Hoping someone can give me some pointers before I take professional
advice alongside my mother.
My (re-married) mother and her husband, both in their 80s, were
recently paying some money into one of the high street building
societies, and from what I can gather they ended up seeing the
society's Financial Advisor.
The conversation revolved around avoiding inheritance tax. They were
apparently told that some of this could be avoided by the use of a
Trust fund, set up for the benefit of their children. Mum was
apparently told that a fund could be set up in such a way that they
would not lose control of their money whilst they were alive.
Their will is such that on the first death everything passes to the
survivor, and they're seeking to minimise inheritance tax on the
In case it makes any difference I would be both the executor of their
estate and a beneficiary. The estate value would be well into
inheritance tax territory.
Just as a matter of interest, where might the Building Society's
Financial advisor be coming from, i.e. where do they benefit in this
equation? My first thought is that they may not realise that I was
named as executor, and they maybe hope to be appointed as such. How
else might the BS be advantaged?
All advice greatly received.
I think the FA was going to then sell them a Life Bond to put in the
trust, B/Socs dot want to be executors.
But from what you are saying there is chance this wouldn't be effective
anyway if the still have full access to the dosh, due to gift with
reservation rules, but there are some gifts into trust which invest in
bonds which allow an annual income for the settlors, and let the
settlors decide who will get the dosh, without it being a reservation of
interest such as a discounted loan trust
From what you say, their wills are currently very inefficient.
By far the best way in the first instance is to make sure that both
parties use their respective nil rate bands by making sure are they each
have sufficient assets in their sole names, possibly by severing the
tenancy of any jointly owned assets up to the value of the NRB, and then
writing wills in which the first to die leaves unspecified assets to the
value of the NRB to a trust, the beneficiary of which is you, which is
empowered to accept an IOU form the survivor for the NRB as the sole
asset held by the trust. All the physical assets pass to the survivor so
that they are owned by them absolutely.
It is important that the trust does not hold any assets other than the
IOU, even for the shortest of times. Many wills pass half the house into
the trust, which is wrong, but you try telling a solicitor that.
If their total assets exceed the NRB x 2 then there may be some reason
for using a trust now in which to place any surplus dosh, but make sure
the B/Socs adviser is 1) Independent (very few b/socs use IFAs) AND that
the adviser has passed an exam called 'G10'. If the answer to either of
these questions is NO, then they should walk away.
Finally, most solicitors dot understand IHT at all despite professing to
Usually the financial advisor works for the Building Society. They aren't
independant and can only offer advice on the products of the company - which
might not be exactly what is needed.
They have usually got sales targets to meet too.
They benefit from selling products and services offered by the BS. Might be
executor service too, but not actually necessary.
Its common for the salesman to try and sell the current investment products
(its why they are employed after all). With associated risks, charges and
Perhaps its worth you sitting down with them and going over what they were
offered, perhaps with an independant financial advisor.
Yes, inheritance tax can hit hard, and can be at least partly bypassed with
care, over the course of a few years.
One of these scum sold my dad something that grew into a
guarenteed amount in 10 years time with penalties for early
What does the average 70 year old want a growth bond
for, they mostly need income and draw-down.
Fortunately, he survived the term without needing the capital
and we cashed it in without penalty.
On 11/2/05 7:32 pm, in article
LL7Pd.62846$ firstname.lastname@example.org, "Martin Davies"
If it is likely that the estates, combined, exceed the tax free limit, it is
normal practice to leave to the children the that tax-free amount. It may be
possible to do this by deed of variation after the first death.
A revocable trust does not save on IHT.
Surely not normal practice. Unless the estate was significantly greater than
500K this could leave the parents with very little liquid capital if the
major part of the remaining estate was a property.
Trusts can be used to avoid IHT and retain some control (but not benefit)
but need to be set up properly. They will often be classified as gifts and
therefore subject to the 7 year rule.
On 12/2/05 12:21 am, in article email@example.com, "Colin
It seems that in the UK a life interest (life estate) will be taxed for IHT
at its full capital value when extinguished upon the death of the life
"When the interest ends on the death of that individual, the property
is taxed as part of the estate as though he or she had transferred
the property as absolute owner (s.4(1), 5(1) and 49(1)).
