With more families facing Inheritance Tax Liabilities due to the Autumn Budget 2024, Planning for this eventuality has become even more essential.
There are many people who have put effective & basic planning in place should they ever lack capacity. Lasting Powers of Attorney (LPA’s) are powerful tools that allow chosen individuals to make decisions financially if you cannot, however, even with a registered LPA in place, these documents can be extremely restrictive if gifting, Inheritance tax planning or specialised investment are needed after you lack capacity.
Attorneys always have to act in a Donor’s interest – not their own when using an LPA, as such, they are not allowed to gift large sums of money, they are not allowed to deal with tax planning (for the benefit of others) without the Court of Protection’s permission, they are also not allowed to use high yield investment if income is required to help fund future care needs.
Separate to this, once the Donor dies, their estate will be frozen and subject to probate before assets can be distributed to the family, which currently on average is taking up to a year. This can cause major headaches for the executors and the family – especially if Inheritance Tax is due, as this has to be paid within 6 months (after which an accruing interest of 7-8% is charged by HMRC) with no access to monies to pay the tax which can lead to large bridging loans being charged at 2% a month until probate is granted and assets sold.
To give families more freedom to plan & invest, to allow assets to bypass the outdated & costly procedures of probate, a new approach is needed, the solution is called ‘The Investors Living Trust’ (ILT).
The Investors Living Trust (ILT) is a simple lifetime trust, where the Settlor and beneficiary (same person) have an immediate and absolute right to both the capital and income of any assets the trust holds. The assets are held in the name of the trustees, but the trustee have no discretion over the assets held in trust.
The trustee of an ILT trust is a mere nominee (A person in whose name assets are held, but who does not have any beneficial entitlement to those assets, a nominee is a mere agent of the person who appoints them in whose name the property is held). The trustee must simply follow the (lawful) advanced instructions of the settlor/beneficiary about the assets held within trust.
The ILT is a frequently used example of a fixed trust (A Bare Trust). It is an arrangement whereby the Settlor allows assets to be held by Trustees on their own behalf. As the settlor is the named beneficiary, they have an absolute entitlement both to the assets in the trust and any income received by those assets.
The ILT also sits with a ‘Letter of Direction’ prepared by the settlor in the event they lack capacity. This Letter of Direction outlines the Settlors advanced Intent to their trustees/nominees towards the management of their funds after capacity has been lost. This direction is on three parts and with consultation with their financial adviser:
- The gifting of funds to direct descendants or extended family and how much of the funds can be gifted.
- The use of Business Relief to help lower & mitigate Inheritance tax.
- The use of trust assets for high-yield investments, including loans to help fund their care.
This guidance to the trustees far exceeds any powers an attorney on a LPA can make and reflects the values of monies being held in ILT in the settlors lifetime. After the Settlor/ beneficiary passes, the trust assets fall in accordance with the Settlors wishes within their Will.
As the trust is a Settlor interested Bare Trust, there are no tax implications on entry or exit fees meaning there is no limit to how much can be held under this type of trust. The trust assets are still in the estate for the settlor’s IHT calculations as HMRC views the trust as belonging to the Settlor, as such there are no periodic charges moving forward and very little to no maintenance required in running an ILT.
Unless specifically exempt, most trusts, including The Investors Living Trust, have to be registered with the UK Trust Registration Service (TRS), irrespective of whether there is a tax liability. In 2017, the TRS came into effect with the aim of improving transparency around the Beneficial ownership of assets held in trust with UK tax liabilities.
Probate
Waiting for a grant of probate has become a very costly exercise, in terms of waiting before a house can be sold or the ability to access investments to pay outstanding IHT bills – it is costing families thousands of pounds in interest & charges that could be avoided.
When held in an Investors Living Trust, investments, mortgage-free BTL, 2nd properties, holiday homes, all assets can be sold or cashed in without a grant of probate as they would be in the name of the trustees – not in the name of the deceased. This allows access to assets without the need to wait for a grant of probate, which could negate the need for expensive bridging loans to pay IHT bills or the ability to sell property now instead of a year down the line when prices may have lowered.
The convenience of the Investors Living Trust is the flexibility to manage assets without being restricted by health or death – both of which are part of everyday life.