Transferring assets

Posted on July 1, 2013 by - Uncategorized

Using a trust to pass assets to beneficiaries

Trusts may incur an Inheritance Tax charge when assets are transferred into or out of them or when they reach a ten-year anniversary. The person who puts assets into a trust is known as a settlor. A transfer of assets into a trust can include property, land or cash in the form of:

A gift made during a personís lifetime
A transfer or transaction that reduces the value of the settlorís estate (for example, an asset is sold to trustees at less than its market value) – the loss to the personís estate is considered a gift or transfer
A potentially exempt transferí whereby no further Inheritance Tax is due if the person making the transfer survives at least seven years. For transfers after 22 March 2006 this will only apply when the trust is a disabled trust
A gift with reservation where the transferee still benefits from the gift

If you die within seven years of making a transfer into a trust, extra Inheritance Tax will be due at the full amount of 40 per cent (rather than the reduced amount of 20 per cent for lifetime transfers).

In this case your personal representative, who manages your estate when you die, will have to pay a further 20 per cent out of your estate 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.

Settled property
The act of putting an asset into a trust is often known as making a settlement or settling property. For Inheritance Tax purposes, each item of settled property has its own separate identity.

This means, for example, that one item of settled property 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 item of settled property.

Even though different items of settled property may receive different tax treatment, it is always the total value of all the settled property in a trust that is used to work out whether a trust exceeds the Inheritance Tax threshold and whether Inheritance Tax is due.

If you make a gift to any type of trust but continue
to benefit from the gift you will pay 20 per cent
on the transfer and the gift will still count as part
of your estate. These are known as gifts with reservation of benefit.

Avoiding double taxation
To avoid double taxation, only the higher of these charges is applied and you wonít ever pay more than 40 per cent Inheritance Tax. However, if the person who retains the benefit gives this up more than seven years before dying, the gift is treated as a potentially exempt transfer and there is no further liability if the transferor survives for a further seven years.

From a trusts perspective, there are four main occasions when Inheritance Tax may apply to trusts:

when assets are transferred – or settled – into a trust
when a trust reaches a ten-year anniversary
when settled property is transferred out of a trust or the trust comes to an end
when someone dies and a trust is involved when sorting out their estate

Relevant property
You have to pay Inheritance Tax on relevant property. Relevant property covers all settled property in most kinds of trust and includes money, shares, houses, land or any other assets. Most property held in trusts counts as relevant property. But property in the following types of trust doesnít count as relevant property:

interest in possession trusts with assets that were put in before 22 March 2006
an immediate post-death interest trust
a transitional serial interest trust
a disabled personís interest trust
a trust for a bereaved minor
an age 18 to 25 trust

Excluded property
Inheritance Tax is not paid on excluded property (although the value of the excluded property may be brought in to calculate the rate of tax on certain exit charges and ten-year anniversary charges). Types of excluded property can include:

property situated outside the UK that is owned by trustees and was 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)

Inheritance Tax is charged up to a maximum of 6 per cent on assets or property that is transferred out of a trust. The exit charge, which is sometimes called the proportionate charge, applies to all transfers of relevant property.

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 ëspecial trustí (for example, a charitable trust or trust for a disabled person) and therefore ceases to be relevant property
the trustees enter into a non-commercial transaction that reduces the value of the trust fund

There are some occasions when there is no Inheritance Tax exit charge. These apply even where the trust is a relevant property trust, for instance, it isnít 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 three months of setting up a trust, or within three months following a ten-year anniversary
when the assets are excluded (property foreign assets have this status if the settlor was domiciled abroad)

Passing assets to beneficiaries
You may decide to use a trust to pass assets to beneficiaries, particularly those who arenít immediately able to look after their own affairs. If you do use a trust to give something away, this removes it from your estate provided you donít use it or get any benefit from it. But bear in mind that gifts into trust may be liable to Inheritance Tax.