We charge tax on the value of the property, which is normally
payable by the trustees out of the settled property (s.200(1)(b) and
212(1)). If the value is greater when valued with other property
of the deceased or spouse, then we tax the higher value."
That isn't true in other countries; in the USA a terminable interest of a
surviving spouse in property of a decedent gets an estate tax credit for the
value of that interest, per 26 C.F.R. 20.2056(b)-1:
"If property is purchased jointly by a married couple, a potential problem
is that the interest of the first to die will typically pass to the survivor
who will then pay tax on the total property on his or her death, losing the
benefit of the first to die's unified credit (discussed below). One way that
may avoid that problem is to have the couple own the property as tenants in
common (i.e. no right of survivorship) and, under their wills, to leave the
survivor only a life estate in their respective interests. The same result
may also be possible using a trust."
Perhaps a good reason for Brits to retire to Florida. (The above is intended
for Canadians doing just that; there is no death duty in Canada, just a
capital gains tax on deemed sale at death, which can be taken as a credit
for US estate tax.)
The definition of "domicile" is different as between England and Florida,
but perhaps the tax treaty resolves that point.
On 13/2/05 6:06 pm, in article NZmza6P+ firstname.lastname@example.org,
US-UK Estate Tax Convention
(1) For the purposes of this Convention an individual was
(a) in the United States: if he was a resident (domiciliary)
thereof or if he was a national thereof and had been a resident
(domiciliary) thereof at any time during the preceding three years; and
(b) in the United Kingdom: if he was domiciled in the United
Kingdom in accordance with the law of the United Kingdom or is treated
as so domiciled for the purpose of a tax which is the subject of this
(2) Where by reason of the provisions of paragraph (1) an
individual was at any time domiciled in both Contracting States, and
(a) was a national of the United Kingdom but not of the United
(b) had not been resident in the United States for Federal income
tax purposes in seven or more of the ten taxable years ending with the
year in which that time falls,
he shall be deemed to be domiciled in the United Kingdom at that time.
(3) Where by reason of the provisions of paragraph (1) an
individual was at any time domiciled in both Contracting States, and
(a) was a national of the United States but not of the United
(b) had not been resident in the United Kingdom in seven or more of
the ten income tax years of assessment ending with the year in which
that time falls,
he shall be deemed to be domiciled in the United States at that time.
For the purposes of this paragraph, the question of whether a person was
so resident shall be determined as for income tax purposes but without
regard to any dwelling-house available to him in the United Kingdom for
(4) Where by reason of the provisions of paragraph (1) an
individual was domiciled in both Contracting States, then, subject to
the provisions of paragraphs (2) and (3), his status shall be determined
(a) the individual shall be deemed to be domiciled in the
Contracting State in which he had a permanent home available to him. If
he had a permanent home available to him in both Contracting States, or
in neither Contracting State, he shall be deemed to be domiciled in the
Contracting State with which his personal and economic relations were
closest (centre of vital interests);
(b) if the Contracting State in which the individual's centre of
vital interests was located cannot be determined, he shall be deemed to
be domiciled in the Contracting State in which he had an habitual abode;
(c) if the individual had an habitual abode in both Contracting
States or in neither of them, he shall be deemed to be domiciled in the
Contracting State of which he was a national; and
(d) if the individual was a national of both Contracting States or
of neither of them, the competent authorities of the Contracting States
shall settle the question by mutual agreement.
(5) An individual who was a resident (domiciliary) of a possession
of the United States and who became a citizen of the United States
solely by reason of his
(a) being a citizen of such possession, or
(b) birth or residence within such possession,
shall be considered as neither domiciled in nor a national of the United
States for the purposes of this Convention.
