Help me understand inheritance tax? (UK)?

Question

My mum was in an accident and got money in compensation. It was put into a trust fund. If she writes a will does she still have to account for inheritance tax or can she split all the money into where she wants it to go?
Does the inheritance tax only apply if she doesn't write a will?
Is it in her best interest to just spend/invest all the money so she doesnt lose half of it to tax?

Politically Correct · Accepted Answer

If the money from the accident was put into a trust, it may not be subject to inheritance tax.  You need to read the terms of the trust.  For example; if it states that the trust is to be used to pay for her care during her lifetime and that the remainder interest falls back into her estate, anything she did not spend will be subject to IHT.  If it is a trust that continues after her death then it will not be.  However income from a trust is taxed at a higher rate than IHT so this is not the best way to minimise tax.  Hard to understand why she did it this way.  I'm sure there is a reason.

Everyone must write a will.  Winding up an estate with no will can cost more than the value of the estate and you pay IHT either way.  She should write a will that leaves everything the way she wants.  Then her executor will pay the IHT before the estate is distributed.

I'm sure the money in the trust is invested now.  Whether it is invested sensibly is something you could look into.  FTSE ETFs are the best because youl do not pay management fees and your returns will match that of the market averages which is better than most money managers.  Unfortunately she also has to pay fees to the trustee, no way to avoid those and she will pay tax on her profits.  Better than not paying tax on her losses.

Should she spend it?  We do not know your mother's financial circumstances.  Does she own her home, does she need money for disability care, is your father working . . .
There are ways to minimise IHT but they all have hair on them.  You pay less IHT if you leave your home to a direct heir.  You do not pay IHT on money you give away during your lifetime if you survive the gift by 7 years.  You cannot do this with your house by the way and continue to live there.

Best advice is for you, her children, to tell her to eat drink and be merry.  She should spend her compensation money having a good life.  You children will have to do what we all did which is to work hard and save carefully for your own future.

Help me understand inheritance tax? (UK)?

1 Answer