Trusts offer a means of holding and managing money or property for people who may not be ready or able to manage it for themselves. Used in conjunction with a will, they can also help ensure that your assets are passed on in accordance with your wishes after you die.

Writing a will
When writing a will, there are several kinds of trust that can be used to help minimise an Inheritance Tax liability. From an Inheritance Tax perspective, an ëinterest in possessioní trust is one where a beneficiary has the right to use the property within the trust or receive any income from it. Assets put into an interest in possession trust before 22 March 2006 are not considered to be relevant property, so there is no ten-yearly charge.

During the life of the trust there are no exit charges as long as the asset stays in the trust and remains the ëinterestí of the beneficiary.

If the trust also contains assets put in on or after 22 March 2006, these assets are treated as relevant property and are potentially liable to the ten-yearly charges.

Who gets what?

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Don’t leave your heirs embroiled in years of legal feuding

If you leave everything to your spouse or registered civil partner, in this instance there usually won’t be any Inheritance Tax to pay because a spouse or registered civil partner counts as an exempt beneficiary. But bear in mind that their estate will be worth more when they die, so more Inheritance Tax may have to be paid then.

Other beneficiaries
You can currently leave up to £325,000 tax-free to anyone in your will (frozen until April 2014), not just your spouse or civil partner. So you could, for example, give some of your estate to someone else or a family trust.

Inheritance Tax is then payable at 40 per cent on any amount you leave above this.

UK Charities
Inheritance Tax isn’t payable on any money or assets you leave to a registered UK charity ñ these transfers are exempt.

From 6 April 2012, if you leave 10 per cent of your estate to charity the tax due may be paid at a reduced rate of 36 per cent instead of 40 per cent.

Wills, trusts and financial planning
As well as making a will, you can use a family trust to pass on your assets in the way you want to. You can provide in your will for specific assets to pass into a trust or for a trust to start once the estate is finalised. You can also use a trust to look after assets you want to pass on to beneficiaries who can’t immediately manage their own affairs (either because of their age or a disability).

You can use different types of family trust depending on what you want to do and the circumstances. If you are planning to set up a trust you should receive specialist advice. If you expect the trust to be liable to tax on income or gains you need to inform HM Revenue & Customs Trusts as soon as the trust is set up. For most types of trust, there will be an immediate Inheritance Tax charge if the transfer takes you above the Inheritance Tax threshold. There will also be Inheritance Tax charges when assets leave the trust

Take it step by step

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How to avoid the probate pitfalls

A look at the steps to take in England and Wales (the process differs in Scotland and Northern Ireland).

Step 1 – Value the estate to see if you need a grant of representation.
When you might not need a grant of representation

A grant may not be needed if the estate:

is a low-value estate - generally worth less than £5,000 (though this figure can vary) – and doesnít include land, property or shares
passes to the surviving spouse/civil partner because it was held in joint names

When you contact the deceasedís bank or other financial institutions, they will either release the funds or tell you to get a grant of representation (or confirmation) first.

Some banks and financial institutions may insist on a grant before giving you access to even a small amount of money.

When a grant of representation is usually needed

You will almost certainly need a grant if the estate includes:

assets generally worth more than £5,000 in total (though again this figure varies)
land or property in the sole name of the deceased, or held as tenants in common with someone else
stocks or shares
some insurance policies

Step 2 – Applying for a grant of representation
Youíll have to fill in an Inheritance Tax form in addition to the PA1 Probate Application form, even if the estate doesnít owe Inheritance Tax. The estate will only owe Inheritance Tax if itís over the threshold currently £325,000 (frozen until April 2014).

The Inheritance Tax forms you need depend on the following:

where the deceased lived – England and Wales, Scotland, Northern Ireland or abroad
the size of the estate
whether it is an excepted estate (i.e. you donít need to fill in a full Inheritance Tax account – form IHT400)

Usually, if an estate has no Inheritance Tax to pay, it will be an excepted estate. However, this is not always the case. Some estates that donít owe Inheritance Tax still require a full Inheritance Tax account.