-- from the US-UK Estate Tax treaty
I don't think the new (2001/2002) Income Tax treaty changes anything. The
latter, ratified in 2003, is discussed by Freshfields at
Thus, a UK domiciliary who has lived in the US 7 out of the last 10 years of
his life may have an estate that escapes UK taxation, although the high rate
of US tax may not provide much succor for the heirs (except that there are
ways and means of avoiding that, including various charitable and
quasi-charitable trusts, and pre-immigration dynasty trusts, etc.)
As for domicile: one can contrive to be non-UK domiciled; indeed most of
those whose fathers were born abroad will probably remain non-UK domiciled
the rest of their lives.
Even where the Inland Revenue lay claim to tax, so long as taxes are
uncollectible abroad they can, as the Floridians say, pound sand. (The US
has an active collection agreement with Canada, but none others that are
honoured, although there are provisions in their treaties with France, South
Africa and a few other countries; and even the Canadian collection agreement
is only effective in the USA in respect of non-US citizens and in Canada as
For those who are in fact UK-domiciled and have no hope of being (or having
their estate being) exempted under the treaty, it appears that -- like my
Maltese and Saudi neighbours in London -- they will have to divest
themselves of all UK (and, arguably, Channel Islands -- think of the
Rossminster/Tucker case) property and visit the UK only as a tourist.
But life is tough on several counts for people with one foot in the UK and
the other in the USA:
(US capital gains tax on sale of UK residence based on dollar value at time
of purchase and time of sale, respectively, with no allowance for mortgage.
So someone with a 100% mortgage may owe more tax than s/he made in gain
(even if qualifying for $250,000 or $500,000 exclusion, given the current
rate of exchange and property prices). And the marginal rate of estate duty
in the USA is close to 50% (federal and state).
On 13/2/05 8:56 pm, in article email@example.com,
It's worth noting that countries don't always agree on the facts, or on the
conclusions to be drawn from them. And sometimes they simply refuse to meet
as "competent authority" as the treaty provides. The taxpayer's solution is
to sue in tax court (special commissioners in Britain, I guess). But tax
courts tend to be parochial. Here's an interesting case:
Caron v. The Queen:
(taxpayer held taxable in Canada since that's where his family lived; even
though he lived and worked in France (and was taxable there) his 'centre of
vital interests' was Canada).
In estate taxation the tocsin too-clever tax lawyers was the Dorrance case,
and the limits of double (triple, etc.) taxation were set out in Texas v.
Florida, the case of the estate of Ned Green, son of Hetty Green (who, in
the first and second decades of the 20th Century, was America's richest
woman, I think):
In re Dorrance, 115 N.J.Eq. 268, 170 A. 601 (Prerogative Ct. 1934), aff'd
mem. 13 N.J.L. 3625, 184 A. 743, cert. denied, 298 U.S. 678 (1936); In re
Dorrance's Estate, 309 Pa. 151, 163 A. 303 (1932), cert. denied, 288 U.S.
617; Texas v. Florida, 306 U.S. 398:
Moral: states can double and triple tax up to the total value of an estate,
but they can't tax 101% or more. In the USA anyway. That's for dead people.
For living people, there is the Multistate Tax Compact
and other multilateral and unilateral allowances that permit tax credits; in
some states (NY and Michigan come to mind) Canadian provincial taxes are
allowed as a credit.
But I digress.
Dorrance was the heir to the Campbell's soup fortune.
On 12/2/05 12:11 pm, in article firstname.lastname@example.org,
Correctly done, the surviving spouse will get -- in the small estate you
envisage -- a life interest (usufruct).
1) the nil band is so derisorily small as to throw most estates that include
the family home near a major city into the tax net, saved from tax only (if
at all) by the spousal exclusion/sexemption.
2) most small estates of the kind you envisage can't afford proper planning.
Most solicitors are incompetent. I am dealing with an incompetently-drafted
will now, that because of a redundant power of appointment throws much of
the husband's estate into the wife's for IHT purposes. H's will was written
20 years ago; the lawyer is long dead.
If you care to see some really incompetent estate planning (with inevitably
tragic results) you should see the wills commonly written in England for
retirees who sell up and move to Spain. Especially when the couple aren't
legally married, under Spanish law. And those written with the fond
expectation that Continental land can pass via an English trust.
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