Inheritance Tax

[SydneyRover]

NR, what does it cost to set up a trust to minimise IH?

[BillyStubbsTears]

NR.

1) If you leave your house to your kids, the threshold is effectively £500,000.


2) The overwhelming majority of IHT tax income (96% of the total) comes from estates worth over £1m.

3) The average IHT bill on an estate valued at 400k is about £15k. It's hardly highway robbery territory. At £500k it's about £45k. At £1m it's about £120k. At £4m, it's about £1m. Whichever way you look at it, the great majority of the estate is still passed on to the beneficiaries.


4) I agree that the very, very rich can afford to take steps to minimise their tax. Here's a thought. If the Govt really clamped down on them, they could very well afford to cut IHT at the lower end of the scale. Instead, what they are going to do this week is not go after the very rich. They are going to take money from people who've been invalided out of work and give it predominantly to relatively well off southerners.

[drfchound]

NR, what does it cost to set up a trust to minimise IH?

 Very little.

[Branton Red]

Thanks NR

That's good advice - for anyone reading this who might get caught out by IHT.

My parents are relatively recently retired and are planning to spend away any IHT issue - though who knows what will happen to house prices.

I've tried to persuade them to gift me a wedge of money, as assuming they survive at least 7 years such monies would be IHT exempt, but so far have had no joy 

[SydneyRover]

I would have thought that if you want better services such as a modern police force with modern computer systems, a modern health service, etc etc, then a strong economy with everyone that can afford to pay there share in taxes would be an obvious choice.

If you also want a better society where everyone/most feel that they belong then better services with a better standard of living is more likely to achieve that than the reverse.

[drfchound]

Some people might also find the following of interest:

“Inheritance Tax usually doesn't apply when you pass on your pension pot. This is because, unlike other investments, your pension plan isn't normally part of your taxable estate.”

The beneficiary will simply pay any income tax due at the appropriate  rate when they draw money from the fund.

[silent majority]

Some people might also find the following of interest:

“Inheritance Tax usually doesn't apply when you pass on your pension pot. This is because, unlike other investments, your pension plan isn't normally part of your taxable estate.”

The beneficiary will simply pay any income tax due at the appropriate  rate when they draw money from the fund.

Which is effectively the same thing, it just has a different label.

[Superspy]

Some people might also find the following of interest:

“Inheritance Tax usually doesn't apply when you pass on your pension pot. This is because, unlike other investments, your pension plan isn't normally part of your taxable estate.”

The beneficiary will simply pay any income tax due at the appropriate  rate when they draw money from the fund.

Which is effectively the same thing, it just has a different label.

Yes and no. At least in that case it's only getting taxed once, because it was tax free going into the pot in the first place.

[Branton Red]

Some people might also find the following of interest:

“Inheritance Tax usually doesn't apply when you pass on your pension pot. This is because, unlike other investments, your pension plan isn't normally part of your taxable estate.”

The beneficiary will simply pay any income tax due at the appropriate  rate when they draw money from the fund.

Which is effectively the same thing, it just has a different label.

Yes and no. At least in that case it's only getting taxed once, because it was tax free going into the pot in the first place.

And only paid at the same 40% tax rate as IHT if your beneficiary is in the higher rate income tax band

[drfchound]

Some people might also find the following of interest:

“Inheritance Tax usually doesn't apply when you pass on your pension pot. This is because, unlike other investments, your pension plan isn't normally part of your taxable estate.”

The beneficiary will simply pay any income tax due at the appropriate  rate when they draw money from the fund.

Which is effectively the same thing, it just has a different label.

Not necessarily.
Say someone has a £300,000 private pension pot, a house valued at £500,000 and other assets worth another £500,000 the inheritance tax wouldn’t apply to the money in the pension fund. It would only be applicable to that which goes over the limit on the house and other assets.
The beneficiary of the pension fund might only end up paying 20% income tax from anything drawn down if he wasn’t in a higher bracket tax bracket and didn’t go into it by drawing out too much each tax year.

[normal rules]

Some people might also find the following of interest:

“Inheritance Tax usually doesn't apply when you pass on your pension pot. This is because, unlike other investments, your pension plan isn't normally part of your taxable estate.”

The beneficiary will simply pay any income tax due at the appropriate  rate when they draw money from the fund.

Which is effectively the same thing, it just has a different label.

Not necessarily.
Say someone has a £300,000 private pension pot, a house valued at £500,000 and other assets worth another £500,000 the inheritance tax wouldn’t apply to the money in the pension fund. It would only be applicable to that which goes over the limit on the house and other assets.
The beneficiary of the pension fund might only end up paying 20% income tax from anything drawn down if he wasn’t in a higher bracket tax bracket and didn’t go into it by drawing out too much each tax year.

