George Hay Chartered Accountants were one of the first accountancy firms in the country to obtain a licence to carry out non-contentious probate work. In our monthly column, we give you an insight into the process and provide an update on what is happening in the world of probate and estates.
This month’s tale from the Probate Box is a salutary lesson in how trying to be clever can be a disaster.
We have taken on a probate case where the deceased had, many years ago, tried to be clever by transferring assets to a trust. Apparently, the motive was to avoid his assets being taken by Social Services to pay for his care home fees.
The method by which he did this was probably valid at the time but, whilst it may have succeeded for care home fees, was never going to work for Inheritance Tax (IHT).
We have not done the sums, but it could be that when the trust was set up thirty years ago that IHT was not so much an issue. However, with a house and a rental property in the trust and the nil rate band having been frozen at £325,000 since 2009, IHT is certainly at play now.
The trust had been set up but was structured as a gift with reservation of benefit i.e., the deceased continued to enjoy the assets given away.
What this means is that whilst the deceased no longer ‘owned’ the properties and so they were not counted towards the value of his assets in respect of care home fees (assets or cash exceeding £23,250 requires you to pay for your care fees), because he was still living in the property, both formed part of his estate for the purposes of IHT.
Furthermore, because of the reservation, the trustees do not get a tax free uplift on death which means that even though the estate is paying IHT at 40% on the market value today, the trustees are going to have to pay CGT at 28% on the increase in value of the property from when it was transferred to the trust in 1990 – ouch!!
As a further twist, you should be aware from earlier “tales” that if a property is left to a child, then there is an additional residential IHT relief of £175,000. However, the property is in a trust so, therefore, this relief does not apply – increasing the IHT bill by 40% x £175,000 i.e., £70,000 – ouch again!!
This case highlighted two fundamental planning problems. Firstly, in an attempt to save one “tax” (care home fees), there was a downside on other taxes.
The second problem is probably the most important. The failure to review and update. The residential nil rate band was only announced in 2015, therefore was clearly not part of any 1990’s planning.
The lesson to be learnt is plan in advance, review, update if needed, review, update if needed and so on…
Authored by Director of GH Probate Ltd., Barry Jefferd.
Our Probate service is provided through GH Probate Limited. GH Probate is the trading style of GH Probate Limited. Registered in England and Wales number 9630102. Registered Office: St George’s House, George Street, Huntingdon, Cambridgeshire PE29 3GH.
Authorised to carry out the reserved legal activity of non-contentious probate in England and Wales by the Institute of Chartered Accountants in England & Wales.
