Updating my will - tax question

[longdarktunnel]

OK, so following separation from my husband I need to update my will as really don't want him to get anything. I am very clear what I want - for it all to be left to the children to inherit when they turn 21, but obviously for whatever is needed to support them to be used as needed before then. My father and my father-in-law (soon to be ex FIL) will be the executors.

There's a reasonable amount of money at stake - mostly equity in the house, but my life insurance policy and death in service benefit.

My question is this. My bank offers a free will writing service, which I can use. But there's no provision in there for tax as far as I can see - I vaguely remember some talk when we drew up our current wills (pre children) about sorting out some form of trust to reduce tax. Presumably then inheritance tax would be payable on the entire estate if it passes to the children? Or do I need to do something more complicated about putting the money in trust (probably more complicated than the will writing service will permit)?

And, finally, is a life insurance payout or death in service benefit payout free of tax, or is it included in the estate for inheritance tax purpose?

I should probably ask my solicitor this, but given how much every phone call to him costs, I doubt there would be much money left to worry about...

Hi there, I'm a will writer and will try to help.

The part of your estate which would come from Death in Service/life insurance is free of tax as it's under a separate, discretionary trust.

The rest of your estate is liable to tax, but not at the usual 40% if your children inherit at a reasonably young age. If they inherit at 18, no IHT is payable (I'm assuming it's a straight forward split between the children), if they inherit at, say, 21 then some tax is payable on a fairly complex formula, usually around the 6-9% mark.

If they inherit at around 25 then significantly more tax will then be payable.

It's a bit of a silly system, the government is effectively encouraging you to give 18 year olds large amounts of money, and discouraging you from holding it back until a more sensible age.

If I was going to write your will, I'd include a clause immediately after the Guardian appointment to ensure that the Guardians are not out of pocket, but still the executors' job would be to keep as much as reasonably possible in the trust.

I see that you can get your bank to write your will, but be careful that you aren't talked into appointing them as executors, which can be horribly expensive.

If you need any further info or would like me to write your will, my email addy is [email protected]. My standard rate for a single will is £85 (No VAT is payable). I'm a lawyer with over 20 yrs experience.

Mumblechum - wouldn't IHT be paid on the estate? I thought that the rules encouraging kids to get their hands on drug and alcohol money inheritances at 18 applied to the taxation of funds coming out of trust? I'm prepared to stand corrected as much as a man in orthapaedic shoes.

Don't go to your bank for this. Not sure they're up to tax advice anyway, and as mumblechum says, they try and encourage you to appoint them executors then charge the earth.

Check as well that your life insurance and DIS benefits aren't payable into your estate. If they are, they will be taxed like the rest of it.

Resolution,no, funds held in separate trusts like death in service benefits etc are definitely exempt. The rest of the estate would, however, be liable in accordance with the rules, ie dependent on the ages of the children. This only applies to the testator's own children, not, eg, grandchildren.

Thank you, that's brilliant. Will probably be in touch - your rate is al
almost certainly a fraction of my London solicitor!

Depends though if it is discretionary. If it is paid into the estate it forms part of it and suffers inheritance tax like the rest of the estate.
www.hmrc.gov.uk/manuals/psimanual/part11/psi11.2.24.htm

I am pretty sure that IHT is paid on anything inherited by a child. There is only a spouse exemption.

Hi, that's fine, look forward to hearing from you.

Just to clarify, if we assume that you don't die till you're 90, then IHT will then of course be payable at the usual 40% over whatever the IHT threshold then is; it's only if you die when your children are minor that the IHT tax break kicks in for them to pay less tax depending on when they inherit.

I agree with resolution - the death in service benefit and any eg life policies have to be specifically written in trust by you during your lifetime for them to fall outside your estate for IHT purposes. You need to check with the provider if this has been done and, if it is, also whether you have given a direction to the trustees as your separation i(and any possible divorce) is relevant to them.

I also am unaware of IHT breaks for children - if the whole estate passes to non-exempt beneficiaries(which children are) IHT is payable at 40% on the value of any net estate which is greater than the taxable threshold - currently £325,000.