Yep. Savvy accountants that assist families in this situation call it re distribution of wealth.
You can put cash, investments and property into a trust, all of which would avoid IHT if left in a will to beneficiaries.

[normal rules]

NR, what does it cost to set up a trust to minimise IH?

The cost of creating a simple trust is usually in the region of £1000 - £1,500. The exact amount depends on how much legal advice you need and how long it takes your solicitor to draft the precise wording.
 
Trusts come in many shapes and sizes and they are a flexible way to structure your financial affairs. The law behind them can be complicated, so you must use a solicitor to make sure it is set up correctly based on your personal circumstances.
 
If you come to them prepared with an understanding of the key information you need to set up your trust, this can significantly reduce the cost of the initial legal advice. This information includes:
What the purpose of the trust is?
A list of assets to go into the trust
Who controls the trust (the ‘trustee’)
Who benefits from the trust (the ‘beneficiary’)
And any other specific rules you would like to include (like an age requirement before funds are released).
 
If you have a complex collection of assets and business interests and any foreign assets requiring tax planning, the cost can be as high as £5,000 - £10,000.
 
What Are Trusts Typically Used For?
 
The property inside a trust is treated separately from property owned by individuals for tax purposes, and that can be very useful especially when it comes to Inheritance Tax.

They are commonly used to protect and control family assets, to ensure finances are secure when someone is too young to handle their own affairs, to set up long-term care for someone less able to take care of themselves, for their own future care home fees, and for the more obvious purpose of passing on assets either during someone’s lifetime or upon their death.
 
Originally introduced during the reign of Henry VIII in the 16th century, trusts were invented to solve a gap in the justice system around Wills and how property should be transferred. Trusts are a useful mechanism for passing on property in a Will whilst still retaining some control over what happens to it.
 
Today, trusts are not just used in Wills and people are realising they are not reserved for the very wealthy either. There are only about 200,000 trusts in the UK at the moment but 1/5th of those were set up in the financial year between March 2021-2022.

[big fat yorkshire pudding]

Some people might also find the following of interest:

“Inheritance Tax usually doesn't apply when you pass on your pension pot. This is because, unlike other investments, your pension plan isn't normally part of your taxable estate.”

The beneficiary will simply pay any income tax due at the appropriate  rate when they draw money from the fund.

Which is effectively the same thing, it just has a different label.

Not necessarily.
Say someone has a £300,000 private pension pot, a house valued at £500,000 and other assets worth another £500,000 the inheritance tax wouldn’t apply to the money in the pension fund. It would only be applicable to that which goes over the limit on the house and other assets.
The beneficiary of the pension fund might only end up paying 20% income tax from anything drawn down if he wasn’t in a higher bracket tax bracket and didn’t go into it by drawing out too much each tax year.

Yep. Savvy accountants that assist families in this situation call it re distribution of wealth.
You can put cash, investments and property into a trust, all of which would avoid IHT if left in a will to beneficiaries.

That's something you're quite likely to do at 65,70 etc but not at 30 or 40.  Some good posts in this thread about the unfairness of it.

Perhaps there are some more innovative solutions to it. Example they could cut the tax free pension allowance for those with high inheritance or something like that?  Yes it's still a tax but then it only kicks in for those earning good money and when they earn it.  It also answers the unfairness of those who don't have good money. As it stands someone unable to work would pay the same iht as someone on £10m a year.  There are better ways to structure it.

[normal rules]

NR.

1) If you leave your house to your kids, the threshold is effectively £500,000.


2) The overwhelming majority of IHT tax income (96% of the total) comes from estates worth over £1m.

3) The average IHT bill on an estate valued at 400k is about £15k. It's hardly highway robbery territory. At £500k it's about £45k. At £1m it's about £120k. At £4m, it's about £1m. Whichever way you look at it, the great majority of the estate is still passed on to the beneficiaries.


4) I agree that the very, very rich can afford to take steps to minimise their tax. Here's a thought. If the Govt really clamped down on them, they could very well afford to cut IHT at the lower end of the scale. Instead, what they are going to do this week is not go after the very rich. They are going to take money from people who've been invalided out of work and give it predominantly to relatively well off southerners.

If my estate was worth 400k I’d be pissed and turning in my grave if my kids had to fork out 15k having paid tax all my life. And it’s easily avoided.
And my comment about the very rich avoiding tax was misleading. It’s just that it seems to be only those with lots of money that seem to employ tactics to avoid iht. Why should hard working families allow themselves to be shafted by the taxman when, with a little forethought and planning, they can assure that their estate is left untouched by HMRC. Spending a couple of grand getting a trust set up to avoid a five figure tax bill on your family seems like a no brainier to me.