If youíre not sure whether the estate is an excepted estate, youíll need to start filling in a Return of Estate Information form (form IHT205 in England and Wales).

Depending on your answers to certain questions, the form will make clear when you should stop filling in that form and switch to form IHT400 (a full Inheritance Tax account) instead.

Step 3 – Send the forms to the relevant government bodies
Send completed IHT205 forms and the PA1 Probate Application form to your nearest Probate Registry.

Youíll also have to include the original will (if there is one), the death certificate, and the probate fee. If youíve filled in form IHT400, follow the instructions on page 55 of the IHT400 guidance notes.

The process is different in Scotland and Northern Ireland.

Step 4 – Pay any Inheritance Tax due
If the estate owes Inheritance Tax, you wonít receive the grant of representation (or confirmation) unless you pay some or all of the Inheritance Tax first. The due date is six months after the date of death.

Steps 5 to 7 – What happens next?
Once youíve paid any Inheritance Tax and sent off the forms to the Probate Registry, the process takes about eight weeks if there are no problems. There are three stages:

examination of forms and documents - Probate Registry staff check the forms and documents and prepare the papers for your interview

swear the oath – all the personal representatives who have applied for a grant of representation will need to swear an oath, either at the Probate Registry or local probate office

probate is granted - the grant of representation is sent to you by post from the Probate Registry

After you get the grant of representation (or confirmation) and have paid any Inheritance Tax due, you can collect in the money from the estate. You can then pay any debts owed by the estate and distribute the estate according to the will or the rules of intestacy.

The probate process

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Getting started: what you need to know

Probate (or confirmation in Scotland) is the system you go through if youíre handling the estate of someone whoís died. It gives you the legal right to distribute the estate according to the deceasedís wishes. Inheritance Tax forms are part of the process even if the estate doesnít owe Inheritance Tax.

If the deceased left a will, it usually names one or more executors who can apply for the grant of probate. If the named executor doesnít want to act, someone else named in the will can apply (depending on a strict order of priority). This person is called the administrator and they apply for a grant of letters of administration with will.

If the deceased died without leaving a will, a blood relative can apply for a grant of letters of administration. This is based on a strict next-of-kin order of priority defined in the rules of intestacy. The person who applies is also called the administrator.

The catch-all term for a grant of probate, letters of administration with will or letters of administration is a grant of representation. The catch-all term for an executor or administrator is personal representative.

Different terms in Scotland and Northern Ireland
Scotland and Northern Ireland have different legal systems, processes and terms. The terminology is generally the same in Northern Ireland. However, in Scotland the process is called confirmation and the personal representative applies for a grant of confirmation. Different forms are required in Scotland and Northern Ireland too.

Financial prudence

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Financial prudence

It’ll take longer to sort out your affairs if you don’t have a will

Itís easy to put off making a will. But if you die without one, your assets may be distributed according to the law rather than your wishes. This could mean that your spouse receives less, or that the money goes to family members who may not need it.

If you and your spouse or registered civil partner owns your home as joint tenants, then the surviving spouse or civil partner automatically inherits all of the property.

If you are tenants in common you each own a proportion (normally half) of the property and can pass that half on as you want.

Planning to give your home away to your children while youíre still alive

You also need to bear in mind, if you are planning to give your home away to your children while youíre still alive, that:

gifts to your children, unlike gifts to your spouse or registered civil partner, arenít exempt from Inheritance Tax unless you live for seven years after making them

if you keep living in your home without paying a full market rent (which your children pay tax on) itís not an outright gift but a gift with reservation, so itís still treated as part of your estate, and so liable for Inheritance Tax

following a change of rules on 6 April 2005, you may be liable to pay an Income Tax charge on the benefit you receive from having free or low cost use of property you formerly owned (or provided the funds to purchase)

once you have given your home away, your children own it and it becomes part of their assets. So if they are bankrupted or divorced, your home may have to be sold to pay creditors or to fund part of a divorce settlement

if your children sell your home, and it is not their main home, they will have to pay Capital Gains Tax on any increase in its value

If you donít have a will there are rules for deciding who inherits your assets, depending on your personal circumstances.

