Arford Henderson Law

Author name: Nadeem Afzal

buying through a Trust

Why buying through a Trust could save you £260,000 and leave you in control

Wills /

Wealthy families will be able to buy properties for their offspring and avoid the higher rates of stamp duty thanks to a loophole involving the use of trusts.

It is being reported that there is a surge of interest from people seeking advice on how to use the strategy.

The tactic will suit those who previously would have bought a buy-to-let in their own name but earmarked it to give to their child in future.

By buying property through a trust, the taxman will treat the trust’s beneficiary as the property buyer. Provided they don’t own another property, the lower rates would apply.

Tax increase like this invariably lead to behavioural changes among taxpayers.

There are very good reasons to use trusts when buying property for children. The stamp duty changes mean trusts could make more sense.

The Government has made it clear that it doesn’t want people doing buy-to-let. Since buy-to-let was a major way in which families bought homes for their children, they need to find other routes.

There could be pitfalls however, in the form of inheritance tax charges or other knock-on taxes.

You need to be clear that any stamp duty saving isn’t outweighed by other tax consequences.

The following explains how the trust concept would work.

Buying property for adult children

Where children are over 18 the simplest option is to give the child the money with which to buy the property.

That way, provided this is their only property, they will payer the lower stamp duty rates.

But not all families are keen to entrust young adults with full responsibility for valuable property.

Where the parent wants to keep control a form of trust would need to be used where typically the child gets to keep the income, but has no power over the property itself. That remains with the trustees.

I would advise parents to use trusts if they want to keep control of assets in any case.

In the common scenario where parents have adult children at university, and where there is a wish to buy-to-let they could use a bare trust or set up a formal trust with the adult child as a “life tenant”.

By that means the parents can keep control of the property.

But it is tax-efficient from a capital gains perspective, because if it is the main home of the child it will qualify for their capital gains tax relief.

But it won’t work where your children are under 18

In the original notes no reference was made to the age of the trust beneficiaries.

But when the detail was published it appears HMRC saw the possible use of this and sought to close the loophole where younger children are concerned.

The legislation makes a special case for trust beneficiaries who are minors – it confirmed that where the parents are trustees and own other property, the higher rates would apply.

Minors cannot own property directly, so some form of trust is a necessity if a child under 18 – rather than their parents – is to own it.

There is thus an incentive to wait until the child is over 18 and set up a trust then.

Please contact me on [email protected] or 0207 041 6069 to find out how I can best help you protect your family and your assets.

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Why your children may never inherit your wealth!

Wills /

Let me tell you of a horror story. Mr. Thrifty married to Mrs. Thrifty has ensured that he has paid off his mortgage on his £1m home (with your help) and hopes that one day his daughter Lucy will inherit the home. You have advised them to get a mirror Will and they decided to get a DIY Will.

However, Mr. Thrifty dies a year later in an accident. The home transfers to Mrs. Thrifty who marries her tennis coach, Mr. Opportunity a year later. They have two children. She makes a new Will, leaving everything to her children.

Unfortunately they divorce ten years later, and Mr. Opportunity receives half the value of the house (£500,000) in the divorce settlement. Mrs. Thrifty dies in shock and the rest of the estate is divided amongst the three children. Lucy receives £166,000 from the £1m asset.

This is not what Mr. Thrifty had intended when he was setting out his long-term financial plan.

And the moral of this story is…

If there is a lesson to be learned from the above tale, it is this:

  • It is a good investment to obtain sound Estate Planning advice.

Please contact me on [email protected] or 0207 041 6069 to find out how I can best help you protect your family and your assets.

Why your children may never inherit your wealth! Read More »

share of the house

Your share of the house is at risk despite you writing a Will

financial security, Wills /

If you own a property with your partner or wife, it is important to know how it is being ‘owned’ at the Land Registry. Is it being held as Joint Tenants or Tenants In Common.

For instance, if you are owning the property as Joint Tenants and one of you dies, then the other person will become the owner of the property regardless of what it says in your Will.

When property is owned jointly by 2 or more people they are said to own the property either as “joint tenants” or as “tenants in common”.

How do I know whether I am a joint tenant or a tenant in common?

If you are unsure whether you own property as joint tenants or as tenants in common, if the property is registered with the Land Registry, as most properties are these days, confirmation can be obtained by obtaining “office copies” of the register from the Land Registry. If the property is held as tenants in common the office copies will contain what is known as a “Form A restriction” which reads as follows:

“No disposition by a sole proprietor of the registered estate (except a trust corporation) under which capital money arises is to be registered unless authorised by an order of the court”.