[SydneyRover]

NR, what does it cost to set up a trust to minimise IH?

The cost of creating a simple trust is usually in the region of £1000 - £1,500. The exact amount depends on how much legal advice you need and how long it takes your solicitor to draft the precise wording.
 
Trusts come in many shapes and sizes and they are a flexible way to structure your financial affairs. The law behind them can be complicated, so you must use a solicitor to make sure it is set up correctly based on your personal circumstances.
 
If you come to them prepared with an understanding of the key information you need to set up your trust, this can significantly reduce the cost of the initial legal advice. This information includes:
What the purpose of the trust is?
A list of assets to go into the trust
Who controls the trust (the ‘trustee’)
Who benefits from the trust (the ‘beneficiary’)
And any other specific rules you would like to include (like an age requirement before funds are released).
 
If you have a complex collection of assets and business interests and any foreign assets requiring tax planning, the cost can be as high as £5,000 - £10,000.
 
What Are Trusts Typically Used For?
 
The property inside a trust is treated separately from property owned by individuals for tax purposes, and that can be very useful especially when it comes to Inheritance Tax.

They are commonly used to protect and control family assets, to ensure finances are secure when someone is too young to handle their own affairs, to set up long-term care for someone less able to take care of themselves, for their own future care home fees, and for the more obvious purpose of passing on assets either during someone’s lifetime or upon their death.
 
Originally introduced during the reign of Henry VIII in the 16th century, trusts were invented to solve a gap in the justice system around Wills and how property should be transferred. Trusts are a useful mechanism for passing on property in a Will whilst still retaining some control over what happens to it.
 
Today, trusts are not just used in Wills and people are realising they are not reserved for the very wealthy either. There are only about 200,000 trusts in the UK at the moment but 1/5th of those were set up in the financial year between March 2021-2022.

thanks nr

[SydneyRover]

Some people might also find the following of interest:

“Inheritance Tax usually doesn't apply when you pass on your pension pot. This is because, unlike other investments, your pension plan isn't normally part of your taxable estate.”

The beneficiary will simply pay any income tax due at the appropriate  rate when they draw money from the fund.

Which is effectively the same thing, it just has a different label.

Not necessarily.
Say someone has a £300,000 private pension pot, a house valued at £500,000 and other assets worth another £500,000 the inheritance tax wouldn’t apply to the money in the pension fund. It would only be applicable to that which goes over the limit on the house and other assets.
The beneficiary of the pension fund might only end up paying 20% income tax from anything drawn down if he wasn’t in a higher bracket tax bracket and didn’t go into it by drawing out too much each tax year.

Yep. Savvy accountants that assist families in this situation call it re distribution of wealth.
You can put cash, investments and property into a trust, all of which would avoid IHT if left in a will to beneficiaries.

That's something you're quite likely to do at 65,70 etc but not at 30 or 40.  Some good posts in this thread about the unfairness of it.

Perhaps there are some more innovative solutions to it. Example they could cut the tax free pension allowance for those with high inheritance or something like that?  Yes it's still a tax but then it only kicks in for those earning good money and when they earn it.  It also answers the unfairness of those who don't have good money. As it stands someone unable to work would pay the same iht as someone on £10m a year.  There are better ways to structure it.

In Oz, IT is political poison for any party, discussion of it pre-election is immediately jumped on by the rw media. And so there is none. It is not helped by using descriptors such as 'caught' and 'trap' etc.

[normal rules]

As further food for thought, the UK govt got £7bn from IHT in the financial yr 22/23. That was an increase of £1bn from the £6bn they receipted in FY 21/22.
Its hard to comprehend that most of this is avoidable.
I suppose there are trains of thought out there that when people die they just dont care. Notwithstanding those that pass away unexpectedly. Then there are family fueds to consider. People with no family etc.
Even so, thats a huge sum of money.   
Its a wonder there arent huge adverts on the TV for big accountancy companies to attract customers into this field.
Maybe its a culture thing. We pay taxes all our lives and we just take it on the chin that any inheritance we leave behind gets taxed also.

[Bentley Bullet]

It seems as it stands, that paying inheritance tax is optional, and you can opt for ways of avoiding paying it. That seems fair enough. If you don't agree with avoiding paying it, you can choose to pay it and rest peacefully in heaven while your family actually do the forking out for your generosity.

In a different scenario, if IHT is abolished you can donate the equivalent to a charity or something.

