US Edition
Dear Mike
My wife (56) and I (58) recently saw a solicitor about our wills. We have two unmarried children in their mid-20s who will be our beneficiaries when we have both died.
Our main assets are a house valued at £500,000, which we own jointly. I have £270,000 in a self-invested personal pension (Sipp) and £30,000 in a drawdown pension. I have an “expression of wishes” completed for the Sipp and drawdown accounts.
I also have an Isa worth £100,000 invested in qualifying AIM shares, with £60,000 held for two years.
The solicitor suggested we each place our share of the house into a trust on death with a life interest for the surviving spouse, but otherwise passing to our children.
I was also advised to place my pensions and Isa into the trust on my death. However, there was no explanation given as to the pluses and minuses of doing this from a tax perspective.
Paul, via email
Dear Paul,
Trusts can play an important part in financial planning. However, they are not straightforward, can have traps for the unwary, and should be used with professional advice.
It is important to know why a trust is being recommended, and the tax implications. Having seen a solicitor I am surprised that you are unsure about this, but in fairness to them it all depends on what you asked them to do, referred to as their “instructions”.
There need to be good reasons for using a trust, in my view. The normal approach would be that you and your wife each leave your share of the home and other assets directly to each other on death. Both the inheritance tax (IHT) nil-rate band and the residence nil-rate band can transfer to the surviving spouse.
Downsizing relief would be available, as long as you keep the qualifying conditions mentioned in my earlier articles: The little-used ‘downsizing loophole’ that cuts inheritance tax, and ‘Can my mum use downsizing relief to cut inheritance tax if she sells up and lives with me?’.
The property will automatically benefit from capital gains tax (CGT) relief as your Principal Private Residence (PPR), and at death there is an automatic uplift to market value.
Other assets also have an uplift and CGT exemption if held at death. Your Sipp benefits can transfer to your wife if you die first, and any funds remaining after that can be left free of IHT to a pension arrangement for your children.
Having said that, there are circumstances where it is helpful to establish a will trust at your death.
For example, you may be concerned that assets should not leave the family, which can happen if one partner remarries – particularly if their new spouse has children of their own.
For similar reasons, people are sometimes concerned that assets may be lost if their children get divorced. A trust can offer protection in these circumstances.
If you expressed such concerns to your solicitor I can understand why the advice was given. However, you do need to understand the effect trusts can have on tax.
You are not subject to CGT on your main home because it automatically qualifies for PPR.
Where your home is owned by a trust, you can also qualify for this exemption where the person living there has a right to do so under the trust deed, such as the life interest.
However, this relief is not given automatically. It has to be claimed by the trustees, and time limits apply. This could easily be overlooked following a death, and CGT relief lost.
Care would also be required to ensure that you continued to qualify for the IHT residence nil-rate band and downsizing relief, if relevant.
Trusts can also give rise to IHT, both when assets are transferred into trust and at each 10-year anniversary.
Special rules apply to will trusts, if set up correctly.
These are known as Immediate Post Death Interest trusts, and in this case the assets in the trust are treated as owned by the life tenant for IHT purposes, which avoids the input and 10-year charges. I assume this is what your solicitor is recommending.
Under new rules trusts now have to be registered with HM Revenue & Customs (HMRC), and penalties can apply if this is overlooked. In addition, HMRC will typically issue a tax return for the trustees to complete for the first year.
I am concerned that you were advised to place your Isa and Sipp into trust.
As the name implies, an Isa is an “individual” savings account, and it cannot be held by trustees.
There are special provisions whereby assets held in an Isa for the first spouse to die can transfer to an Isa for the surviving spouse through an Additional Permitted Subscription. This is in addition to their own Isa allowance.
Investments in a Sipp, by its very nature, are already held by trustees. Under your letter of wishes the trustees will continue providing benefits to your wife.
In summary, I think you should clarify your objectives with your solicitor and ask them to confirm the tax implications.
Email your tax questions to Mike via email: taxhacks@telegraph.co.uk
‘My solicitor wants me to place £900,000 of my assets into a will trust – is this a good idea?’
Trusts can play an important role in financial planning, as long as you avoid the tax traps