Trusts, Care Fees and Inheritance Tax
A Trust is most often set up by married couple or civil partners and are aimed at splitting ownership of the family home - known as ‘Tenants in Common” - so that each partner has a half share. Each partners share is left to a trust which comes in existence on the death of the first partner.
As well as reducing potential IHT liabilities for the surviving partner it allows them to retain the right to live in the house. Should the surviving partner need to go into a Care Home only their share is assessed by the local authority and is the inheritance is therefore protected from the effect of Care Fees.
Another reason for setting up a Trust in your Will is to avoid the family destroying potential for ‘Sideways disinheritance. This can happen when the first partner dies leaving children from that marriage who might have a reasonable expectation of an inheritance at some point in the future. If the surviving partner remarries without making provision for those children, there is a risk that when they die all will be left to the new spouse. A Trust will ensure that your children receive what you intended.
Inheritance Tax is now biting at a historically low level meaning that many us of relatively moderate means need to take care in avoiding or mitigating its worst effects.
The simplest ways are spending it or giving it away in your lifetime. There are several types of gift you can make during your lifetime that are entirely free of Inheritance Tax and others that may not be on the list of tax-free gifts but can become so. These are known as potentially exempt transfers or PETs. Most gifts to people, as distinct from Trusts or companies, are PETs. You do need to survive for seven years after the gift is given to avoid tax, and depending on what you give, your gift could fall into the category of Gifts with reservation of benefit (knowns as GROB’s), which can cause all kinds of problems in the future if you haven’t followed the rules, we can help with this by giving you the right information so you can make an informed choice.
As can be seen these subjects are complicated and there are many a trap for the unwary, so it pays to take advice from experts such as ourselves at Will & Trust Services.