Managing trusts and tax

Publish date

20 July 2023

FAQ: Tax planning

Q. We want to help our 20 year old daughter buy her first flat, but we’re worried about putting such a valuable asset directly in her name. Is there anything we can do to protect the property until she’s a bit older?

A: If you want to make a gift to your daughter, but protect the property until she’s older then you could purchase the property through a trust established for her benefit. As a married couple, subject to previous gifts, you can each give up to £325,000 into trust every seven years without triggering an immediate charge to Inheritance Tax. If you survive seven years from the date of the gift the value will leave your estates for the purposes of calculating Inheritance Tax and a potential tax saving of as much as £260,000 will have been made.

You and your partner could be the trustees of the trust, which would hold the property for your daughter’s occupation and benefit. If the property isn’t rented out then it won’t be necessary to complete trust tax returns. Provided the property is occupied by your daughter as her principle private residence, if the property was later sold, the trustees could claim relief so that no capital gains tax was payable. While the property is in your names, as trustees, your daughter wouldn’t be able to sell, mortgage or otherwise dispose of the property. When she’s older, if you want to transfer the property out of the trust and into your daughter’s name you could do so.

Q. My husband and I want to leave our estates to our three children once we’ve both died. Is there anything we can do in our wills that would potentially protect our estates from spouses/cohabiting partners and also allow us to skip a generation and benefit our grandchildren where appropriate?

A: Instead of leaving your estates to your children outright on the second death you could include trusts in your wills, giving your executors discretion to distribute your estates in accordance with the circumstances that exist at the time, or subject to a letter of wishes. Your children could be your executors and trustees, although this isn’t advisable if you’re worried about assets being taken into account in a financial settlement on divorce. Depending upon the terms of the trust your children could decide whether to take the capital and/or just the income from their respective shares. If one or more children wanted to, they could skip a generation and benefit their respective children. The advantage of including a trust structure in your wills is that it would enable your children to benefit from the assets without them forming part of their own estates for tax purposes. Discretionary trusts in wills are subject to their own Inheritance Tax charging regime, but this is normally no more than 6% of the value of the trust fund every 10 years, which is considerably less than the 40% rate applicable to individual’s estates.

Q. I am the sole shareholder and a director of my family business. I would like to leave my business to my children in my will but I am worried about the Inheritance Tax consequences of leaving assets to my children rather than my wife and also my children inheriting the business at a young age.

A: The good news is that unquoted shares in a company can enjoy up to 100% relief from Inheritance Tax (IHT) under business relief once they have been owned for two years as long as the company is a trading company. Therefore, assuming that your family business is not purely investment you should be able to pass your shares to your children free of inheritance tax.

There are two ways to avoid your children inheriting your shares when they are too young:

  • Make the gift in your will contingent on your children reaching a certain age, usually 25 at the oldest
  • Alternatively, if you want more flexibility then the shares could pass into a discretionary will trust on your death. The trustees of the trust can be given complete discretion over when your children receive the shares outright meaning that the trustees could delay giving the shares to a child who is not financially astute.

The relief from IHT is available for both options. However, ensuring that the full amount of relief is available is quite complicated so it is important that proper tax advice is sought when preparing your will.

Q: My late father changed his will shortly before his death to leave everything to his new girlfriend so my brother and I have been left out. It does not seem fair, is there anything we can do?

A: Unfortunately, it is not the case that you are able to contest a will simply because you believe it to be unfair. There are only limited grounds on which you can legally challenge a will including:

1. Lack of proper formalities – the will needs to satisfy all of the legal formalities. We would need to see a copy of your father’s will to see if these formalities have been met

2. Lack of testamentary capacity – i.e. whether your father understood that he was making a will and had the necessary mental capacity to do so. We would need to consider if your father had dementia for example or any other illness that may have affected his mind at the time

3. Lack of knowledge and approval – your father must have known and approved the contents of his will and appreciated the extent of what he was giving to whom, i.e. that he was excluding his children in favour of his girlfriend. It is often closely related with testamentary capacity above and we would need more information to make a judgment here

4. Undue influence and fraud – for this challenge to succeed there must be coercion or fraud. There is a very high threshold to challenge a will on this basis and it is rarely brought as a claim on its own but is more commonly added to another challenge for example lack of capacity. Again, it is something we could discuss to see if it is of relevance.

Before considering making any potential challenge to your father’s will, it is worth checking whether you benefit from any earlier will he made, as if you were to be successful in your claim, it would be the previous valid will that would be admitted to probate.

It is common to request a copy of the file from the solicitors who prepared the will in order to review the circumstances surrounding the making of it and to request copies of any previous wills.

It is also worth considering as a separate type of claim whether you and your brother could bring a claim for financial provision from the estate under the Inheritance (Provision for Family and Dependants) Act 1975. As an adult child (as with spouses, dependants and limited others) you could bring a claim on the basis that the provision you receive is not reasonable. In order to assess such a claim we would need to look at a number of factors, including amongst others: your financial position versus the girlfriend of your father and the size of the estate. You would have to act quickly as you only have six months from the date of the grant of probate to bring such a claim.

It is very important to assess the merits of such claims very early as the costs in bringing them can quickly become disproportionate.

Can we assist you with any of the questions above? Please get in touch with one of our tax planning lawyers today to learn more about how we can help.

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