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Our assets include a home worth between £800,000 and £1 million, plus approximately £300,000 in Premium Bonds and cash.
Our daughter has a controlling husband who has his eye on her inheritance. We want to protect his share, but allow our two sons immediate access to theirs.
To minimise inheritance tax, we want to take advantage of the zero-rate band for housing.
We have been told that this is possible if we create a trust and the children decide to leave it within two years.
Inheritance plan: We want to protect our daughter’s share of our house and savings, but allow our children immediate access to their shares.
We understand that all beneficiaries would have to opt out, as the trust prevents the use of the additional allocation.
However, our lawyer says that our daughter’s inheritance can remain in the trust and this will not affect the residential allocation.
We would be very grateful for your opinion on this matter.
SCROLL DOWN TO FIND OUT HOW TO ASK HEATHER HIS TAX QUESTION
Heather Rogers responds: It is understandable that you would want to protect your daughter and her inheritance in these circumstances.
Your attorney is largely correct about how a trust would work, as I will explain below.
However, before acting, it is preferable and important to talk to your daughter if you have not done so already.
I say this with the caveat that you and she can safely speak, something about which you should exercise careful judgment, of course.
But the reason I think it’s better to have a discussion with her first is that, even if you want to protect her, allowing your sons to get their share of your estate but not your daughter could cause a bigger problem than it solves.
Plus, it could leave her in a vulnerable position.
There is more on this topic below, but now let’s move on to your questions about inheritance and first take a look at the Residence Zero Rate Band (RNRB) and how and when it applies, and then what happens if you set up a trust.
What is the zero-rate residential tax band?
The RNRB allows a residence to be passed on to direct descendants. Its value can reach up to £175,000 (£350,000 for a couple) for net worths of less than £2 million.
For net worths over £2 million, the RNRB is reduced by £1 for every £2 over £2 million.
It is claimed when someone dies as part of the inheritance tax return.
To be entitled to it, the deceased must:
– Be the owner of a home or part of it that is included in the assets;
– Have direct descendants who will inherit the home or part of it in the event of death.
The maximum that can be claimed is equal to the value of the person’s home passing to their direct descendants, subject to any reduction in allowance for estates exceeding £2m.
What is considered a “residency”?
A residence is any property in which the deceased lived as his or her home and which was included in his or her estate.
It does not have to be your primary residence or have been lived in or owned by someone for a specific period of time.
In the case of UK property, it can even apply to properties abroad.
However, the RNRB can only be applied to one property.
Any property that was owned by the deceased person but never lived in, for example a property rented by the deceased person, is not a residence and is not eligible for the RNRB.
What is a linear descendant?
Children, grandchildren, great-grandchildren, etc. But for the purposes of the RNRB, a child also includes:
– Stepchildren, but they must be children of the deceased’s spouse/civil partner.
– Adopted children
– Foster children
– Children of whom the deceased was the guardian
– The spouses or civil partners of the child, grandchild, great-grandchild, etc.
What happens if there is no housing or the deceased moved before dying?
Where someone has sold or given away a home, or moved into a less valuable home before they died, their estate may still be able to get the RNRB if they qualify for a downsize increase.
You may hear this described as a “qualified prior residential interest.”
To qualify, all of these conditions must be met:
– The person sold, gave away or exchanged housing for one of lesser value, starting on July 8, 2015
– The old house would have qualified for the RNRB if it had been kept until his death.
– Your direct descendants inherit at least part of the estate. However, the RNRB is limited to the value of the property, so a property worth £150,000 would only receive £150,000 of RNRB and if only half of the property was left to direct descendants then only £75,000 would qualify for RNRB.
What if you have a testamentary trust and want to use the RNRB?
Trusts created in wills are usually discretionary trusts. In this type of trust, the trustees have complete control over the assets and the income generated from them and decide how and when to deliver the income and assets to the beneficiaries.
Depending on the trust deed, trustees can decide what is paid to which beneficiaries (this may be income or principal), how often, and whether conditions apply.
Discretionary trusts are often used to protect family assets.
Since the beneficiaries, by the very nature of the trust, have no rights to the trust fund itself, it does not generally Become part of the beneficiaries’ estate in the event of divorce, bankruptcy or death.
You may want to take particular note of this last point regarding what might happen to what is in the trust if your daughter and her husband divorce, and consult with your attorney about it.
Where the house or part of it is left to a discretionary testamentary trust then no RNRB can be available as the trust does not meet the definition of a linear descendant even if all the beneficiaries are.
However, if within two years of the death there is a deed designating trust assets by the trustees to a direct descendant or descendants, then this would be treated as if the assets had been left directly to the direct descendant.
The RNRB could then claim only an amount equal to the value of the person’s home which passes to their direct descendants.
In your case, if the value of your children’s share of the property that passes is equal to or greater than the maximum RNRB available at your death, then you will be able to claim the full RNRB, provided the estate is less than £2 million under the current rules.
However, if the value of the property passing to them is less than the maximum RNRB available, the RNRB will be restricted to the value of the property passing directly to them.
However, keep in mind that if your daughter’s share remains in trust after the two-year period, then inheritance tax charges every 10 years and exit charges on assets leaving the trust may apply.
Similarly, depending on the assets and whether income is generated, annual tax returns may be required.
Tax Tips from Heather Rogers
What action should you take now?
As I have explained before, I think it is important to talk to your daughter in these circumstances, and to your sons too if you have not done so already.
You may decide that the best course is to move forward with your plans for a trust no matter what his reaction is, but if you are forewarned, you will hopefully be better prepared when your husband finally learns of your plans for his inheritance.
Naturally, you should think carefully about appointing suitable trustees.
Since you have consulted a lawyer, I assume you have drawn up a will. You would also leave a “letter of wishes” with both wills, which your lawyer can advise you on.
I don’t know how serious the situation is with your daughter and husband based on what you’ve said here.
However, I will be cautious and suggest some organisations you can contact to discuss your concerns confidentially, if you feel it is necessary. I wish you and your family all the best.
Shelter – support for someone I care about
Ask Heather Rogers a tax question
Tax expert Heather Rogers answers our readers’ questions
Heather Rogers, founder and owner of Aston Accountancy, is our tax columnist.
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