Parental Trusts for Children
There’s a common misconception that parental trusts for children are a separate type of trust in their own right.
This is not the case, though there are some notable differences between standard examples of the following trusts and those that are set up by parents for their own children under eighteen who have never been married or in a civil partnership.
Parental Trust Income Deemed as Settlor Income
For each of the below trusts, if all assets in a child’s trust equate to less than £100 per parent then the child’s trust income doesn’t count as the settlor’s income for income tax purposes.
For trusts that produce over this amount the entirety of the child’s income from the trust is deemed to be the settlor (parent’s) income for income tax purposes. In most cases the trustees pay the income tax on income from the trust by filling out a Trust and Estate Tax Return, then they give the settlor a statement containing all the income paid and the rates of tax charged on it (for a detailed definition of trustees and their responsibilities, see our recent article on the topic). The settlor is then required to account for the amount of tax the trustees have paid on their behalf through their Self Assessment tax return.
Types of Parental Trusts for Children
Parental trusts for children under eighteen who have never been married or in a civil partnership will be either a:
Bare Trust
Though not their primary function, as with all the trusts here, bare trusts are commonly used to pass money and assets down to children under eighteen. While the assets within a bare trust are held in the name of a trustee, the beneficiary (the child) has the right to access all capital and income from the trust once they turn eighteen.
Interest in Possession Trust
Different from bare trusts, except for the standard prerequisite that no child under eighteen can receive any income or assets from the trust until they reach the age of eighteen, an interest in possession trust differs in that once the child reaches this age the trustee must pass on all income from the trust to the beneficiary (child) as it accumulates.
Accumulation Trust
Accumulation trusts allow the trustee to accumulate income inside the trust and add this amount to the trust’s overall capital. It’s also possible, in most cases, for the trustee to pay income out of an accumulation trust in a similar fashion to discretionary trusts…
Discretionary Trust
Discretionary trusts for children allow the trustees to make decisions surrounding how the trust income (and occasionally the trust capital) is used. The trustees can decide on a number of things for the beneficiary (child), including what gets paid out, how often these payments are made, and which beneficiary to pay when, if there is more than one beneficiary.
Experienced Trust Accountants
To speak with a professional accountant to discuss which parental trust is right for you and your child, or for anything else, contact us today on 020 8780 2349 or get in touch with us via our contact page to arrange a complimentary, no obligation meeting.
Trustee Responsibilities
Whether you’ve recently been asked if you can be a trustee for a friend or family member’s trust, or you’ve been a trustee for some time and you want to brush up on what your responsibilities to the trust are, this article will answer all (and any) questions you may have.
In the simplest possible terms, a trust is a method of organising money, investments, land, or buildings (known collectively as assets) for a person or group of people. There are three types of people involved in a trust: the settlor, the trustee, and the beneficiary. The settlor is the person(s) who place the assets into a trust. The beneficiary (or beneficiaries) is the aforementioned person or group of people who benefit from the assets over time, and the trustee…
The Trustee
As a trustee you will be expected to manage the trust in the best interests of the beneficiary or beneficiaries. In the words of the Money Advice Service:
“As a trustee, you’re responsible for using the money or assets in a trust to benefit someone else. You won’t be able to benefit from the trust yourself (unless the trust agreement says you can). What you can and can’t do may be set out in detail in the trust document.”
Tax Responsibilities
Trustees hold the sole responsibility for reporting and paying tax on behalf of the trust. If there is more than one trustee (you’re not the only trustee for your specific trust), one of you must be nominated the ‘principal acting trustee’ and manage the trust’s tax affairs by yourself.
Assuming you’re the only trustee, or you’re nominated the principal acting trustee, you are required to register the trust with HM Revenue and Customs (HMRC) by 5 October of the tax year after the trust is set up. To do this you’ll need to complete form 41G and send it to HMRC’s trust and estates department.
Once the trust is registered you’ll be required to send HMRC an annual Self Assessment tax return regarding the trust’s income and any gains.