The title documents relating to the property will also record whether the property was purchased or transferred to the co-owners as joint tenants or tenants in common. However, the manner in which the property is owned may have changed since the title documents were prepared.

For this reason it is usually necessary, in the case of registered property, to obtain clarification by obtaining office copies from the Land Registry.

What happens when one of the tenants in common dies?

Where property is owned by tenants in common each co-owner is free to leave his or her share of the property to who ever they wish when they die. If they do not make a will their share in the property will pass to their relatives in accordance with the rules of intestacy.

This is in contrast to the position relating to joint tenants where their share in the property passes automatically to the other joint tenant or tenants upon their death.

From an inheritance point of view is a tenancy in common better than a joint tenancy?

The question as to whether a tenancy in common is better than a joint tenancy, from an inheritance point of view, will depend upon the circumstances of each individual.

Unmarried couples may, for example, prefer to hold property as joint tenants to ensure that if one of the parties dies the surviving party will inherit the deceased’s share in the property.

Please contact me on [email protected] or 0207 041 6069 to find out how I can best help you protect your family and your assets.

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life insurance

Why writing your life insurance into a Trust will save you thousands?

Wills /

When you are planning your family’s financial future, it is prudent to take all the necessary steps possible to protect their standard of living.

Arranging your life insurance in the right way – to give your family the maximum possible benefit – is an important consideration.

One option to consider when taking out life insurance is putting the policy into a trust.

And yet according to insurer Aegon, only 6% of life-insurance policies in the UK are set up in this way.

This is surprising as, although this process isn’t necessarily suitable for all people, it can be advantageous in the case of many.

Do bear in mind that if you want to discuss the specific advantages of putting your life insurance policy into trust, you’ll need to speak to an independent legal advisor.

What is a trust?

A trust allows you to set aside an asset to benefit a specified person or people (the beneficiaries).

The asset is managed by a trustee or trustees until such time as the beneficiary is intended to benefit.

So, for example, your spouse may look after property on behalf of your children until they reach a responsible age.

Life insurance policies are such an asset, and putting a policy into a trust can affect what happens to the payout from a policy in the event of your death.

The principal advantages to putting a life insurance policy into trust are as follows:

Trusts can help sidestep inheritance tax.

Under normal circumstances, the payout from a life insurance policy will form part of your legal estate, and may therefore be subject to inheritance tax.

By writing a life-insurance policy in trust, the proceeds from the policy can be paid directly to the beneficiaries rather than to your legal estate, and will therefore not be taken into account when inheritance tax is calculated.

This means the value of your estate may not move above the threshold, depending on your circumstances.

You don’t need probate to be granted in order for the policy to pay out.

Writing a policy in trust also means payment to your beneficiaries will probably be quicker, as the money will not go through probate.

This is a legal process which confirms an executor’s authority to deal with your possessions.

So, for example, if you leave everything to your spouse in your will, then your spouse will have to get probate granted before they can distribute your money, property and so on.

This process can take a long time, even when there is a will. In cases of intestacy (where there is no will), it can take much longer.

However, if the life insurance policy is put into trust, then it can pay out before probate is granted, as the insurance provider will just require a death certificate before paying out.

You could get greater control over your policy.

Writing life insurance in trust allows you to specify how you want the proceeds to be paid out. For example, trustees can be appointed to oversee money for the benefit of children under 18.

In addition, setting up a trust means that the payout will go to the people you intend it to.

Does it cost extra?

No. Your insurance provider should be able to provide you with this option for free when taking out the policy.

Some existing life policies can also be transferred into trust. Although if you want to write a life insurance policy in trust, we suggest you speak to an independent legal advisor first.

Please contact me on [email protected] or 0207 041 6069 to find out how I can best help you protect your family and your assets.

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disinheriting your children

Thinking about disinheriting your children?

Wills /

There has been an increase of 11.5% in the number of claims made by disinherited adult children seeking to challenge their deceased parent’s decision. The increase is suspected to have been caused by the established case of Ilott v Mitson where the daughter made a successful claim against her mother’s estate after she left everything to charity.

However, a recent case heard at the Central London County Court has the potential to halt this trend.

Michael Ames died in 2013 leaving his entire estate, valued at approximately £700,000, to his second wife. Mr Ames’ daughter from his first marriage has two teenage children, is financially dependant on her long-term cohabitant and is unemployed. She issued a claim against her late father’s estate for ‘reasonable financial provision’ under the Inheritance (Provision for Family and Dependants) Act 1975.

