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In probate we trust

As part of the advice process, when meeting a client for the first time, one of the key questions the adviser asks is whether the client has a will in place. This can then lead to discussions around the provisions a client has made for their family and heirs should they die. It is sometimes an area that clients may not want to discuss initially or it may take some time before they are willing to talk about it. Planning for what happens after they die is just as important as planning for when they don’t die – it is essential to make sure that financial affairs are as up to date as possible for those that are left behind.

Advisers have an array of trust-based solutions available to mitigate inheritance tax; however, not every client is interested in inheritance tax planning. For example, in the right circumstances, a married couple will soon be able to pass on £1m before inheritance tax is payable and their estate may be below this threshold and inheritance tax not payable.
For anyone holding investments, the use of a bare probate trust can offer advantages, perhaps not for inheritance tax purposes, but there can be other advantages. For many, the simplicity of a bond is attractive for trust investments, but probate trusts can work for collective investments too.

When using a probate bare trust, the client transfers assets to the trust and the legal ownership of the assets passes from the client to the trustees. The client, who is the donor, is the sole beneficiary so there is no transfer of value for inheritance tax purposes - the client has not given anything away and they remain the beneficial owner, but not the legal owner. If they wish, they can even be a trustee, but there should be at least one other trustee to make sure there is a surviving trustee in the event of their death.

As the client is not the legal owner of the trust property, the estate should not pay any probate fees on the assets within the trust – these fees are charged on the assets owned by the client at the time of death. According to the Money Advice Service, whilst some solicitors will charge on an hourly basis and some a flat fee, probate fees can typically be between 1% to 5% of the value of the estate, plus VAT.

On an investment portfolio of £200,000, the estate could therefore save somewhere between £2,400 and £12,000 in probate fees. By looking at a probate bare trust when considering a lump sum investment, an adviser can add a real, and tangible, benefit for an investor.

In addition to the monetary benefit, the trustees have the ability to distribute the assets to the beneficiaries of the will without the need for the grant of probate, or confirmation in Scotland. These distributions will follow the deceased’s will and so the trustees may need to work with the executors to identify the beneficiaries. If the underlying asset is an investment bond written on a capital redemption basis or the client wasn’t the last surviving life assured, the trustees could assign the bond. This could avoid the need to surrender the bond and generate a tax liability, unless of course that is desirable.

As for tax during the life of the trust, when using a bare trust solution, any income tax or capital gains tax liability will pass through the trust and fall on the beneficiary, who is also the
donor. The tax position is therefore the same as if the client retained ownership of the assets outside of the trust – so again the transfer to the trust is neutral for tax purposes. One point to bear in mind is that, as the trustees own the assets, they will need to carry out any changes or instructions. This could be any buy or sell transactions under a collective portfolio or fund switches, withdrawals, or surrenders under an investment bond.

Should the client no longer want to use the probate bare trust then the trustees can simply assign the legal ownership of the assets back to the client, giving them back full control. It is possible to use a discretionary settlor-interested probate trust to provide flexibility around the choice of beneficiary and avoid the need to distribute the trust property in accordance with the will. Whilst this can provide flexibility in this regard, it is worth considering that the trust assets will be relevant property and therefore potentially subject to lifetime inheritance tax charges, periodic charges and so on. This can therefore incur taxes and impact any gifting that the settlor has made in the previous seven years or may consider making in the next seven years.The use of a probate trust in the right circumstances can provide a real benefit to the client’s estate with very little potential downside.

Neil Jones, Market Development Manager. Neil is an investment specialist with over 20 years’ financial services experience with life and pensions providers, an investment company and as a professional adviser specialising in pensions, investments and estate planning. Neil has been involved in product development, investment research and training.