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Where Taxpayers and Advisers Meet

How to reduce IIP Trust Exit Charges?

mrbluesky
Posts:3
Joined:Fri Mar 05, 2021 9:41 am
How to reduce IIP Trust Exit Charges?

Postby mrbluesky » Fri Mar 05, 2021 4:35 pm

My late father created an IIP Trust in November 2015, and passed away last October.
He settled his half of the marital home (as Tenant-in-Common) into it when it was created, plus some cash in 2016, total value was about £227,000 (£102k cash + £125k valuation for his half of the house).
He continued to live in the house rent free until his death.
The cash (£100k) was invested into an Onshore Investment Bond written on his life alone and which had made a small loss at the date of his death.
About £2k is held in a bank account and an NS&I account, generating about £5 interest per year.

Beneficiaries were himself, his descendants (myself and my son), and a local hospital charity.
My father and I were the trustees, and we also appointed my partner as a backup trustee if needed.
The Trust was varied so it could continue after his death, or be wound up or transfer the assets to another Trust, at the Trustees discretion.

There was no IHT to pay on his estate, as the IHT nil rate band and residence nil rate bands, together with those transferred from my mother who pre-deceased him, exceeded the value of his estate including the Trust valuation at date of death.
Her will allowed him to continue to live in the house rent free, but bequeathed her half of the house to myself and my son in equal shares on his death.

The sale of the house is going through and hopefully will complete in April when Grant of Probate is received, so there will potentially be the £125,000 as cash within the Trust (there was no gain in value of the house).

If his Trust is wound up and the assets distributed, or assets transferred to another Trust, I understand there will be exit charges.
Can IHT nil rate band and resident nil rate band be applied to the assets he settled into the Trust to reduce the exit charges?
If not, are there other ways to reduce/eliminate the amount payable?

Thank you in advance.

AGoodman
Posts:1738
Joined:Fri May 16, 2014 3:47 pm

Re: How to reduce IIP Trust Exit Charges?

Postby AGoodman » Mon Mar 08, 2021 6:30 pm

On those values, there won't be an exit charge. It's horribly complicated but essentially the exit charge rate during the first ten years is based on the assets that went into the trust and take into account the nil rate band. If your father hadn't made other substantial gifts in the 7 years prior to transferring assets into the trust, the value in would be under the threshold and the rate on distributions during the first ten years would always be zero.

Even better, as the assets put in were under £260k, there's no need to file a (fiendishly complicated) IHT return.

mrbluesky
Posts:3
Joined:Fri Mar 05, 2021 9:41 am

Re: How to reduce IIP Trust Exit Charges?

Postby mrbluesky » Tue Mar 09, 2021 6:22 pm

Thank you AGoodman

mrbluesky
Posts:3
Joined:Fri Mar 05, 2021 9:41 am

Re: How to reduce IIP Trust Exit Charges?

Postby mrbluesky » Wed Apr 21, 2021 10:02 am

Even better, as the assets put in were under £260k, there's no need to file a (fiendishly complicated) IHT return.
Out of curiosity, what is the significance of the £260k figure?


So I have been advised it may be better to not wind up the Trust, but to allow it to continue, thereby keeping any assets outside of the beneficiaries estates.
Can the Trust can make interest-free loans, repayable on demand, to the beneciaries without a tax liability on either the trust or beneficiaries?

The investment bond has increased in value since my father's death, so when that is converted to cash, i presume there will be tax to pay on the gain?

After that, what will be the best way to manage the trust with minimal admin?
I understand as long as there is no income, then tax will not be due.
I recall reading on gov.uk somewhere that on the ten year anniversary there will be some tax due, and every ten years after that. How can that be legally avoided or minimised?


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