Trusts and Inheritance Tax Basics

Purpose Trust Checklist

• Is the trust charitable?
• Does the trust have a charitable purpose?
• Does the trust offer public benefit?
• Is the trust exclusively charitable?
• If not, is it a valid non-charitable purpose trust?
• Does it satisfy the beneficiary principle?
• Does it satisfy the rule against inalienability?
• Are the objects certain?
• If not, the trust is void.

Inheritance Tax Calculation

• Step 1: Identifying the Value of the Estate
  • Calculate half of the value of residential property held as joint tenants.
  • Calculate half of the value of money in joint bank accounts.
  • Exclude life insurance policies or pension funds assigned or written into trust, unless payable to the estate.
  • Deduct debts, liabilities, and funeral expenses.
  • Include personal effects (PETs) and liabilities controlled by tax (LCTs) incurred in the last 7 years before death.
• Step 2: Applying Exemptions and Reliefs
  • Anything passing to a spouse or civil partner (including shares in a house if joint tenants) is exempt.
  • Charitable donations and shares in private companies held for 2 years are exempt.
  • Public company/quoted shares have a 50% reduction in tax if the deceased controlled the company.
• Step 3: Calculating Tax at the Appropriate Rate
  • Residential property passing to a lineal descendant (e.g., child or grandchild) under the will is exempt up to £175,000.
  • Up to £325,000 of net assets are exempt. Everything above this amount is taxed at 40%.
  • PETs and LCTs are applied against the NRB first.
• Other Points
  • Value transferred (surrender value) is used at the time of assignment.
  • Unused annual exemptions for PETs (£3,000) can be carried forward to the next tax year (to a maximum of £6,000).
  • Inheritance tax is due 6 months after the end of the month in which the deceased died.

Wills (FLK2)

• General Principles
  • Wills speak from the date of death. (Section 24).
• Pecuniary Legacies
  • Cash gifts are typically payable after one year, unless otherwise stipulated in the will. Interest is payable if delayed.
  • Beneficiaries may receive assets in the estate, up to the value of the legacy (if chattels or assets are not specifically bequeathed in the will).
• Gifts to Children
  • If a child pre-deceases the testator, the child's issue inherits the gift. (s. 33 Wills Act 1837).
• Validity of a Will
  • An attestation clause's absence isn't conclusive proof of issues with the execution of the will;
  • Evidence of due execution (an affidavit from witnesses, for instance) will be needed.
• Witnesses
  • Witnesses only need to sign in front of the testator.
• Will Amendments, Codicils and Revocations -Codicils supplement or alter wills and use the same execution process as wills. -A will can be amended or revoked in different ways.
  • If a testator marries or enters a civil union后, the will is automatically revoked.
  • Any alterations made after execution are usually invalid unless the contrary is proven.

Inheritance Tax (IHT)

• IHT400 and IHT401
  • Special account numbers for UK and non-UK domiciled people.
  • Separate forms are needed.
• Exempt Estates
  • Some estates are exempt from IHT (e.g. not needing to submit a HMRC form).

Grant of Probate/Representation

• Grant of Probate
  • Necessary when there's a will and no executor.
  • Beneficiaries can obtain a grant.
• Grant of Letters of Administration
  • Necessary when there's no will or a will is invalid.
  • One administrator is usually needed, but sometimes two.

Intestacy

• No Will
  • If there's no valid will, the estate is distributed according to statutory rules.
• Surviving Spouse
  • If there's a surviving spouse, the distribution prioritizes them based on if children also exist.
  • A surviving spouse receives assets, and usually a statutory legacy, depending on estate value..
• No Spouse
  • If there's no spouse, statutory inheritance rules distribute the estate to relatives.
• Children
  • Adopted children are treated similarly to biological children.
• Other Relatives -Other relatives (siblings, grandparents, etc.), follow a hierarchy that determines who inherits.

Other

• Mutual Wills
• Dependent Claims
• Family provision

This quiz covers essential aspects of charitable trusts and inheritance tax calculation principles. It provides an overview of trust requirements and the steps needed to assess estate value for tax purposes. Test your knowledge on these important legal concepts.