on assets inherited from a Trust

#416368

Postby scrumpyjack » May 31st, 2021, 1:15 pm

bruncher wrote:Parents set up Trusts - one each. The beneficiaries are:

1. Their two daughters who both get income from the investments.

2. The children of the two daughters inherit the capital assets on the death their mother.

So one of the daughters died and the Trusts were split and half the assets were distributed to the children of that daughter. When the second daughter died, the Trusts were wound up and remaining assets were similarly distributed.

My question is whether the fact that the assets were in a Trust, has any bearing on the application of IHT, or whether the setting up of the Trusts was purely a way of ensuring that grandchildren would inherit capital from their grandparents?


What you describe, where the daughter has a life interest in the trust income, sounds like an 'Interest in Possession' trust and would form part of her estate for IHT and IHT would be payable on her death before the net goes to the grandchildren.

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Re: IHT on assets inherited from a Trust

#416731

Postby eisman » June 2nd, 2021, 12:53 am

It is not altogether clear from the OP's query whether the terms of the trust deeds ENTITLED the daughters to the trust income, or the trustees merely used their discretion to pay the income to them. If the latter, the trusts will be discretionary ('relevant property') trusts and, irrespective of when the trusts were created, subject to IHT 10 year anniversary charges, and exit charges when assets are distributed to the beneficiaries.

Each relevant property trust will have its own nil rate band (currently £325k) and IHT 10 year anniversary and exit charges will only arise if the trust value exceeds the nil rate band. This is provided only one trust was ever created by each grandparent.

The remainder of this post refers to the position if the daughters were entitled to the income under the terms of the trust deeds.

Scrumpyjack wrote:

What you describe, where the daughter has a life interest in the trust income, sounds like an 'Interest in Possession' trust and would form part of her estate for IHT and IHT would be payable on her death before the net goes to the grandchildren.


The IHT position depends when the trusts were created.

Scrumpyjack's comment may be correct if interest in possession trusts were created prior to 22 March 2006.

However, interest in possession trusts created on or after 22 March 2006 do not now form part of the estate of the life tenant for inheritance tax. They generally* fall within the 'relevant property' regime (essentially the same as discretionary trusts) and are therefore subject to IHT 10 year anniversary and exit charges.

* There are limited exceptions to this general rule:
- an immediate post-death interest (IPDI)
- a disabled person's trust
- a transitional serial interest.

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Re: IHT on assets inherited from a Trust

#416737

Postby Dod101 » June 2nd, 2021, 6:53 am

The OP will of course respond I am sure but the question did not seem to me to be about the taxation of the trusts (after all it seems they have been wound up) but the IHT position of one of the grand daughters who benefited from the capital which originated in a trust. Surely in her estate it does not matter where the funds originated?

Dod

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Re: IHT on assets inherited from a Trust

#417665

Postby bruncher » June 6th, 2021, 12:38 pm

Apologies for the incomplete information.

The Trusts were part of the Wills made up by my grandparents c. 1964, to come into effect upon their deaths, and definitely had to provide income, firstly for each other, then for their two daughters.

Looking at the Wills, the term 'Protective Trust' is used 'as declared by Section 33 of the Trustee Act 1925'.

My mother and her sister became beneficiaries of income during their lives, but they decided to terminate the tradition and their instructions in their own Wills were for the Trusts to be wound up, rather than paying income to a further generation. It's been a major administrative hassle and I think Trusts are probably only a good idea for wealthy people not moderately prosperous as my grandparents were.

Apparently we do have to pay IHT on this inheritance, which I was initially surprised about, as I had the uninformed notion that Trusts were for 'tax planning' purposes, but I suppose the idea was more to protect capital for a further generation of the family.


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