Mr and Mrs Chana

Mr and Mrs Chana have spent their working lives building up a small portfolio of five rental properties which they use as a source of income rather than relying on their pensions.

Mr and Mrs Chana were aware that they were in for a large Inheritance Tax Bill on their estate after they die as residential properties do not qualify for any Tax reliefs.

The biggest issue was that they both relied on the rental incomes for their day to day living needs and as such needed a way they could both manage their inheritance tax burden but retain an income.

After commissioning a report to look at all of their options they decided to follow expert advice and set up a Family Partnership with their children to control the impact tax would have on their estate.

The property partnership would be made up of both Mr and Mrs Chana as designated members or senior partners, and their children as junior partners. We would also then include a pair of Discretionary Trusts as further partners. The first step would be to transfer the ownership of their buy-to-let portfolio into the partnership and the value would then sit on their capital accounts within the partnership accounts. This is not a disposal for CGT purposes. At the same time, the other partners and the Trusts would have a zero balance on their capital accounts.

The object of this exercise is to move the value off of Mr and Mrs Chana’s capital accounts and onto the capital accounts of the junior partners and the Trusts, thereby lowering the value of Their estate for IHT purposes as those values will now sit with the junior partners.

We use a Discretionary Trust because we are able to elect hold-over relief when transferring an asset into it. This way the Trusts will allow us to move more of the property values out of their estate at a faster rate, without triggering a capital gains charge. We are limited to moving £325,000 of value into a Discretionary Trust in any seven-year period without triggering a tax charge. As we have two in this partnership, we can move up to £650,000 in any seven year period.

We will also be able to use their annual allowances for capital gains to make annual movements of capital out of their estate as well.

This means that in every seven year period we would look to reduce the IHT liability of the estate by at least £260,000.

Partnership law states that there does not have to be a relationship between capital and income within a partnership; therefore, despite the fact Mr and Mrs Chana will move the capital value of the properties out of their capital accounts and over to the junior partners and the Trusts, they, as the senior partners, can continue to earn a majority of the income generated by the business.

The other partners must earn some of the income so we suggest a minimum of 1% be paid over to each of the other partners. The actual amounts paid over will be decided on an annual basis by the Chana’s and will be done to suit their needs and lifestyle.

In some ways, a family investment LLP acts very like a Trust, with the older and wiser heads looking after the wealth of the more vulnerable members. Unlike a Trust, there’s no automatic lifetime charge to IHT when the properties are transferred in, even if those properties are worth more than the IHT Nil Rate Band (currently £325,000); nor is there a ten year IHT charge levied at 6% on asset values in excess of £325,000.

A family property LLP is a flexible business structure that has tax advantages over direct ownership, a family company or a Family Trust. Partners can divest themselves of capital value whilst still having flexible access to income by way of the deed, rather than by way of ownership of the asset. Income and capital allocated to each person is flexible so Care Fees and other asset protection issues can be addressed.

Mr and Mrs Cook

Mr and Mrs Cook were concerned about late life re-marriage, Mr Cook was older than Mrs Cook and he therefore expected to be the first to die.

He made it clear that he wanted to make sure Mrs Cook was well provided for and had a secure future, but he was also worried about her meeting someone else and remarrying. Mr cook didn’t mind the idea of her remarrying he just wanted to make sure that his estate ended up with his children and not lost to a new husband.

We recommended that Mr and Mrs Cook become tenants in Common thereby splitting the ownership of the house in half so they now owned half each rather than all of it together as most people do as joint tenants.

We then drafted new Wills with a property protection Trust in it. So now if Mr cook dies his half of the home will go into a trust for his wife, she will have use of his half in her lifetime but she will never take ownership of it.

This means that his half will always be protected should she re-marry or go into care, his estate will always end up with his children exactly as he intends.

Mr and Mrs Richards

Mr And Mrs Richards wanted to find the best way possible to help get their daughter Mary on to the property ladder and set her up for life. Like many of our clients, they were scared, scared of making a substantial gift and losing control of that gift.

What if they gave Mary a house and she ended up in a divorce situation? Would they lose half of the gift they had made to their daughter? What if she got into financial trouble? What if she died before her husband would he get the gift and then what if he re-marries?

The solution for the Richards was to use a Discretionary trust to hold the gift.

Instead of buying a property outright for Mary or giving her the cash to buy the property, we set up a Discretionary Trust. The property was owned by the Trust for Mary’s benefit, and Mr and Mrs Richards are the Trustees, which means they are still in charge of the asset.

Why Trusts rather than Direct Gifts?

Trusts enable you to maintain control over the assets placed into trust, and in the case of Discretionary Trusts, the value does not appear in the beneficiaries’ estate for IHT purposes. The Richards have made a seven year gift (PET) so in Seven years after settling the gift into Trust the value of the gift will leave their estate for inheritance tax purposes.

