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 second death.
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?
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 do so.
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 paperwork.
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. Martin <
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.
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.
Correctly done, the surviving spouse will get -- in the small estate you envisage -- a life interest (usufruct).
Unfortunately:
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.
This is exactly what the spouse does not want, because that creates an interest in possession and that means the asset within the trust will be taxed for IHT purposes on their death as though the survivor owns it.
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 tenant:
"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."
formatting link
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."
formatting link
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.
(1) For the purposes of this Convention an individual was domiciled:
(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 Convention.
(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 States, and
(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 Kingdom, and
(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 his use.
(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 as follows:
(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
formatting link
I don't think the new (2001/2002) Income Tax treaty changes anything. The latter, ratified in 2003, is discussed by Freshfields at
formatting link
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 regards non-Canadians.)
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:
formatting link
and
formatting link
(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).
BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here.
All logos and trade names are the property of their respective owners.