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bigduckontax, Accountant
Category: Tax
Satisfied Customers: 3829
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Does a settlement which my three step children are the benificiaries

Customer Question

Does a settlement which my three step children are the benificiaries and my wife received the income for life get the tax free element before my own son from her estate.the settlement is valued at £304,000 so my son will only have £ 21000 tax free
Submitted: 2 years ago.
Category: Tax
Expert:  Sam replied 2 years ago.
Thanks for your question
Can you expand a little on what has happened and what you are asking
Customer: replied 2 years ago.

What I am questioning is

A settlement in 1966 was set up for my wife's 3 children from her 1st marriage.5/8th was given to them when they were 21 or married.3/8th was kept in the settlement and my wife was given the income for life.On her death the 3/8th amounting to £304,000 was given to her 3 children from her 1st marriage.

My question is ''why is the capital 304,000 put into her estate for inheritance tax and why does it take precedance for the nil rate band of £325,000 before the rest of her estate,so that there is only £21000 nilrate tax band left to give to the son of her 2nd marriage to me

Expert:  bigduckontax replied 2 years ago.
If you read HMRC Information Sheet Inheritance tax on transfers into trust you will find the following summary:
'Working out if Inheritance Tax is due
For most types of trust Inheritance Tax is due when you make transfers that total more than the Inheritance Tax threshold (£325,000 in 2014 to 2015 tax year). You work this out by adding up the value of any transfers (based on the loss in value to the settlor's estate) and any chargeable gifts made in the previous 7 years by the settlor. Inheritance Tax is due on everything above the threshold.
If the trustees pay, the rate of tax is 20%. If the settlor pays the Inheritance Tax instead of the trustee, this means there will be an increased loss from the settlor's estate. The amount of tax due will therefore increase. These calculations are complex.'
You can see from this extract that had this distribution not been set up as a trust the seven year add back rule on gifts would have expired and the capital sums involved escaped Inheritance Tax (IHT). However, this was not the case and the moneys are well and truly caught by Benjamin Franklin's dictum that in life there are but two certainties, death and taxes. I have to tell you that that is simply how IHT works and the treatment appears correct. Did the donor not seek professional advice before creating such a trust?
I am so sorry to have to rain on your parade, but I am afraid the whole affair is long since water under the bridge and nothing can now be done to remedy the situation.
bigduckontax, Accountant
Category: Tax
Satisfied Customers: 3829
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Expert:  bigduckontax replied 2 years ago.
Thank you for your excellent support.

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