Combining predictability with clever planning

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Make sure everything you own goes where you want it to tax-efficiently

Planning your finances in advance should help you ensure that when you die everything you own goes where you want it to. Making a will is the first step in ensuring that your estate is shared out exactly as you want it to be.

If you don’t make a will, there are rules for sharing out your estate called the Law of Intestacy, which could mean your money going to family members who may not need it, or your unmarried partner or a partner with whom you are not in a registered civil partnership receiving nothing at all.

If you leave everything to your spouse or registered civil partner there’ll be no Inheritance Tax to pay because they are classed as an exempt beneficiary. Or you may decide to use your tax-free allowance to give some of your estate to someone else or to a family trust.

Good reasons to make a will
A will sets out who is to benefit from your property and possessions (your estate) after your death. There are many good reasons to make a will:

you can decide how your assets are shared ñ if you don’t have a will, the law says who gets what
if you’re an unmarried couple (whether or not it’s a same-sex relationship), you can make sure your partner is provided for
if you’re divorced, you can decide whether to leave anything to your former partner
you can make sure you don’t pay more Inheritance Tax than necessary

Before you write your will, it’s a good idea to think about what you want included in it. You should consider:

how much money and what property and possessions you have
who you want to benefit from your will
who should look after any children under 18 years of age
who is going to sort out your estate and carry out your wishes after your death, your executor

Passing on your estate
An executor is the person responsible for passing on your estate. You can appoint an executor by naming them in your will. The courts can also appoint other people to be responsible for doing this job.

Once you’ve made your will, it is important to keep it in a safe place and tell your executor, close friend or relative where it is.

It is advisable to review your will every five years and after any major change in your life, such as getting separated, married or divorced, having a child, or moving house. Any change must be by codicil (an addition, amendment or supplement to a will) or by making a new will.

Scottish law on inheritance differs from
English law.

Inheriting a property

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Could you be liable to pay Inheritance Tax?

If you owned property jointly as joint tenants with the deceased and you werenít their spouse or registered civil partner, youíll have to pay any Inheritance Tax due on the property when you inherit it.

If you owned property jointly as tenants in common with the deceased and werenít their spouse or registered civil partner, but inherited their share under the will, the deceasedís executor or personal representative must pay any Inheritance Tax or debts before distributing the estate among the beneficiaries.

Theyíll usually try to do this by using funds from other parts of the estate. However, if thereís a shortfall, you as the remaining owner are responsible for that shortfall and HM Revenue & Customs (HMRC) and other creditors have the right to approach you.

If there isnít enough money in the rest of the estate to pay the outstanding tax or other debts, you may need to sell the property.

Valuing a deceased person’s estate

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Responsibility for paying Inheritance Tax

To arrive at the amount payable when valuing a deceased personís estate, you need to include assets (property, possessions and money) they owned at their death and certain assets they gave away during the seven years before they died. The valuation must accurately reflect what those assets would reasonably receive in the open market at the date of death.

Inheritance Tax is payable by different people in different circumstances. Typically, the executor or personal representative pays it using funds from the deceasedís estate. The trustees are usually responsible for paying Inheritance Tax on assets in, or transferred into, a trust. Sometimes people who have received gifts, or who inherit from the deceased, have to pay Inheritance Tax – but this is not common.

Valuing the deceased personís estate is one of the first things you need to do as the personal representative. You wonít normally be able to take over management of their estate (called applying for probate or sometimes, applying for a grant of representation/confirmation) until all or some of any Inheritance Tax that is due has been paid.