Once the Trust has been established, the assets within it are outside of both your and the beneficiary’s estate. By passing assets in this way, you would not simply be passing your IHT liability on to your beneficiaries, nor would the assets be in their estates for other purposes, i.e. divorce, bankruptcy etc.

The Trust can benefit beneficiaries either by direct distributions or by loan (which can be interest free); for example, if the Trustees loaned funds to your children or grandchildren, they would always have a deduction from their estate for the amount of the loan. This will help if, at any time, they need asset protection, such as if they are in a divorce or bankruptcy situation. It will also help with their own IHT position as the loan will be a deduction on their estate.

We also use these types of trust to pass property down the generation not only for all the reasons listed above but because when you give a second property away you will normally trigger a capital gain. By gifting the property into a Discretionary Trust we can elect to hold the gain over saving the settlor (Our client) from paying a capital gains tax charge by making the gift.

Mr and Mrs Ford

Mr and Mrs Ford were a married couple with two children, their estate was simple they had their family home, some savings, and investments. The estate was not large enough to attract inheritance tax as they were able to qualify for the new Residence Nil Rate Band meaning they had a tax allowance as a couple of £1,000,000 before the estate would be subject to any inheritance tax.

Their main concern was to control the impact any care need would have on their estate, and to make sure the children were protected should they suffer a divorce or financial issues in later life.

At Richardson Tribe we created our Family Protection package to help all clients in this position. They want strong flexible planning in place to protect the family should something go wrong, but also to keep ownership and flexibility.

Our Family protection package is the position we want to see all of our clients in as a minimum, it offers protection and flexibility to family’s and comprises three key elements:

Avoid unnecessary care costs
Keep it in the family with bloodline protective Wills
Maintain Control

A lot of people are still unaware that if they need social care in later life everything they own will be subject to a means test by the local authority. It has been this way since the 1990 community Care act.
If you need social care in later life the local authority will use your assets to pay for this care until you reach the lower limit which in England is currently set at £14,250.

There are many myths about how people can protect their assets from these assessments, a common one is for a parent to sign their house over to the children, so it will escape the means test. This just doesn’t work, the local authority will go back over any period of time to see if you have deliberately deprived yourself of an asset.
Our Family protection package uses a property protection trust to leave your half of the house to your children but stops them from inheriting it until you have both passed away. This way if your spouse needs care in later life or remarries after you die, then your half of the estate is safe for your children.

This type of planning doesn’t change anything in your lifetimes, both you and your spouse are still the owners of the estate.

Mirror wills are used by many clients, these simply leave everything to each other, then down to the children on the second death of the couple. With modern life, these types of wills leave a lot to chance.

If you were to pass away and leave everything to your spouse, then later in life they go into care or remarry, either the new spouse or local authority are likely to inherit most from your estate.

This is because a remarriage will invalidate a previously made will and make the new spouse the next of kin.
The same is true in regards to the grandchildren. The clients assume that everything will make its way down to them, but if one of your children dies first in their relationship, then their estate will likely go to your son or daughter-in-law. If they were to remarry, the chance of the grandchildren not inheriting is greatly increased.

The trust used in our Family protection package will ensure that you have bloodline protection, and allows controls to be kept with the children and the grandchildren after you die.

Lasting Powers of attorney are a relatively new piece of Estate planning, they were introduced in 2007. They come in two forms, the lasting power of attorney for property and financial affairs, and the lasting power of attorney for health and welfare.

These documents are registered with the courts, and can be given to the attorneys so that they in turn can deal with banks, financial institutions, medical professionals, and the local authorities. These documents allow the attorneys (normally the children) the ability to make the most important decisions at your most vulnerable time, such as are you to go into care or have care come to you?

The attorneys must act in your best interests at all times, and you can have multiple attorneys and decide if they are to act jointly or jointly and severally.

By setting up your Lasting powers of Attorney you remove the burden from the children, should ill health arrive in later life. To complete a Lasting power of Attorney this must be done whilst you are in good mental health and have capacity.

If someone becomes ill such as having a stroke or dementia and capacity is affected then this option can be lost to the family and they will be forced to have the local authority take control of the estate and situation until a deputyship order can be taken from the court which can take some time and a great deal of cost.

Our Family protection package puts our clients and their families in a very strong position should anything happen in later life.

Mr and Mrs Phillips

Mr and Mrs Phillips wanted to make some plans for managing their inheritance tax burden, they had a normal family house and good pensions, over the years they had used their full ISA allowances and had built up substantial savings.

The did not however want to lose control of their savings, nor did they want to give large amounts away, as they may need some of the money to pay for life’s luxuries in their retirement.