The Judge dismissed the daughter’s claim on the basis that the deceased’s estate was not ‘significant’ enough to support both the wife and the daughter. Further, the widow was ‘elderly’ and ill. The Judge contrasted the widow’s position with the daughters, whose unemployment he described as a ‘lifestyle choice’.

It is easy to note the differences between the Ames case and Ilott v Mitson. The needs of Mrs Ames are clearly very different to a charity. The Judge in the Ames case felt that Mrs Ames could not be expected to sell or mortgage her home, which would be the only way to realise funds to provide for the daughter.

Whilst this case goes some way to dampen down the sensationalist claims following Ilott v Mitson that testamentary freedom is a thing of the past, it does not clear up all of the grey areas. There are many issues that will arise when an individual wishes to write a will that does not provide for an adult child. Sensible consideration of the risks and any alternative options available can go a long way to minimising the chance of expensive litigation following your death, or avoid it altogether.

Please contact me on [email protected] or 0207 041 6069 to find out how I can best help you protect your family and your assets.

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Inheritance tax

7 Ways to save Inheritance tax

Taxes, Wills /
  1. Make a Will

An important element of sound estate planning is to make a Will – unfortunately 70 per cent of adults with children under 18 fail to do so.

This is mainly due to apathy but also a result of the fact that many of us are uncomfortable talking about issues surrounding our death. Making a Will ensures your assets are distributed in accordance with your wishes.

This is particularly important if you have a spouse or partner as there is no inheritance tax payable between the two of you but there could be tax payable if you die intestate – without a will – and assets end up going to other relatives.

2. Make allowable gifts 

You can give cash or gifts worth up to £3,000 in total each tax year and these will be exempt from inheritance tax when you die.

You can carry forward any unused part of the £3,000 exemption to the following year but then you must use it or lose it.

Parents can give cash or gifts worth up to £5,000 when a child gets married, grandparents up to £2,500 and anyone else up to £1,000. Small gifts of up to £250 a year can also be made to as many people as you like.

3. Give away assets

Parents are increasingly providing children with funds to help them buy their own home. This can be done through a gift and provided the parents survive for seven years after making it, the money automatically ends up outside their estate for inheritance tax calculations – irrespective of size.

4. Make use of trusts 

Assets can be put in trust, thereby no longer forming part of the estate.

There are many types of trust available and can be set up simply at little or no charge. They usually involve parents (called settlors) investing a sum of money into a trust. The trust has to be set up with trustees – a suggested minimum of two – whose role is to ensure that on the death of the settlors the investment is paid out according to the settlors’ wishes. In most cases this will be to children or grandchildren.

5. The income over expenditure rule 

As well as putting lump sums into a trust you can also make monthly contributions into certain savings or insurance policies (not Isas) and put them in trust.

The monthly contributions are potentially subject to inheritance tax but if you can prove that these payments are not compromising your standard of living they are exempt.

6. Invest in Business Property Relief Products

These are very effective and can save your estate a great deal of IHT. Unfortunately they are not great for capital growth but they are useful for capital preservation. You can also give these directly to your children or grandchildren without attracting IHT. In effect taking them out of your estate without any liability.

However, you can not raise debt on other assets in order to invest in a BPR product. You should talk to your IFA to find out which are the best products in the marketplace, which have consistently done well.

7. Provide for the tax

If you are not in a position to take avoiding action, an alternative approach is to make provision for paying inheritance tax when it is due.

The tax has to be paid within six months of death (interest is added after this time). Because probate must be granted before any money can be released from an estate the executor – usually a son or daughter – will often have to borrow money or use their own funds to pay the inheritance tax bill.

This is where life assurance policies written in trust come into their own. A life assurance policy is taken out on both a husband’s and wife’s life with the proceeds payable only on second death.

The amount of cover should be equal to the expected inheritance tax liability. By putting the policy in trust it means it does not form part of the estate.

The proceeds can then be used to pay any inheritance tax bill straightaway without the need for the executors to borrow.

Please contact me on [email protected] or 0207 041 6069 to find out how I can best help you protect your family and your assets.

7 Ways to save Inheritance tax Read More »

Inheritance Tax liability

Why it is important to think about your Inheritance Tax liability

Taxes /

The tax is usually paid out of the funds in the estate, or from money raised from the sale of assets if the estate has no cash. However, you may not want your beneficiaries to sell the assets as it maybe difficult for them to purchase another similar property due to the size of the Stamp Duty.

Sometimes, the deceased has left money in their estate to pay this tax. They may also have arranged for a life insurance policy to cover this bill. This is is an important consideration.