Reporting Responsibilities
As a trustee you are also expected to report to the trust’s beneficiary or beneficiaries on what tax has been paid and what income has been created whenever they ask for this information.
If the beneficiary is a close friend or family member they will, fingers crossed, not be asking you for this information every few weeks. But as and when they do ask for this information you will be required to complete form R185, or form R185 (Settlor) if you need to report this information to a settlor who has an interest in the trust.
Experienced Trust Accountants
To speak with a professional accountant to discuss your responsibilities as a trustee, or for anything else, contact us today on 020 8780 2349 or get in touch with us via our contact page to arrange a complimentary, no obligation meeting.
Making Tax Digital: Welcome Change or Worrying Burden?
The government’s Making Tax Digital plan was first touched upon during Budget 2015, then again in December of last year when they launched the ‘Making Tax Digital Roadmap’ in an effort to explain how their plan to turn HM Revenue and Customs (HMRC) into one of the most “digitally-advanced tax administrations in the world by 2020,” would be achieved.
But the question remains, despite all of the government’s assertions that Making Tax Digital will reduce the taxpaying burden for all individuals (small business owners, employed individuals with other income, retired individuals, and more), should this be seen as a welcome change for taxpayers or indeed a worrying burden?
With the consultation period on these changes due to run until 7 November of this year, here at TaxAgility we’ve looked at what Making Tax Digital may mean for you, and how we can help you to navigate these changes.
Who is Affected
If you’re a small or medium-sized business (SME) owner, self-employed, or a landlord with turnover over £10,000 per year, you will be affected by these changes. This last point refers to all landlords making over £10,000 per year (gross), even if you’re in full-time employment and you just rent out a property on the side.
There are also edge-cases that will also be affected, such as pensioners whose pension exceeds their personal allowance.
What is Required
If you’re affected by Making Tax Digital you will be required to have a digital tax account through which you will report your accounts to HMRC every three months (once a quarter) under standard categorised headings (sales, expenses, etc).
This will no doubt be a burden, as despite what the government wants to think tax is not at the forefront of most people’s minds on a day-to-day basis; that’s what accountants are for. That said, the government is correct in its assumption that more frequent reporting by those who don’t work alongside an accountant will help to keep them on top of their tax liabilities.
Is Big Brother Watching?
Though there’s really no need to be paranoid, especially if you have nothing to hide, this is a fair question and one that’s come up consistently since the government announced their ‘Making Tax Digital Roadmap’ back in December of last year.
It’s certainly true that the more we use our smartphones, tablets, and laptop computers to digitise our records and store them in ‘the cloud’ the more opportunity there will be for this data to be used against us should it get into the wrong hands. And for those of us who grew up before the computerisation of everything, the idea of taking photographs of our receipts and uploading them to the internet can seem somewhat daunting. But from working with computerised accounting software here at TaxAgility for many years we can tell you that so long as you’re sensible, computerised software is both safe and convenient.
Experienced Tax Accountants
To speak with a professional accountant to discuss the government’s upcoming Making Tax Digital changes, or for anything else, contact us today on 020 8780 2349 or get in touch with us via our contact page to arrange a complimentary, no obligation meeting.
Ten Inheritance Tax (IHT) Mistakes: And How to Avoid Them
If you’ve been reading our recent article series on inheritance tax (IHT) you’ll know the importance of planning for IHT in advance, and what forms your personal representative will need to fill in after your death.
Here we’re going to put to you a number of mistakes that it’s easy to make with regard to IHT, along with our own thoughts on how you can avoid them. Some of these mistakes are things you should look out for in the future, while others you may already be falling victim to. Once you’ve read through this list twice, take a look take a look at this other great list from The Times.
Not Planning in Advance
It seems obvious, but this is where it all begins. If you don’t plan for the fallout of IHT in advance you could be throwing away thousands (maybe even tens of thousands) of pounds that could have otherwise benefited your beneficiaries. It’s never too early to start planning.