The valuation process
This initially involves taking the value of all the assets owned by the deceased person, together with the value of:

their share of any assets that they own jointly with someone else
any assets that are held in a trust, from which they had the right to benefit
any assets which they had given away, but in which they kept an interest ñ for instance, if they gave a house to their children but still lived in it rent-free
certain assets that they gave away within the last seven years

Next, from the total value above, deduct everything that the deceased person owed, for example:

any outstanding mortgages or other loans
unpaid bills
funeral expenses

(If the debts exceed the value of the assets owned by the person who has died, the difference cannot be set against the value of trust property included in the estate.)

The value of all the assets, less the deductible debts, gives you the estate value. The threshold above which the value of estates is taxed at 40 per cent is currently £325,000 (frozen until April 2014).

When the executor pays Inheritance Tax
Usually, the executor, personal representative or administrator (for estates where thereís no will) pays Inheritance Tax on any assets in the deceasedís estate that are not held in trust.

The money generally comes from the deceased personís estate. However, because the tax must be paid within six months of the death and before the grant of probate can be issued (or grant of confirmation in Scotland), sometimes the executor has to borrow the money or pay it from their own funds. This can happen if it hasnít been possible to get the money from the estate in time because itís tied up in assets that have to be sold.

In these cases, the executor or the people who have advanced the money can be reimbursed from the estate before itís distributed among the beneficiaries.

When a trustee pays Inheritance Tax
Inheritance Tax on transfers into trust is only necessary if the total transfer amount is above the Inheritance Tax threshold. Itís usually payable by the person making the transfer(s) – known as the settlor – not the trustees.

The trustees must pay any Inheritance Tax due on land or assets already held in trust. The occasions for this include:

a transfer out of trust (known as the exit charge)
every ten years after the original transfer into trust (known as the ten-year anniversary charge)
when the beneficiary of the trust (known as the life tenant) dies – interest in possession trusts only

When a beneficiary or a donee has to pay Inheritance Tax
If the executor or the trustees canít pay the Inheritance Tax, the beneficiaries or donees (recipients of gifts made during a personís lifetime) may have to pay it. A beneficiary or donee only has to pay Inheritance Tax in this case if:

they receive a share of an estate after a death
they receive a gift from someone who dies within seven years of making the gift
they benefit from assets in a trust at the time of death or receive income from those assets
they are the joint owner – other than a spouse or a registered civil partner – of a property

Doubling the Inheritance Tax threshold

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Transferring assets can seriously improve your wealth

Current rules mean that the survivor of a marriage or registered civil partnership can benefit from up to double the Inheritance Tax threshold – £650,000 in the current tax year, in addition to the entitlement to the full spouse relief.

Inheritance Tax is only paid if the taxable value of your estate when you die is over £325,000. The first £325,000 of a person’s estate is known as the Inheritance Tax threshold or nil rate band because the rate of Inheritance Tax charged on this amount is currently set at zero per cent, so it is free of tax.

Transferring exempt assets
Where assets are transferred between spouses or registered civil partners, they are exempt from Inheritance Tax. This can mean that if, on the death of the first spouse or registered civil partner, they leave all their assets to the survivor, the benefit of the nil rate band to pass on assets to other members of the family, normally the children, tax-free is not used.

Where one party to a marriage or registered civil partnership dies and does not use their nil rate band to make tax-free bequests to other members of the family, the unused amount can be transferred and used by the survivor’s estate on their death. This only applies where the survivor died on or after
9 October 2007.

In effect, spouses and registered civil partners now have a nil rate band that is worth up to double the amount of the nil rate band that applies on the survivor’s death.

Since October 2007, you can transfer any of the unused Inheritance Tax threshold from a late spouse or registered civil partner to the second spouse or civil partner when they die. This can currently increase the Inheritance Tax threshold of the second partner from £325,000 to as much as £650,000, depending on the circumstances.

