Inheritance tax

[Mamma473738]

I’m setting up trusts for my children. My options are to set up a vulnerable persons trust, or to set up a discretionary trust and apply for a vulnerable persons election.

I have spoken to different solicitors. Solicitor 1 told me that both trusts are the same and both will receive IHT relief. Solictor 2 said that only a VPT will have IHT relief and a discretionary trust will not.

I’ve tried to google it and the results seem to favour 2 but I don’t really want to go by google. Why would the solicitors, both respected and occupying senior positions, say opposing things? I went back to both to clarify and they both repeated what they said. I have also asked other solicitors but I would need to be taken on as a client. I would like to clarify this point before we start making decisions.

Would and IFA be able to advise us on our options or would a solicitor be the better option?

I think your best bet is to talk to an Estate Planning company. This is what we've just done and they were great. We needed to set up a Vulnerable Person's Discretionary Trust for our child. They talked us through the whole process before we had to pay anything. The company is called Estate Planning Solutions: https://www.estplan.co.uk

Solicitors are not estate planners. As pp said, you need a proper estate planner.

A solicitor who is a member of STEP should be what you need.

https://www.step.org/

its a good job you gave more detail!

Not in any way a recommendation, but Herrington Carmichael handled our second house sale, the first one where we were both selling and buying. We dealt with Mr Herrington himself and I have never forgotten his kindness and patience.

... and now the ad has vanished and I look like an idiot!

I agree you need a STEP qualified professional. MENCAP are also well known to give advice in this area.

Thanks. Both solicitors I spoke to are STEP qualified and recommended by Mencap.

I did initially talk to an estate planning company but I found them confusing and they had a thing of only answering half my questions. When I came here looking for answers I was told I needed a STEP qualified solicitor 😂

@Mamma473738 😂 well at least you have asked the right people. Sorry I can’t help further. Good luck.

Is there a particular reason for choosing a Discretionary Trust?
If not, just go with the one (VPT) that both solicitors say will provide the relief.

VPT is often better from a taxation viewpoint.

But if the trust is for more than one beneficiary and you have a child that does not fit the HMRC legal definition of vulnerability (for example if one child is vulnerable and a second child is not) then it could be wise to setup a separate trust for each child to avoid the non-vunerable child being legally restricted in terms of distributions.

It’s a little complicated but yes a discretionary trust was suggested because 1) it would include my non-vulnerable child (who may be deemed vulnerable in the future) so it would save on admin and solicitor fees, and 2) if I submit a vulnerable person exemption then I was told a DT would have the same tax benefits (specifically asked about IHT) as a VPT.

But the other solicitor said it doesn’t work like that, only the VPT has the full tax benefits. And generally solicitors seem to recommend a VPT for disabled children but they haven’t advised as extensively as the two I have mentioned here.

If there’s any doubt over a DT then we should probably just opt for a VPT. But I did like that solicitor. 🤷‍♀️

For those suggesting an estate planner, the one we saw offered a wills and trust writing service. They had a legal team who were STEP qualified that would do all the drafting but estate planner was not a solicitor themselves. I tried to ask but it wasn’t clear whether we would deal with their solicitors directly. Is this kind of setup recommended? Or would it be better to pay for advice from the estate planner but get our own solicitor?

The Estate Planning company did everything for us - wrote up our wills and created the VPDT. We didn't deal with the solicitors directly, the company did that. They employ their own solicitors to do the legal side of everything.

Thanks, that’s good to know.

I spoke to a third solicitor about the above and they didn’t really answer the questions I had, but on a different point they said the complete opposite to what the previous solicitors have said.

I honestly want to cry. I thought it would be very black and white and it’s not. I might make yet another thread to get some fresh feedback.

I’ve tried to avoid saying “I spoke to another STEP qualified solicitor and they are saying the exact opposite to what you are saying”, but I don’t know if it would get me anywhere.

https://www.gov.uk/trusts-taxes/trusts-and-income-tax

Thanks, I have been on that page quite a lot! It doesn’t answer the question to my specific circumstances. And the two STEP solicitors (both recommended by the same charity) have offered a lot of free advice but say opposing things - it’s quite a straightforward question on whether IHT applies or not so I’m really surprised they disagree.

So I’m not sure which one to go with. I’ve tried to talk to other solicitors but they won’t advise unless we are taken on as clients and pay fees. I’m quite happy to pay obvs but I don’t know which solicitor to go with if they are advising different things and each option puts us on very different pathways that could have long term and expensive consequences if wrong.

I am not STEP but CTA and happy to be corrected as it’s a complicated area. My understanding is you would need to settle a Vulnerable Persons Trust to ensure IHT reliefs and then also make the Vulnerable Persons Election in order to claim the income tax and CGT reliefs on tax returns.

That does help a little thanks. It explains why the gov website only refers to CGT and income tax wrt vulnerable person elections.

So for a joint discretionary trust where one child is vulnerable, would IHT apply to the half of the assets that belongs to the vulnerable person?

If so, and it later emerged that the second child was also vulnerable, could IHT relief also apply?

I don’t think you could have a “mixed” trust like that for vulnerable and non-vulnerable beneficiaries and still claim IHT relief. My understanding is one or the other.

A vulnerable persons trust can have other non-vulnerable beneficiaries but their entitlement is restricted. I would have thought the Deed could include wording for adding future vulnerable beneficiaries but that’s beyond me I’m afraid! Otherwise I would have thought you would have to settle a normal discretionary trust which offers more flexibility although you couldn’t claim IHT reliefs. But you can still make the election to claim the income tax and CGT relief on the portion the vulnerable person is entitled to.

(Obviously with the caveat I’m no expert, but have seen a few in practice and did have to do this in exams!).

Thanks, I appreciate your response - it does help me to talk it through whether or not it is accurate!

I’ve been struggling because one STEP solicitor has said that a trust is a vulnerable persons trust if we make the election. I asked specifically about IHT and the reply was not specific and just said tax reliefs apply. They have strongly recommended one discretionary trust for flexibility and to submit elections as required. They said this would be exactly the same as a VPT. I really liked this solicitor and would like to work with them. (They said we can also make two separate trusts if we want to.)

A second STEP solicitor says pretty much as you have, that it’s not the same wrt IHT.

I think as I can’t verify which is correct I’ll have to go with two separate trusts, one VPT and one standalone trust for the non-vulnerable child, and make an election if needed.