Improper Planning of Pension Funds
Your pension fund(s) can be passed on to your dependants (spouse, children, step-children, and grandchildren) IHT free. If it’s paid to your estate after your death, or to non-dependents, it will be liable to IHT.
Not Writing Life Insurance Policies in Trust
If a life insurance policy is written into trust, on your death the proceeds from the policy can be paid directly to your beneficiaries instead of to your estate, thus its value won’t add to the value of your estate.
Avoiding Generational Planning
Talking about money, inheritance, and Wills with your family is never easy. But avoiding these conversations may be an even bigger mistake when it comes to IHT, as generational planning with regard to wealth creation and preservation can save your estate thousands of pounds.
Having an Outdated Will
Your Will is outdated if, among other things, any of the beneficiaries have died, any notable assets no longer belong to you, or it refers to your ‘spouse’ but you have since divorced. Make an effort to update your Will regularly.
Trying to Avoid IHT by Living Abroad
Living abroad doesn’t necessarily mean your estate is exempt from IHT upon your death, especially if you wish to be buried in the UK. If you’re currently living abroad ask a UK-based accountant about your specific situation.
Having Low Estate Liquidity
Having low estate liquidity means you don’t have enough (or much) cash available at your death to cover IHT, without assets needing to be sold to cover this bill. Consider taking out life insurance to help overcome any deficit.
Gifts Made With Reservation
If you’ve given a gift with reservation in the past this may come back to bite your estate after your death. One of the best examples of this is gifting your home to your children, then continuing to live in it rent free.
Losing the Family Home
This may not be as much of an issue in upcoming tax years’ as an increase to the current IHT allowance of £175,000 between now and 2020, commonly known as a family home allowance, will work to ensure that all family homes £1m and below (two spousal allowances of £500,000 each) can be passed down IHT free.
Not Speaking with a Professional
Last but not least, when it comes to IHT one of the biggest mistakes you can make is not speaking with a professional sooner! Here at TaxAgility our professional accountants are experienced in everything related to IHT; they’re here to save you money.
Experienced Inheritance Tax Accountants
To speak with a professional accountant to discuss more ways you can maximise the value of your estate with inheritance tax planning, contact us today on 020 8780 2349 or get in touch with us via our contact page to arrange a complimentary, no obligation meeting.
Inheritance Tax (IHT) Guide to Completing Forms
Mastering Inheritance Tax Forms and Navigating the Probate Process
Inheritance Tax (IHT) is a complex area, and completing the necessary forms can feel daunting, especially during an already emotional time. This guide will walk you through the process, providing clarity on which forms are required, when to use them, and how to ensure accuracy to avoid delays.
What is Inheritance Tax (IHT)?
Inheritance Tax (IHT) is a tax applied to the estate (property, money, and possessions) of someone who has passed away. In the UK, there is typically no tax payable if:
- The estate is valued below the current £325,000 threshold (the “nil rate band”).
- The estate is left to a spouse, civil partner, or a charity.
For estates above the threshold, a 40% tax is usually applied to the portion exceeding the £325,000 limit. However, various reliefs and exemptions can reduce this, such as the residence nil-rate band (RNRB), allowing an additional £175,000 if a home is passed on to direct descendants.
Why is Completing IHT Forms Important?
Even if no tax is due, it’s essential to submit the correct forms to HMRC. Failure to do so could lead to delays in probate, fines, or additional complications. Executors, or those handling the estate, are legally responsible for ensuring the accuracy and timely submission of these documents.
Key Inheritance Tax Forms You Need to Know
Depending on the estate’s value and situation, different forms are required:
- IHT205: This is used when the estate is below the IHT threshold and there is no tax to pay. If the estate qualifies as an “excepted estate” (a simpler estate), you must complete this form. An excepted estate typically means:
- The estate is below the £325,000 threshold, or
- The full estate is being transferred to a spouse or civil partner.
