Estate and Inheritance Tax Planning for Widows | Folwealth

The Scenario

Susan, at seventy-five years old, has lost her spouse to pass away. She's the mother of four and has a handful of grandchildren.

Her first spouse, Robert, recently departed, leaving her widowed a second time. In these instances, when one spouse doesn't leave a NRB, the entirety of it is left unused. This rule applies even in scenarios involving remarriage, stipulating that the NRB of the survivor (in Susan's case) cannot exceed a maximum of 100%.

Susan resides in the UK for tax-related reasons, particularly for estate and Inheritance Tax (IHT) planning being a top priority for her.

The Advice

At seventy-five, Susan has been widowed after the passing of her husband. She is the mother of four and also has a number of grandchildren. Following her first husband's death, Robert, she was left widowed once again. However, in cases where one spouse does not leave an NRB, the entire portion is left unclaimed. This policy is even stricter in situations where a new spouse remarries, setting a limit of the maximum NRB the survivor can receive to 100%.

Susan lives in the UK due to tax considerations, especially regarding estate and Inheritance Tax (IHT) planning, which is a significant focus for her.

The Outcome

The people managing the discretionary trust will have the power to collect earnings and can distribute either income or assets to a beneficiary as they see fit. When it comes to inheritance tax (IHT), it would be considered as though Robert established the trust, indicating that Susan is not conducting a taxable lifetime transfer (CLT).

As a result, Susan could be considered a possible beneficiary of the trust without breaking the gift with reservation rules.

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For tax purposes related to Inheritance Tax, Robert's Non-Resident Benevolent Association (NRB) will now be completely used up, leaving no excess NRB left to pass on to Susan. Keep in mind, though, that Susan has experienced two previous instances of losing her spouse. On her first marriage, she had received a fully inherited NRB from her spouse, which, therefore, was 100% unused. This situation will result in a combined NRB for Susan upon her passing. To summarize, if Susan were to transfer £325,000 of the inherited NRB from Robert into a trust set up for discretionary use, then:

• Assuming she meets the criteria, she has the potential to receive from that discretionary trust.
• Her estate will experience a reduction of £325,000, but for taxation purposes, it is considered to have been established under Robert.
• Susan's estate will still gain from a double NRB upon her demise (because her first spouse's NRB was completely unutilized).
• Consequently, three NRBs will be applied for.

Are there Capital Gains Tax (CGT) implications to consider?

Under CGT laws (S62(6)-(9) TCGA 1992), if the document says S62(6) is in effect, the person receiving the gift (Susan) won't have to pay CGT on the gift. However, it's also possible to remove S62(6) from the equation.

Let's take Susan as an example. She transferred shares worth £315,000 to herself, and if those shares had to go through the probate process, they'd be worth £304,500. What happens to the earnings from these shares after Susan passes away?

Susan could add specific language in the document that she's not going to make a CGT-related transfer, which would set the value of the gift to the trustees as £304,500 for tax calculations. Assuming Susan doesn't use up her full CGT-related gift exemption, the extra £10,500 gained from the transfer after she's gone would not be taxed as part of her annual gift allowance. In this scenario, Susan can opt to not include S62(6). As a result:

1. The transfer of the shares to the trustees is exempt from any tax.
2. The trustees get a CGT value of £315,000 for any future sales of the shares (instead of £304,500).
3. This means there could be a lower capital gain on a later sale of the shares by the trustees.

The trustees may keep owning the stocks, keeping in mind that any interest or dividend earnings are subject to trustee tax rates. According to tax rules, since Susan stands to benefit from the trust, she's considered the 'settlor interested' for income tax, meaning any income she might receive will be taxed on her. The trustees will pay taxes on the earnings, and these taxes will be subtracted from Susan's tax bill.

However, there are no 'settlor interested' rules for capital gains tax (CGT). Rather, the trustees are taxed at a flat rate of 20% on any gains that exceed their annual tax-free allowance under CGT.

• If Susan finds the 'settlor interested' income tax rules complicated for self-assessment purposes, this could sway her decision towards investing in a non-income-producing Insurance Bond as a trustee's holding rather than income-earning assets.
• Taxes are not due until a taxable event happens and there's a profit that's figured out from it.
• During Susan's lifetime, the taxable event profits are considered to be hers for tax reasons. She has the legal right to get back any taxes owed from the trustees.
• Trustees are allowed to withdraw 5% at a time from the taxable event profits without paying taxes on it. They can then give this money to a chosen beneficiary.
• Trustees have the option to transfer, or give away, parts of the taxable event profits to family members, including both children and adult grandchildren. This transfer would not cause the part to be considered a taxable event.

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