If there is a Will, it’s usually the executor of the will who arranges to pay this tax.

If there isn’t a Will, it’s the administrator of the estate who does this.

Once the tax and debts are paid, the executor or administrator can distribute what remains of the estate to the heirs.

When is the tax paid?

Inheritance Tax is normally paid within six months after the person’s death. If the tax is not paid within six months, HMRC will start charging interest.

HMRC can give the executor of the estate more time to pay the tax if certain assets in the estate, such as property, take a while to sell.

In this situation, your executor can ask to pay the tax in yearly instalments. But the outstanding amount of tax will still get charged interest.

If your estate is likely to incur Inheritance Tax, it’s a good idea for your executor to pay some of the tax even before they finish valuing the estate.

This will help the estate avoid getting charged interest if it takes longer to sell the assets to pay off the debts and taxes.

If the executor or administrator is paying the tax from their own account, they can claim it back from the estate.

Please contact me on [email protected] or 0207 041 6069 to find out how I can best help you protect your family and your assets.

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How to use Trusts to ensure your estate is protected

How to use Trusts to ensure your estate is protected

financial security, Wills /

There are various kinds of Trust. You can write a Trust into your Will, while others you can set up as a separate entity.

Some trusts will have to pay Inheritance Tax in their own right rather than as part of your tax bill; others might have to pay Income Tax or Capital Gains Tax.

The kind of trust you choose depends on what you want it to do. Here are some of the most common options:

  • Bare trust – the simplest kind of trust, a bare trust just gives everything to the beneficiary straight away (as long as they’re over 18).
  • Interest in possession trust – the beneficiary can get income from the trust straight away, but doesn’t have a right to the cash, property or investments that generate that income. The beneficiary will need to pay income tax on the income received. You could set up this kind of trust for your partner, with the understanding that when they die the investments in the trust will pass to your children.
  • Discretionary trust – the trustees have absolute power to decide how the assets in the trust are distributed. You could set up this kind of trust for your grandchildren and leave it to the trustees (who could be the grandchildren’s parents) to decide how to divide the income and capital between the grandchildren. The trustees will have the power to make investment decisions on behalf of the trust.
  • Mixed trust – combines elements from different kinds of trusts. For example, a beneficiary might have an interest in possession in (ie a right to the income of) half of the trust fund and the remaining half of the trust fund could be held on discretionary trust.
  • Trust for a vulnerable person – if the only one who benefits from the trust is a vulnerable person (for example, someone with a disability or an orphaned child) then there’s usually less tax to pay on income and profits from the trust.
  • Non-resident trust – a trust where all the trustees are resident outside the UK. This can sometimes mean the trustees pay no tax or a reduced amount of tax on income from the trust.

Please contact me on [email protected] or 0207 041 6069 to find out how I can best help you protect your family and your assets.

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Letter of Wishes

Why a Letter of Wishes is only a wish!

Wills /

A Letter of Wishes is a private and confidential document, which can be drafted to be kept with a Will. A Will is legally binding, whereas the contents of a letter of wishes are not. However, a Letter of Wishes can still be useful in certain circumstances.

One example is when considering who should inherit any household items or personal items, for example, furniture, ornaments, books or jewellery. Although some of these items may have substantial value.

More often than not it is the sentimental attachment to them, which leads people to list each item separately in the Will, confirming the full details of the person to inherit them. The Will can then become lengthy and more cumbersome than intended.

A way around this would be to pick a trusted individual and name him or her in the Will to receive the specific items with a wish that he or she should distribute them in accordance with a separate letter of wishes. The letter is then stored with the Will. This way, if there is a later change of heart about who should inherit a specific item or items are to be removed or added, it can be done without having to alter the Will.

However, the potential problems with this are:-

The person named to receive the items is under no legal obligation to distribute them in accordance with the letter. They are nothing more than mere wishes. He or she could keep the items;

The person named to receive the items could pass away first or not have the required capacity to carry out the wishes;

As the letter of wishes is not part of the Will there is always the concern that the letter could be separated from the Will or lost.

More than one individual could be named to lessen the chance of no-one being alive or capable to carry out the wishes or another option would be to name the Executors and Trustees (“Trustees”) already appointed in the Will to accept the items.

Naming Trustees in this professional capacity also carries a risk. The person or persons who are named in the Will to inherit the bulk of your estate (“residuary beneficiaries”) could claim these items as belonging to them and not the individuals named in the letter. This is because the Trustees are under no legal obligation to follow the letter of wishes but they do have to answer to the residuary beneficiaries.

