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bigduckontax, Accountant
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Inheritance Tax/Setting up a trust

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Hello, I am a single parent with a 15 year old daughter living with me. My property is currently valued at £600,000 with a mortgage of £100,000. I have a health issue and I do worry about my daughter losing her home to pay the tax while coping with my death (it may not happen in near future but better be safe than sorry)


I have been given advise to set up a trust to avoid inheritance tax as below.


 


"Trusts for bereaved minors


A bereaved minor is a person under 18 who has lost at least 1 parent or step-parent. Where a trust is set up for a bereaved minor, there are no Inheritance Tax charges if:


##the assets in the trust are set aside just for bereaved minor


##they become fully entitled to the assets by the age of 18 A trust for a bereaved young person can also be set up as an 18 to 25 trust - the 10-yearly charges don’t apply. However, the main differences are:


##the beneficiary must become fully entitled to the assets in the trust by the age of 25 ##when the beneficiary is aged between 18 and 25, Inheritance Tax exit charges may apply"


 


Could you please explain what exit charges are?


Please advise on what sort of trust and how it operates, and more importantly the charges that arise, and how they affect the Inheritance tax position.


 


Thank you for your help.


Kind regards

Submitted: 3 years ago.
Category: Tax
Expert:  Nicola-mod replied 3 years ago.

Hello,

I've been working hard to find a Professional to assist you with your question, but sometimes finding the right Professional can take a little longer than expected.

I wonder whether you're ok with continuing to wait for an answer. If you are, please let me know and I will continue my search. If not, feel free to let me know and I will cancel this question for you.

Thank you!
Nicola
Customer: replied 3 years ago.

Hello Nicola


 


Thank you for getting back to me.


I am happy to wait for 3 - 4 more days. If I am not able to obtain an answer, I will seek advice elsewhere.


 


Kind regards


Reiko

Expert:  Nicola-mod replied 3 years ago.
Hello Reiko,

We will continue to look for a Professional to assist you.

Thank you for your patience,
Nicola
Expert:  bigduckontax replied 3 years ago.
Hello, I'm Keith and happy to help you with your question. Here is HMRC's advice on trusts for bereaved minors:

'IHTM42815 - Special trusts: Trusts for bereaved minors

Finance Act 2006 introduced a new category of “trusts for bereaved minors”, IHTA84/S71A..

A trust of this kind can generally only be set up under:

The Will (or intestacy) of a deceased parent, including where this is deemed to have happened – for example, following a Deed of Variation that satisfies the conditions of S142 ( IHTM35021 +), or the Criminal Injuries Compensation Scheme.

A bereaved minor is a person who has not yet reached age 18 and at least one of whose parents has died, S71C. Parent can include a step-parent or a person who, immediately before their death, had parental responsibility for the minor, S71H. It is possible, though, for a trust of this sort to be set up under the intestacy of a grandparent, great grandparent etc. For example:

X dies intestate, one of his children (A) having predeceased him;
A’s two children, B and C, are minors but on attaining 18 will take under the rules of intestacy ( IHTM12112) A’s share of X’s estate that A would have taken;

The trusts for B and C while they are under 18 will qualify as trusts for a bereaved minor under s.71A(1)(a), since this requires only that the settled property should be held “on statutory trusts for the benefit of a bereaved minor”.

Other conditions

For as long as the minor is living and under the age of 18:

Any of the settled property that is applied for the benefit of a beneficiary must be applied for the minor, S71A(3)(b) and (c); and
either he must be entitled to all the income arising from the settled property, or no such income may be applied for anyone else.

On attaining the age of 18, or before, the minor must become absolutely entitled to the settled property, any income arising from it, and any income that has arisen and been accumulated before that time, S71A(3)(a).

The IHT charges on trusts for bereaved minors

There is no charge to IHT where:

The bereaved minor receives absolute ownership on or before their 18th birthday, or

Property is applied for the maintenance of the bereaved minor, or
the bereaved minor dies before reaching 18.

However, a flat rate charge to IHT (IHTM42802) arises in any other circumstances where:

S71A ceases to apply to the settled property, or

The trustees make a disposition which reduces the value of property held in the trust

Where S71A applies to accumulation and maintenance trusts created before 55 March 2006 that previously met the conditions of S71A, S71A will take precedence over S71 (S71(1B)).'

In very general and broad terms your children would escape Inheritance Tax. However, this is a complex legal area and if you try to do it yourself the slightest error in the drafting could cost your estate dear. You should have the trust deed prepared by a local, trusted solicitor with trust experience which might, of course, take you further afield!
bigduckontax, Accountant
Category: Tax
Satisfied Customers: 3817
Experience: FCCA FCMA CGMA ACIS
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Expert:  bigduckontax replied 3 years ago.
Thank you for your support.

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