Spouse or registered civil partner exemption
Everyone’s estate is exempt from Inheritance Tax up to the current £325,000 threshold (frozen until April 2014).

Married couples and registered civil partners are also allowed to pass assets from one spouse or registered civil partner to the other during their lifetime or when they die without having to pay Inheritance Tax, no matter how much they pass on, as long as the person receiving the assets has their permanent home in the UK. This is known as spouse or registered civil partner exemption.

If someone leaves everything they own to their surviving spouse or registered civil partner in this way, it’s not only exempt from Inheritance Tax but it also means they haven’t used any of their own Inheritance Tax threshold or nil rate band. It is therefore available to increase the Inheritance Tax nil rate band of the second spouse or registered civil partner when they die, even if the second spouse has re-married. Their estate can be worth up to £650,000 in the current tax year before they owe Inheritance Tax.

To transfer the unused threshold, the executors or personal representatives of the second spouse or civil partner to die need to send certain forms and supporting documents to HM Revenue & Customs (HMRC). HMRC calls this transferring the nil rate band from one partner to another.

Transferring the threshold
The threshold can only be transferred on the second death, which must have occurred on or after 9 October 2007 when the rules changed. It doesn’t matter when the first spouse or registered civil partner died, although if it was before 1975 the full nil rate band may not be available to transfer, as the amount of spouse exemption was limited then. There are some situations when the threshold can’t be transferred but these are quite rare.

When the second spouse or registered civil partner dies, the executors or personal representatives of the estate should take the following steps.

Calculating the threshold you can transfer
The size of the first estate doesn’t matter. If it was all left to the surviving spouse or registered civil partner, 100 per cent of the nil rate band was unused and you can transfer the full percentage when the second spouse or registered civil partner dies even if they die at the same time.

It isn’t the unused amount of the first spouse or registered civil partner’s nil rate band that determines what you can transfer to the second spouse or registered civil partner. It’s the unused percentage of the nil rate band that you transfer.

If the deceased made gifts to people in their lifetime that were not exempt, the value of these gifts must first be deducted from the threshold before you can calculate the percentage available to transfer. You may also need to establish whether any of the assets that the first spouse left could have qualified for Business or Property Relief.

Supporting a claim
You will need all of the following documents from the first death to support a claim:

a copy of the first will, if there was one
a copy of the grant of probate (or confirmation in Scotland), or the death certificate if no grant was taken out
a copy of any deed of variation if one was used to vary (or change) the will

If you need help finding these documents from the first death, get in touch with the relevant court service or general register office for the country you live in. The court service may be able to provide copies of wills or grants; the general register offices may be able to provide copies of death certificates

The relevant forms
You’ll need to complete form IHT402 to claim the unused threshold and return this together with form IHT400 and the forms you need for probate (or confirmation in Scotland).

You must make the claim within 24 months from the end of the month in which the second spouse or registered civil partner dies.

Inheritance tax nil rate band and rates

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We can help you evaluate the size of your estate

We can help you evaluate the size of your estate – which could include assets such as property, pensions, shares and personal property – and identify the opportunities that will help you avoid or reduce the amount of Inheritance Tax your family will have to pay on your estate and enable you to preserve wealth for your dependents if the worst comes to the worst.

We can advise on making appropriate provisions for vulnerable beneficiaries, protecting their resources whilst continuing to benefit from them. You may also want to consider appointing a Lasting Power of Attorney who can manage your affairs in the event you become unable to do so.

Our aim is to maximise the inheritance your beneficiaries will receive, avoiding or minimising the amount of Inheritance Tax your family will have to pay on your estate, ensuring plans are in place to protect your property so that you are not forced to sell your home to pay for your care home costs should the need arise.

We are on hand to provide straightforward, up-to-date advice. We will assess your situation and provide advice on a number of tax migration solutions, creating bespoke estate protection planning strategies that are tailored to suit you and your circumstances.