So as to prevent this from happening, Trustees could be named to receive the items personally and not in their professional capacity. However, this takes us back to the first potential problem; the Trustees could keep the items for themselves.

It is therefore not advisable to consider these options when the items are of substantial value or absolute certainty is wanted as to who will inherit the items but can be very useful to dispose of everyday belongings.

It is a good investment to obtain sound Estate Planning advice.

Please contact me on [email protected] or 0207 041 6069 to find out how I can best help you protect your family and your assets.

Why a Letter of Wishes is only a wish! Read More »

share of the estate

I don’t want my wife’s new husband to have my share of the estate!

financial security, Wills /

Q: My wife and I want to write our Wills. We have two young children.

I want to make sure that if I die before my wife that she gets the money but if she remarried and then died, my half would end up with my children and not with any new spouse or children that he had either with her or previously.

She does not want to put the half in trust as this could stop her moving house and she could need it. I am concerned that if she became incapacitated that a new spouse could gain power of attorney. 

How can I safeguard so that any new husband would not take advantage of the rewards of what we have accumulated and at some point my children will get at least the share from my estate?

A: Despite your concerns about trusts, the best way to achieve your objective is by the use of protective and flexible trust structures incorporated into your Wills.

If you were to arrange for your assets to pass into a life interest trust for your wife’s benefit, this would ensure that she has the right to the income generated by any funds as well as to occupation of any property held in trust. The underlying capital would be protected for the benefit of your children.

To achieve maximum protection, you should ensure that any joint property is held as tenants in common so that your share passes according to the terms of your Will and into the trust structure.

This of course means that your wife’s main residence is likely to be owned partly by her personally and partly by the trust. This poses no problem for her ongoing occupation but she may of course want to move properties at some point in the future.

You should choose trustees who would understand  your wife’s wishes and able to work with her, but robust about protecting your children’s interests

She can be assured that this is entirely possible within this type of structure and shouldn’t cause any undue difficulties. The trustees of the life interest trust can purchase a smaller property for her occupation, thereby freeing up some of her own funds or could continue to part own an appropriately chosen property.

In this situation your wife will not be able to make the sole decision about the future of the property but she can be one of the trustees and therefore involved in the decision making process.

This type of trust can also contain flexible powers so that the trustees are able to make capital distributions to your wife if appropriate (and bearing in mind your own wishes) or advance capital to the remainder beneficiaries.

This should give her some comfort about her future financial security.

Alternatively, the trustees could appoint capital during your wife’s lifetime to the residuary beneficiaries. This would of course be subject to your wife’s approval if she was one of the trustees.

If you choose not to incorporate trusts into your Wills but instead make an absolute gift to your wife on your death, the assets will be added to her own estate. Once that has happened, it will be nearly impossible for you to exert any control over their eventual destination.

If your wife remarries, any existing Will would be revoked and she is free to make a new Will giving whatever she pleases to her new spouse. If she dies without a Will, the intestacy provisions would give the first £250,000 of her estate (and personal belongings) to her spouse, with only half of the residue going to the children and the remaining half to the spouse.

Your wife may also wish to protect the capital for your children in these circumstances and could take steps to do so, such as entering into a pre or post nuptial agreement but this does depend on her taking positive action at the appropriate time.

If your wife became mentally incapacitated, any power of attorney (whether an old style Enduring Power of Attorney or a new Lasting Power of Attorney) would dictate who would manage her financial affairs.

If none, an appropriate person could apply to the Court of Protection for a deputy order. While this may undoubtedly give a new spouse acting in this capacity a level of power over your wife’s finances, the use of such power is restricted and heavily scrutinised for any abuse.

The ability to make gifts or distribute assets is limited. If your children suspected that the new spouse was using the funds for his own benefit and against the wishes of your wife, they could take action to prevent this abuse.

To conclude, the use of appropriate Will trusts is likely to be the best means of achieving your aim of providing for your wife for the remainder of her life but protecting the funds for your children in the long term.

Most importantly, Where a testator gives a life interest in a property to a spouse, then no IHT will be due upon first death due to the spousal exemption under section 18 IHTA 1984, and tax may be due upon second death as the property/share of the property will be treated as part of their estate for tax purposes.

And the moral of this story is…

If there is a lesson to be learned from the above tale, it is this:

  • It is a good investment to obtain sound Estate Planning advice.

I have been a qualified solicitor since October 2003, and solely work in Estate Planning law. I work with financial advisors who wish to offer this service to their clients as an added value and opportunity to increase their fees.

Please contact me on [email protected] or 0207 041 6069 to find out how I can best help you protect your family and your assets.

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