I recently had a similar situation with the mother of one of my clients. She had some assets in her own name but not that much. Her late husband left the bulk of his estate in trust for her, with his children and grandchildren being the remaindermen on her death.
This situation is a pretty straightforward financial planning case.
Attention needs to be paid to the mother’s tax returns, the breakdown of her assets, her expenditure patterns and valuations for the trust portfolio. You also need to look at what income she needs to live on, where the income is coming from and whether she can use capital instead.
In my case, it transpired that a large part of her income needs was met by the generous pensions that she received, state and private, all index-linked. The upshot was that the income shown on her tax returns was probably twice the amount she needed.
Not only was the family facing a big IHT bill but she was also paying around £20,000 a year in tax on income she did not need.
It seemed initially that the terms of the trust would not allow capital distributions to be made to anyone. This would have caused some problems because of the amount of money in the trust and the income arising from it. Fortunately, it transpired that distributions could be made, so we could extend our plans to the trust.
Having then talked to the client’s mother, it seemed that she felt more comfortable having cash in her own name. Clearly, she was never happy with the life tenancy arrangement, being beholden to the trustees for money.
She was also mystified as to how her estate would include the assets of the trust when they were not hers to do with as she pleased. A lot of people do not understand this point and I explained that the changes to the trust rules for IHT would mean all this would be different if her trust were to be established now.
Having reviewed every-thing, we decided that she would, for the time being, retain her personal assets and the trustees would make capital distributions to her children. These would come from their presumptive shares of the trust’s assets.
The trustees would also make a capital distribution to her personally to boost her own assets. The distributions would come from gilts that would be maturing fairly soon and other assets which would not create a capital gains tax liability for the trustees.
One distinct part of the trust had the grandchildren as the remaindermen under an accumulation and maintenance trust. This would become somewhat more complicated in the future because the children would become adults long after the new rules came into force. In this case, she would renounce her interest in this trust altogether.
All these gifts would be potentially exempt transfers and she would have to survive seven years for them to fall out of her estate for IHT. If nothing else, a substantial amount of income tax would be saved because of the capital distributions.
Reinvestment would be made into things such as index-linked certificates within the trust and personally to help keep down the future income tax liability.
We agreed to carry through these steps as quickly as possible and the upshot was a greatly reduced income tax bill and hopefully an overall IHT saving of getting on for £250,000.
Once these changes are complete, the new client should be happy that her income is being met comfortably and she has enough assets in her own name to cover any eventuality, in particular, having to go into a home. Once this has all settled down, there is scope for a second round of transfers.
I have also mooted the idea of a discounted gift scheme which could have some limited appeal. However, this is clearly a case where there is considerable scope for gifts because of the balance between pension income and expenditure.
If she does survive the seven-year period for IHT, she will also have saved something like £150,000 in income tax that was needlessly being paid on income she did not need.
Mark Bolland is a director at Chamberlain de Broe