Intestacy, Deed of Variation and Trusts Flashcards Preview

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Flashcards in Intestacy, Deed of Variation and Trusts Deck (11)
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Intestacy (England) - key points and order of distribution:

Since 1 October 2014, the rules dictate that if an individual dies intestate, their estate is distributed to the relatives of the deceased, based on the surviving relatives.

  1. Spouse or Civil Partner
    • ​Spouse or Civil Partner are entitled to everything absolutely. 
  2. Spouse or Civil partner and Issue (e.g. children, grandchildren and so on down)
    • Spouse or civil partner takes personal chattels, the first £270,000 of the estate and 50% of the remaining estate absolutely. 
  3. No spouse or civil partner
    • ​​Any children take the whole value of the estate, absolutely. If no children;
    • Grandchildren, Parents, Brothers and sisters, Grandparents, Uncles and aunts. 
  4. No relatives
    • ​​If there are no relatives, the crown takes the whole of the estate. 


Intestacy (England) - Death and distribution of estate following intestacy with children under 18:

  • The children will take 50% of the remaining estate absolutely.
  • If children are below age of 18, estate is held in trust on their behalf until they reach 18.
  • Or if they marry before then. 


Deed of Variation - Key features:

  • Only the beneficiary who will inherit less because of the variation needs to agree to it. 
    • Beneficiaries unaffected do not need to agree. 
  • If the variation is intended to take effect for IHT purposes there must be a written statement to that effect. 
  • There doesn't need to have been a will; an inheritance by virtue of intestacy can still be varied. 
  • The variation must be made within two years of death, in writing and signed by the affected beneficiary(ies). If it means more IHT is payable then the executors or administrators must also sign and agree to the variation. 
  • Normally a deed is executed which must state how the estate was originally distributed and how it is being varied and who will not benefit from this variation. 
  • An estate can only be varied once. 


IHT and Trusts - Bare Trusts - Key points:

  • Any transfer of value to a bare trust is a Potentially Exempt Transfer.
  • The value of the trust is included in the beneficiary's estate for IHT purposes.
  • The beneficiary is liable for any IHT payable on a failed PET.


IHT and Trusts - Interest in possession trust - Key points:

  • Pre-22 March 2006
    • Creation of the trust during the settlor's lifetime was a PET. 
    • No tax charge if the settlor survived for seven years, but if not, the trustees were liable for IHT if in excess of available NRB. 
    • The trust assets are generally regarded as belonging to the beneficiaries with an interest in possession and therefore divided among them equally. 
    • The value therefore forms part of their estates for IHT purposes. 
  • Post-22 March 2006
    • ​Creation of the trust is a chargeable lifetime transfer. 
    • IHT treatment is now exactly the same as per discretionary trusts. 
    • The trust is subject to periodic and exit charges UNLESS it is either a disabled person's trust, or an IIP created on death by will or intestacy.


IHT and Trusts - Discretionary Trusts - Key points:

  • The creation of a discretionary trust is a charegeable lifetime transfer, chargeable at 20% on the extent that the transfer takes the settlor's cumulative total over the NRB. 
  • There may be further tax to pay if the settlor ies within seven years of creating the trust, although taper relief will be available to reduce the IHT if the transfer uses up all of the available NRB. 
  • Because no beneficiary has a right to income or capital from a discretionary trust, there is nothing to include in the value of their estate on death. 


IHT and Trusts - Periodic charge - Key points:

  • An IHT periodic charge is made on the tenth anniversary of the creation of a discretionary trust. 
  • This is 30% of the lifetie rate of 20%, i.e. 30% x 20% (or 6%) of the excess value of the trust over the current NRB. 
  • This is payable by the trustees. 


10 years after trust establishment, value of assets was £400,000. NRB at the time is £325,000. 

£400,000 - £325,000 = gives us a figure of £75,000 in excess of NRB. 

£75,000 x 30% x 20% = £4,500.


IHT and Trusts - Exit charges - Key points:

An IHT exit charge is payable every time a capital distribution is made or appointment is made to a beneficiary. 

It is generally based on the number of quarters since the last periodic charge. The distribution is multiplied by the number of quarters over 40 and the effective rate at the previous 10-year periodic charge.


The £300,000 fund at 10 years has now grown to £450,000 after 11 years and 8 months. Number of whole quarter years since periodic charge = 6.

The effective rate at the time of the periodic charge was 1.125%. We work this out by dividing the value of the fund at that time by the tax charged at that time and expressing it as a percentage. 

((£4,500 / £400,000) x 100)

Therefore £300,000 x (6/40) x 1.125% = £506.25 tax payable.


Gift With Reservation (GWR) - Key Points:

  • GWR arises when someone gives an asset to someone else, hoping to escape an IHT liability - but continues to use the asset as if it were still theirs. 
  • The most common scenario is gifting a property/ second home to children forexample but continue staying their without paying market rent. 
  • GWR disappears once donor starts paying a market rent (or stops using the property themselves) - gift then becomes a PET.
    • Paying less than market rate only reduces the GWR proportionally. 
  • On death GWR is added back into the estate. 
    • If it became a PET at any point, and dies within seven years the value could be added back into the estate BUT any tax paid on the original gift is credited against the IHT due on death.
  • Exempt gifts cannot be GWR as they are exempt. 


Pre-owned asset tax (POAT) - key points:

  • This is an income tax - NOT an IHT charge. 
  • POAT converts the benefit soeone gets from having free or low-cost enjoyment of an asset they formerly owned into a CEV. 
  • This is then added to their other income from the year and liable to income tax. 
    • Eg. for land, the cash equivalent value is the market rent. For chattels and intangible stuff, it is the official income tax interest rate (currently 2.25%) of the capital value of the asset. 
    • Land or chattels must be re-valued every five years. 
  • If full market value is paid for use of the asset there is no POAT. 
  • POAT can be avoided if the individual elects for the asset to be a GWR instead and liable to IHT. This can be done by submitting:
    • IHT500 form and submitting it by 31st January following the tax year in which the income tax liabiliy arises. 


IHT Planning - Key points:

  • Effective IHT planning started with making a valid and ensuring that it is kept up to date (review every 2 years / after change in client circumstances / legislation). 
  • Establish LPA to allow finances to be managed / decisions about personal welfare be made if incapacitated. 
  • Use exemptions and reliefs, giving away assets if the individual can afford to do so. Giving away assets andusing trusts where they are not sure whom the beneficiaries are to be.
  • Use of transferable NRBs. 
  • When a gift is made, CGT may be payable. When comparing IHT and CGT remember IHT is charged on whole of a CLT, but the NRB may mean no tax bill. CGT is charged on gains, less AEA.