IHT and Ten year anniversary payment

[Keo28]

Hi,

Grandparents passed away and both wills mentioned to create a discretionary trust for the life interest of their daughter who is disabled. Only asset in the trust is the property worth about 900,000, and approximately 200,000 was used to pay IHT off.

Daughter and her children are living in the property. Children are the trustees and would like to know if their would be a Ten year anniversary payment due and would their be anyways of avoiding is at the trust is not generating any income besides having the property within it. Would any additional charges such as CGT or income tax be due?

Thanks

[maths]

This is a somewhat of a specialised area and not one in which I have had much experience.

You state: "create a discretionary trust for the life interest of their daughter'. I am confused. Either the trust which was set up under the wills was a discretionary trust OR an interest in possession trust?

However, my understanding is that under either scenario no exit or 10 year charges should apply.

May I suggest you await other responses form those more qualified the me.

[Keo28]

Hi Maths,

Sorry it was a trust which was set up under the wills was a discretionary trust

This is a somewhat of a specialised area and not one in which I have had much experience.

You state: "create a discretionary trust for the life interest of their daughter'. I am confused. Either the trust which was set up under the wills was a discretionary trust OR an interest in possession trust?

However, my understanding is that under either scenario no exit or 10 year charges should apply.

May I suggest you await other responses form those more qualified the me.

[AGoodman]

I assume one grandparent will have left their assets to their spouse who then set up the trust?

By default, yes, it will suffer the 10 year charge.

It may qualify as a disabled persons trust for inheritance tax (s.89 IHTA). For this to be the case, mother would have had to have been disabled when the trust was established and the trusts must provide that income that arises in the trust can only be paid to her.

i.e. the trusts do not allow income to be paid to anybody other than mother during her life.

If the trust was established before 2013, then the regime is a little more relaxed and the trusts must require at least half of the income paid out is paid to the disabled person.

This would avoid the 10 yearly charge on "relevant property" but would bring the interest into the "interest in possession" regime so that IHT would be payable at 40% on her death. This should be taken into account.

Given the sums involved, it is worth getting some proper advice and if the trusts do not currently qualify, it may be possible to amend into the regime (but with the caveat that you are opting into 40% on death).

[Keo28]

Thanks for replying AGoodman.

The spouse did not set up the trust both of them passed away within weeks of one another.

The mother (daughter of late parents) has been disabled since birth.

Unfortunately there is no income in the trust as it was used to pay IHT and the property only remains in the trust.

Is their anyway for the property to be passed down to the grandchildren to avoid further potential IHT liabilities if anything happens to the mother?

I assume one grandparent will have left their assets to their spouse who then set up the trust?

By default, yes, it will suffer the 10 year charge.

It may qualify as a disabled persons trust for inheritance tax (s.89 IHTA). For this to be the case, mother would have had to have been disabled when the trust was established and the trusts must provide that income that arises in the trust can only be paid to her.

i.e. the trusts do not allow income to be paid to anybody other than mother during her life.

If the trust was established before 2013, then the regime is a little more relaxed and the trusts must require at least half of the income paid out is paid to the disabled person.

This would avoid the 10 yearly charge on "relevant property" but would bring the interest into the "interest in possession" regime so that IHT would be payable at 40% on her death. This should be taken into account.

Given the sums involved, it is worth getting some proper advice and if the trusts do not currently qualify, it may be possible to amend into the regime (but with the caveat that you are opting into 40% on death).

[AGoodman]

If both grandparents set up trusts in their wills (presumably because of survivorship provisions) then there would have been an original two trusts and two nil rate bands = therefore the IHT could be greatly reduced.

There doesn't need to be any income - to qualify as a disabled person's trust, the trust provisions have to correctly address any (here theoretical) income that did arise.

You need to get proper advice to work out the best route. As you are, you avoid any IHT on death but, depending on values and nil rate bands, there may not be any anyway. Advice can also confirm how much tax would be payable on an anniversary, which may be less if the trust assets have two settlors.