Mumblechum - what are the IHT tax breaks for kids?

Yes, the death in service benefit would, of course, have to be written in trust - when the scheme member nominates children as beneficiaries, this happens, not automatically, but there is always a lot of information on the nomination form, and most people do, of course, put the benefits into trust.

On the other query, the Finance Act 2006 set out the new category of 18 to 25 trusts, essentially a trust for bereaved young people similar to the bereaved child trust. As I said originally, some tax is payable (IHT exit charges). The 10 year charge can't apply as the trust is only for a maximum of 7 years. To calculate the amount of tax payable between 18 and 25, you'd have to do a dummy run (which of course would only apply with todays figures and IHT threshold), on form IHT 100 Sections G and H. The HMRC will calculate the tax payable for you, but only on an estate which they're handling (ie after death).

I don't think this affects though the IHT payable on the death of the testator. You don't get free of IHT that part of the estate that is placed into a trust for children. You just avoid the exit charge, which is payable as an added IHT charge, unless the child becomes absolutely entitled at 18.

I think.

I think that too resolution...

also longdarktunnel, you need to make sure that your will addresses the point that you are not yet divorced. Until that time he is still legally a spouse and entitled to make a claim on your estate if he is not provided for. he may well do this if your separation is not accompanied by an agreement which agrees the financial settlement. your will should recite the reason for lack of provision for him and also recite details of the deed of separation./court order made on judicial separation/.

The order on divorce should also state that it is made in full settlement with no further claims - though this is usually a standard clause your solicitor would include.

Just marking this as I may get in touch with mumblechum too.

HMRC website confirms there is only a spouse exemption for inheritance tax. If a will puts anything in to trust for children, IHT will still be paid on that. The trust will thereafter be taxed as all trusts are these days.

See link.

www.hmrc.gov.uk/inheritancetax/pass-money-property/exempt-gifts.htm#1

As for trusts, the link below is really useful.

www.hmrc.gov.uk/trusts/iht/intro.htm

www.hmrc.gov.uk/trusts/iht/which-trusts-pay.htm

These are called 18 to 25 trusts, or Bereaved Young Person's Trusts and, to repeat what I've already posted, there is an advantage in that significantly less than 40% tax is payable depending on the age at which the child/young person inherits.

I can see why other posters are finding it difficult to see this information, but it is there, and it's standard practice to advise clients that the age at which a child inherits does influence the tax payable if between 18 and 25.

Yes but...

This is a seperate tax, payable in respect of all trusts. Your posts convey the impression that if assets are left in a will to a bereaved minor then they won't attract the full inheritance tax, and that simply isn't the case. To give an example:

1 Assets £1m

All to 2 children, aged 10.

First £325000 - no IHT payable.

Balance of estate - IHT payable at 40%

Total to pay - £270,000

Then, when the money goes into a trust (as it will have to until the children reach 18 at least) that trust is taxed as per the link in your post above.

That is in addition to, not to replace, the original IHT payable on death.

Sorry, I'm obviously not expressing myself at all well here!

To clarify:

The income from the fund is taxed at the lower rate under the bereaved young person's trust, but the actual lump sum of IHT does, as Resolution says, have to be paid either immediately or over a period of time,say 10 years, but that would be subject to interest.

Sorry if I've made the waters muddier than they already were!

Can't understand why the rules were changed to discourage parents tying money up in trust beyond age 18. Had I received a large sum of money then it would probably have wrecked my life.

Quite. Almost everyone I write wills for with children currently under 18 choose to have it held in trust until 21, when hopefully they're a bit more mature (and often have massive student debt).

My kids will take when 25, with absolute discretion to trustees to advance as they see fit. I think it's worth any additional tax burden. Helps that my wife is solicitor handling £100m of trust assets. She tends to have a particular view of these things!

Makes for exciting dinner time chat.

Mumblechum - you did say if they inherit at 18 no IHT is payable.

The income tax from the trust is a different thing to the inheritance tax payable on the estate - it is payable in addition to any IHT which my be due.