[silent majority]

There's some very interesting viewpoints on a tax which seems to be, at the very least misunderstood, and at the worst being used as a political club to beat people with.

It seems that the headlines that read like 'the Tories looking after themselves' are just a nonsense, and for somebody like me who votes for no political party it certainly doesn't apply. And initially that's why I responded, because this very subject needs looking at and shouldn't be used as a political football. There's a reason that most countries are abandoning IHT, because its basically unfair, and the longer the thresholds are held at these levels then more and more people will fall into that tax trap.

I am of course fully aware of the steps I can take to avoid leaving my kids, and grand-kids, with a massive bill, but one of the points I've made is why should we do that? What's the point of having a tax that can be so easily avoided? The only purpose it seems to be serving is to line the pockets of the accountancy firms that provide that service.

[Bristol Red Rover]

It seems as it stands, that paying inheritance tax is optional, and you can opt for ways of avoiding paying it. That seems fair enough. If you don't agree with avoiding paying it, you can choose to pay it and rest peacefully in heaven while your family actually do the forking out for your generosity.

In a different scenario, if IHT is abolished you can donate the equivalent to a charity or something.

Charity - we don't need taxes at all really. Scrap them all, people will give to charity.

JR-M for PM! 

[Bristol Red Rover]

SM, how do you think your kids are not lucky to be able to receive at least all of £500k or £800k of £1m inheritance?

I think the government scrapping these loopholes like trusts, as well as all the off shore pirating is also the way to go.

[Bentley Bullet]

It seems as it stands, that paying inheritance tax is optional, and you can opt for ways of avoiding paying it. That seems fair enough. If you don't agree with avoiding paying it, you can choose to pay it and rest peacefully in heaven while your family actually do the forking out for your generosity.

In a different scenario, if IHT is abolished you can donate the equivalent to a charity or something.

Charity - we don't need taxes at all really. Scrap them all, people will give to charity.

JR-M for PM! 

Is that an answer or just a silly outburst?

[normal rules]

There's some very interesting viewpoints on a tax which seems to be, at the very least misunderstood, and at the worst being used as a political club to beat people with.

It seems that the headlines that read like 'the Tories looking after themselves' are just a nonsense, and for somebody like me who votes for no political party it certainly doesn't apply. And initially that's why I responded, because this very subject needs looking at and shouldn't be used as a political football. There's a reason that most countries are abandoning IHT, because its basically unfair, and the longer the thresholds are held at these levels then more and more people will fall into that tax trap.

I am of course fully aware of the steps I can take to avoid leaving my kids, and grand-kids, with a massive bill, but one of the points I've made is why should we do that? What's the point of having a tax that can be so easily avoided? The only purpose it seems to be serving is to line the pockets of the accountancy firms that provide that service.

I've contributed to this thread and in no way shape or form am i interested in the political side of any argument put forward. IHT has been around far longer than i have. And i suspect it will continue to exist for many years after my time. Im just interested in saving people money. Alot of money in most cases. If you can avoid paying something legally, then why not?
Families work too hard, for too long, paying their fair whack on taxes throughout their lifetime.

As an aside, and possibly linked, i believe there exists levels of financial ignorance in the UK. Especially in relation to tax. I was chatting in my workplace the other day about interest on savings and how your income can affect this. Incredibly, no-one in the office even knew about it. And some (who earn over 50K and therefore can only earn £500 per year in interest before tax) were unwittingly paying tax on interest because they have all their cash squirrelled away in normal savings accounts. And they had no idea of tax thresholds for earnings related to interest.

[Dutch Uncle]

I am in favour of Inheritance Tax in some shape or form for the reasons expressed by BST earlier in the thread. However I don't think the current version is particularly good.   

Danum Don was talking about changing income tax threshholds. At least there are various bands. In IHT the rate goes directly from 0% to 40%. I would be in favour of an intermediate band of say 20% IHT on estates from say 0.5M to 2M, and then the 40% kicks in. This would reflect that fact that house prices have risen so much pulling others than the mega-rich into IHT range. 

But I also agree with BST that any IHT tax cut right now is not a good idea as it would entail a more deserving area likely being cut. 

Edit: Changed to 0.5M. Don't know if everyone knows but 500K allowance is per person in a marriage, and it is possible to write into your will that if one parent passes away, that the 500K allowance can be passed to the surviving parent for a 1M allowance on IHT. That is certainly the case in Northern Ireland, so I guess for the rest of the UK as well (some laws are indeed different over here).

[BillyStubbsTears]

SM

The point is, you cannot just look at this in isolation.

Nobody actually wants to pay tax.