As such we introduced them to the Discounted Gift Trust.

Most IHT planning involves gifting assets during your lifetime so that they do not form part of your estate on death. The problem with this approach is that you may be depriving yourself of capital or income that might be required at a later date. You may therefore wish to look at options around the transfer of your savings & investments into a more tax efficient arrangement.

By transferring your savings and investments into an investment bond with certain financial planning attached to it, the value of those savings could be reduced immediately for IHT purposes, subject to your health and life expectancy, with the remainder becoming exempt after seven years. For this arrangement to work effectively the ‘income’ would need to be spent as it was received, you should therefore only consider this option if you considered that your future need for ‘income’ was not currently being met.

These are trusts typically offered in conjunction with investment bonds and these are used as the basis of the investment. The assets within the bond are able to grow free of income tax and CGT. The settlor is able to take an ‘income’ of up to 5% of the original value of the bond each year tax deferred; this ‘income’ has to be established at outset and cannot be varied. If you were to take an income in excess of 5%, income tax would be payable on the excess, however if you are a basic rate taxpayer, no additional tax would normally be payable.

Income tax is payable on the growth, but this would only become payable post death, and if the recipient was a basic taxpayer no additional tax would be payable.

Mr Benjamin

Unfortunately, Mr Benjamin had a long breakdown in his relationship with one of his children. His oldest son had fallen into drugs many years ago and he has not seen him for many years. He wanted advice on the best way to cut his son out of his estate, and to make sure that it went to his two daughters and grandchildren, without his son causing problems for the family by challenging the will.

Richardson Tribe advised Mr Benjamin to set up a Family Trust. The trust would hold his estate for him and once the Trust is six years old unlike a Will it cannot be challenged by his son after his death.

Family Trusts are used for many reasons:

Our Family Trust is specifically designed to protect your assets, such as your home, during your lifetime so those assets pass fully intact to your intended beneficiaries after your death. There are many benefits associated with the trust which means your assets are protected from creditors, you avoid probate fees (depending on the circumstances) and you also avoid sideways disinheritance.

The benefits of the Family Trust are highlighted above. The Family Trust is a trust set up during your lifetime to hold assets on your behalf.  ‘A trust’ is a relationship which is recognised and enforceable in the Courts. The details of which are contained in a ‘trust deed’.  It is a flexible life interest trust and has the benefit of giving you a guaranteed right to benefit from the assets within it. This includes the absolute right of occupation during your lifetime, or if you choose to sell the property, the right to benefit from the proceeds of sale. After your death the assets held within your trust are held on trust for your chosen beneficiaries.

The precise percentages and conditions under which individual beneficiaries will benefit will be set out in a letter of wishes, addressed to your trustees. The assets do not pass under your Will and do not require a Grant of Probate in order to be distributed.

In order for an asset to be protected by the trust it must be registered in the name of the Trust. This is a legal requirement. The trust will normally be named after the person creating it (the Settlor). So, if John Smith set up a Trust it would normally be called ‘The John Smith Family Trust’. The Trust is designed to give you (the Settlor) absolute security during your lifetime while providing you the flexibility you require.

There are numerous benefits to the way in which this trust is structured and people set them up for many different reasons.   Key features of the trust are:-

– You have a guaranteed right of occupation and income during your lifetime
– You are free to move or downsize
– You are free to replace your Trustees at any time while you are fit and well
– You are able to hold both real property (land, Inc. houses) and savings within the trust

Important – The overall effect of placing assets into trust is to maximise the above benefits by separating the legal and beneficial title. It works on the following basis: – If you, as the Settlor (i.e. the person entitled to benefit from the capital) should face any unforeseen difficulties, you are not regarded as the legal owner of the trust assets (the trustees are) and as such the capital value of those assets cannot normally be taken into account and are therefore protected for the beneficiaries of the trust.

It is often the case that people have in their mind thoughts of minimising the impact of care home fees and as you will be aware, one of the benefits of the Family Trust is that the assets within the trust can be disregarded from care fees assessments, provided it is set up at the right time and in the right circumstances.

When it comes to protecting your most valuable assets including your home and you have considered how you want those assets to be distributed once you have passed on it would be our advice that to achieve all the benefits outlined in this letter you proceed in setting up a Family Trust.

The Family Trust is one of the most flexible, useful and protective Estate Planning tools available. It is the ideal way to ensure that what you have worked hard to acquire is removed from being vulnerable to predators during your lifetime whilst also providing the maximum benefit and security to those you love after you have gone.

Our Family Trust is specifically designed to make sure that your home and other assets are safe from a variety of “unintended beneficiaries” and ensure that those you wish to benefit do so.  Unlike other trusts you will benefit from your assets throughout your lifetime as and when you wish.