Question

My wife has investments of her own on which she pays tax. We have arranged for a discretionary trust in our wills using only cash and ignoring the fact that we own property as tenants in common. It is our intention that each individual’s investments, ISAs, Peps and cash deposits are used to fund the trust. The property will not be used. Will this satisfy the legislation as it now stands?

What the Experts Say

Chris Wicks of the Alexander Beard Group Plc (www.abg.net) responds;

The recent Special Commissioners case dealt with a situation in which a couple made Wills and severed the tenancy of the house. When the first of them died (in this case the wife) her half of the house went into the Discretionary Trust and her husband bought it off the trust in return for an IOU repayable on his death. it was held that the wife had effectively been given the asset in question and as a consequence the loan given by the Trustees to the husband could not be offset against his estate. The implication of this case, which does not set a precedent, is that care should be taken where assets have been gifted between spouses.

In this case, if your wife acquired the investments with her own money and on her death before you these go into a discretionary trust, as things currently stand, should the trustees make a loan to you this ought to be offset against your estate when working out the IHT on your eventual death. This is, however a complex matter and the tax treatment depends on exactly how you have structured your Wills and on the sources of your wealth. This is also an area that has come under attack by the government in recent years. What works now may not work by the time you both die. You therefore need to regularly review your affairs to make sure that they take full advantage of all available reliefs.

Daniel Clayden APFS – Director, Clayden Associates (www.claydenassociates.co.uk) responds;

The short answer is yes. However, there are several points to take into account when making any arrangements of this type.

Firstly you need to be aware that the Peps and ISAs will loose their tax-free status on the death of the owner, which means one of two things will happen (depending on the provider’s terms & conditions) – either the investment is effectively cashed-in with the plan proceeds payable as a death claim in the form of a lump sum cash payment or otherwise the investment will be retained in the same fund (not as an ISA or PEP, but instead) held in the underlying Unit Trust, OEIC, ICVC or Investment Trust wrapper, which will be taxable. If the investment is to be retained, the process will normally involve some kind of stock transfer and the opening of a new account in the name of the trustees.

It should also be noted that although there is no capital gains tax liability on death, there is the potential for a gain to be realised (and therefore incur tax) during the period of administration, if an asset has increased in value between the date of death and the date of disposal. There is no liability if assets are merely transferred from the deceased’s estate to the beneficiary (sometimes known as the legatee), but if the personal representatives actually dispose of any assets during the period of administration for more than the acquisition value at the date of death, then a capital gain will have occurred. In these circumstances the personal representatives are liable to tax at 40% (under current legislation, which is paid out of the estate), but they do have a full annual exemption from the period covering the date of death to the following 5th April in addition to the next 2 tax years.

You should also consider how the assets to be held within the trust will be taxed. In a discretionary trust any trust property will be taxed under the chargeable lifetime transfer regime and although the transfer on death will not trigger any immediate inheritance tax (IHT) charge providing the amount is limited to the Nil Rate Band (currently £300,000 for the 07/08 tax year), the trust may still be liable to periodic charges every 10 years and an eventual exit charge. Care should also be taken in respect of gifts made in the 7 years prior to the establishment of the trust, which could reduce the Nil Rate Band available and therefore trigger a tax charge.

Also income and capital gains within a trust are taxed at 40% and so careful consideration should be given to the selection of which type of investment will be the most appropriate for the trustees to hold trust property in order to avoid unnecessary taxation while meeting their obligations under the Trustee Act.

Finally, you should also take into account the fact that the trust in these arrangements is not actually established until the date of death, and although current legislation allows this type of planning, legislation may have changed by the time the trust comes into effect on death. However the main benefit of post-death planning is also the fact that the trust in these arrangements is not actually established until the date of death and it therefore offers the flexibility that arrangements can be easily amended during the lifetime of the settlor, if requirements or circumstances change.

I would suggest you seek guidance from a suitably qualified specialist Independent Financial Adviser for an unbiased recommendation suited to your particular needs.

Donna Bradshaw of IFG Financial Services (www.ifg.co.uk) responds;

It is unclear from our question precisely what you want to achieve and which aspects of legislation you are referring to. I am guessing you want to mitigate inheritance tax but you don’t indicate what the total value of your assets is, including your home, and in what proportion they are held by you and your wife. I would urge you to seek advice from a good independent financial adviser, who will be able to organize your affairs to match with your objectives, working closely with your solicitor in the process. If you don’t know of any IFAs in your area, it is worth asking friends or your solicitor to recommend one.

If they can’t point you in the right direction, IFA Promotion website will provide a list of IFAs in your area. The site allows you to refine your search to help identify firms with the necessary experience for your needs.

Find an Independent Financial Adviser, Click Here

To read more financial questions answered by the experts, View the Archive

Better Money Advice - Bringing you the best money saving deals on 2-4-1 restaurant vouchers, plus the best money advice. Best Loan Deals, Best Insurance Deals, Credit Card Deals & more Money Saving Deals Online- Bettermoneyadvice.co.uk.

Not what you are looking for? Search Better Money Advice for the Latest Money Saving Deals & News