I'd be delighted if we paid zero tax and had world leading  health and education systems freely available to everyone, the best railways in the world, social housing for everyone who needed it and a strong defence.

But you need tax to pay for those things.

So the question is, where does that tax come from.

My approach is simple.

1) Given the current state of our public services, I don't think cutting tax is a priority.

2) I accept that some people will have a different take on that. What I don't understand is why they would support cutting a tax that is overwhelming paid by the very wealthy.  There are many, many more equitable ways to cut tax, and ways that are better for our economic performance over the long term.

I really don't understand why those points seem to generate so much bile. They are eminently sensible to me.

[drfchound]

SM

The point is, you cannot just look at this in isolation.

Nobody actually wants to pay tax.

I'd be delighted if we paid zero tax and had world leading  health and education systems freely available to everyone, the best railways in the world, social housing for everyone who needed it and a strong defence.

But you need tax to pay for those things.

So the question is, where does that tax come from.

My approach is simple.

1) Given the current state of our public services, I don't think cutting tax is a priority.

2) I accept that some people will have a different take on that. What I don't understand is why they would support cutting a tax that is overwhelming paid by the very wealthy.  There are many, many more equitable ways to cut tax, and ways that are better for our economic performance over the long term.

I really don't understand why those points seem to generate so much bile. They are eminently sensible to me.

I suppose it depends on what level you consider to be very wealthy.
Without giving too much away, I have taken steps to make sure that IHT isn’t a problem for my family when I have left the mortal coil, but I don’t consider myself to be “very wealthy”.
What level of wealth would you consider to fall into the category that you think should pay IHT.
As has been said on this thread, what you might call ordinary working people have fallen into the groups who now have this IHT as a potential to be paid.

[tommy toes]

It seems likely that due to the furore around this, they'll shelve the IHT idea.
For me I'd raise income tax by a penny and invest in things that really matter.
Not a snowballs chance in hell of this happening though.

[Bentley Bullet]

SM

1) You wouldn't be handing over 40% of your estate to the country's coffers, as you well know. You'd be charged 40% on any estate value over £500k, assuming your house is passed onto your kids.

2) As I'm sure you also know, even that amount can be minimised by giving gifts to your kids in advance of your death.

3) Yes, I'm sure the richest have ways of minimising IHT, but I've quoted (and you've dismissed) official Govt figures, that the average IHT bill for an estate under £1m is 2% and the figure for estates greater than £1m is 17-20%. So clearly and unambiguously this is a tax which, if cut, will massively disproportionately benefit the very wealthy.

4) You say my argument is thin? You don't even mention the more important points I made . First one is that we have to take enough tax from somewhere to balance what we spend on society. If you want to cut IHT, you have to either cut spending or put up some other tax. Which would you do?

5) You've also ignored what is, to me, the absolute key issue. There is a pretty incontrovertible economic argument that societies in which wealth is encouraged to accumulate within wealthy families are also ones which have poor social mobility. In simple terms, if some kids are well funded by their parents while other ones aren't, the wealthy will tend to get on disproportionately to their actual ability or future work ethic. It's familial instinct to want OUR kids to succeed, but that's not necessarily the right outcome for the society as a whole. So society has a right (I'd say, a sensible duty) to redistribute wealth rather than let it accumulate in small groups. IHT is one of those means.

And I know those more on the right will automatically scream that society has no such right to limit what we, each of us want to do. But of course it does. I have an instinct to give my kids an advantage. But I also have an instinct to want to copulate with every attractive female I see. I don't think anyone would complain about society imposing limits on my right to take action on that.

6) Finally, you talk about multiple taxation. We are taxed multiple times on many things. I pay income tax and NIC on my salary. I've just filled the car up with petrol. I paid VAT and fuel duty on that expenditure. I paid insurance tax on my car insurance payments. All of those taxes, I paid from money that I've already been taxed on.

People being charged IHT have also paid tax on their income, as well as their spending, and are now unfairly having their hard-earned wealth taxed a third time upon death.

[drfchound]

It seems likely that due to the furore around this, they'll shelve the IHT idea.
For me I'd raise income tax by a penny and invest in things that really matter.
Not a snowballs chance in hell of this happening though.

Tommy, on the lunchtime news they were suggesting that the idea might be dropped, for now anyway.

[normal rules]

It seems likely that due to the furore around this, they'll shelve the IHT idea.
For me I'd raise income tax by a penny and invest in things that really matter.
Not a snowballs chance in hell of this happening though.

i suspect wed will see a reduction in income tax. prob 19% for lower rate tax bracket.

Tommy, on the lunchtime news they were suggesting that the idea might be dropped, for now anyway.