- IHT400: If the estate’s value exceeds the £325,000 threshold or tax is due, the executor must complete this form. It is used to calculate the estate’s value and report the tax due. Additionally, it covers complex reliefs such as business property or agricultural relief.
- IHT421: After filing the IHT400, HMRC will issue this form to confirm that all taxes are paid. The probate office will require this document before issuing a grant of probate.
- IHT402: This form is used when transferring any unused nil-rate band from a deceased spouse or civil partner to reduce the tax burden on the current estate.
- IHT403: This supports the IHT400 and deals specifically with gifts made by the deceased in the seven years before their death, which could be liable for tax.
- IHT100: This form is used for certain chargeable lifetime transfers, usually when someone places significant assets in trust while still alive.
Step-by-Step: How to Complete the IHT Forms
Step 1: Gather Information
You will need detailed information about the estate, including:
- The total value of assets, such as properties, bank accounts, investments, and personal possessions.
- Outstanding debts, including mortgages, loans, or other liabilities, which can reduce the estate’s taxable value.
- Lifetime gifts made by the deceased that may still be liable for tax.
Step 2: Choose the Correct Forms
Determine whether the estate qualifies as an excepted estate (use IHT205) or if the value exceeds the tax-free thresholds (use IHT400). Additionally, check if there are other complexities, such as trusts or gifts that need further forms like IHT403.
Step 3: Complete the Forms Accurately
Fill in each section carefully, ensuring that all assets, debts, and any other relevant details are accounted for. HMRC can impose penalties for inaccuracies or deliberate misrepresentations.
Step 4: Submit and Pay
Once the forms are complete, submit them to HMRC along with any Inheritance Tax due. Payment can be made in several ways, including installments for certain types of assets, like property. HMRC must receive this within six months of the death, or interest will start accruing on the outstanding tax.
Step 5: Obtain a Grant of Probate
If IHT is payable, HMRC will issue Form IHT421, allowing the executor to apply for probate. Probate gives you the legal authority to manage and distribute the estate according to the will.
Important Considerations
Potential Tax Exemptions and Reliefs
- Spousal Transfers: There is no Inheritance Tax if the estate passes to a spouse or civil partner, regardless of value.
- Charitable Donations: Leaving at least 10% of the estate to charity can reduce the IHT rate from 40% to 36%.
- Agricultural or Business Property Relief: If the deceased owned a farm or business, you might be eligible for relief, significantly reducing the taxable value of the estate.
The Residence Nil-Rate Band (RNRB)
Introduced to allow estates to pass on property to direct descendants, the RNRB can increase the tax-free threshold by up to £175,000. This is only available if the property is passed to children or grandchildren. Keep in mind that this relief tapers for estates valued above £2 million.
Common Mistakes to Avoid
- Undervaluing Assets: Be thorough when calculating the value of the estate. If HMRC finds discrepancies, you may face penalties or delays.
- Missing Deadlines: Probate cannot proceed without the correct forms, and interest on unpaid tax starts accruing after six months.
- Neglecting Gifts: Remember that gifts made within seven years of death may still be subject to Inheritance Tax, especially if they exceed the annual gift exemption limits.
Expert Assistance with Inheritance Tax Forms
Handling an estate can be complicated, and Inheritance Tax can add stress to an already challenging situation. At TaxAgility, we provide expert guidance to ensure that the correct forms are submitted promptly and accurately. Our experienced team can help you navigate IHT complexities, calculate the correct tax due, and explore ways to minimize your liability.
Conclusion
Inheritance Tax is one of the most complex areas of estate management, and correctly completing the required forms is essential to avoid unnecessary delays or penalties. Whether the estate is small and simple or large and complex, understanding which forms are necessary and how to complete them will ensure that the probate process runs smoothly. If you’re unsure about any part of the process, professional advice is always available to assist you.
For more information or assistance, contact our IHT specialists today.