How can we cut our controlling, greedy son-in-law out of our inheritance AND avoid taxes?

Our estate consists of a house worth between £800,000 and £1 million, plus approximately £300,000 in premium bonds and cash.

Our daughter has a controlling husband who is after her inheritance. We want to shield her share, while our two sons have direct access to theirs.

To minimize inheritance tax, we want to make use of the exemption for housing tax.

We have been told that this is possible if we set up a trust and the boys withdraw from it within two years.

Estate plan: We want to shield our daughter’s share in our house and savings, but give our sons immediate access to their share

We believe that all beneficiaries should opt out, as the trust precludes the inclusion of the additional exemption.

However, our lawyer says that our daughter’s inheritance can remain in the trust and that this will not affect her housing allowance.

We would greatly appreciate it if you could give us your opinion on this.

SCROLL DOWN TO FIND OUT HOW TO ASK HEATHER A QUESTION YOUR TAX QUESTION

Heather Rogers responds: It is understandable that in these circumstances you want to protect your daughter and her inheritance.

Your attorney is largely correct about how a trust works, as I will explain below.

However, before you take action, it is wise and important to talk to your daughter, if you haven’t already done so.

I say this with the caveat that you and she can safely talk to each other. Of course, you must use your own judgment in this.

But the reason I think it’s better to talk to her first is that even though you want to protect her, letting your sons claim their share of your estate but not your daughter could create a bigger problem than it solves.

Moreover, it could put her in a vulnerable position.

You can read more about this topic below, but for now let’s address your questions about inheritance. First, we’ll look at the property tax exemption (RNRB) and how and when it applies. Then we’ll look at what happens if you set up a trust.

What is the tax-free amount for residential properties?

The RNRB allows a residence to be passed on to linear descendants. It is worth up to £175,000 (£350,000 for a couple) on net estates under £2 million.

For net estates over £2 million, the RNRB is reduced by £1 for every £2 the amount exceeds £2 million.

This tax is claimed when someone dies, as part of the inheritance tax return.

To qualify, the deceased must:

– Owning a home or a share in a home that belongs to the estate;

– Have direct descendants who inherit the house or part of it upon death.

The maximum that can be claimed is equal to the value of the person’s home that is left to his or her direct descendants, subject to any reduction in the exemption for estates exceeding £2 million.

What is meant by a ‘place of residence’?

A home is a property in which the deceased lived and which formed part of his estate.

It is not necessary for it to be their primary residence, or for them to have lived there or owned it for a certain period of time.

For UK estates it can even apply to property abroad.

However, the RNRB can only be applied to one object.

A home that the deceased owned but never lived in, for example a rental home owned by the deceased, is not a residential home and does not qualify for the RNRB.

What is a direct descendant?

Children, grandchildren, great-grandchildren, and so on. But for RNRB purposes, a child also includes:

– Stepchildren, but these must be the children of the spouse/registered partner of the deceased

– Adopted children

– Foster children

– Children for whom the deceased was guardian

– Spouses or registered partners of the child, grandchild, great-grandchild, etc.

What if there is no longer a home or if the deceased moved before his death?

If someone has sold or given away a house before their death, or has moved to a less valuable property, their estate may still be able to claim RNRB if they qualify for a smaller extension.

This may be described as a ‘qualifying former residential interest’.

To be eligible, all of the following conditions must apply:

– The person sold, gave away or reduced the value of a home on or after July 8, 2015

– The former home would have been eligible for the RNRB if they had kept it until their deaths

– Their direct descendants inherit at least part of the estate. However, RNRB is limited to the value of the property, so a property worth £150,000 would only receive £150,000 RNRB and if only half the property were left to lineal descendants, only £75,000 would be eligible for RNRB.

What happens if you have drawn up a will and want to use the RNRB?

Trusts created in wills are usually discretionary trusts. In this type of trust, the trustees have complete control over the assets and the income generated from them, and determine how and when the income and assets are given to the beneficiaries.

Depending on the trust deed, trustees can determine what is distributed to which beneficiaries (this can be income or capital), how often and whether any conditions are attached.

Discretionary trusts are often used to protect family assets.

Because the beneficiaries, by the nature of the trust itself, have no right to the trust fund, usual form part of the estate of the beneficiaries in the event of divorce, bankruptcy or death.

It might be wise to pay particular attention to that last point, regarding what happens to the assets in the trust if your daughter and her husband divorce. Consult your attorney on this.

Where the property or part thereof is bequeathed to a discretionary trust fund, an RNRB cannot be granted because the trust fund does not meet the definition of a lineal descendant, even if all the beneficiaries do.

However, if within two years of the death there is a deed in which the trustee allocates the trust assets to a direct descendant or descendants, this will be treated as if the assets had been bequeathed outright to the direct descendant.

You can then claim the RNRB, but this will only amount to a maximum of the value of the person’s home that is transferred to his or her direct descendants.

In your case, if the value of your sons’ share of the estate is equal to or greater than the maximum RNRB available on death, you can claim the full RNRB, provided the estate remains under £2 million under the current rules.

However, if the value of the property transferred to them is less than the maximum available RNRB, the RNRB will be limited to the value of the property transferred directly to them.

However, please note that if your daughter’s share remains in trust after the two-year period, there may be 10-year inheritance tax and exit costs on assets leaving the trust.

Depending on the assets and whether income is generated, annual tax returns may be required.

What action should you take now?

As I explained above, I think it is important to talk to your daughter in these circumstances, and also to your sons, if you haven’t already.

You may decide that it is best to move forward with your trust plans, regardless of her reaction. But if you warn her in advance, she will hopefully be better prepared when her husband finds out about your plans for her inheritance.

Naturally, you should think carefully about appointing suitable administrators.

Since you have seen a solicitor I assume you have wills. I would also leave a ‘letter of wishes’ with both wills which your solicitor can advise you on.

I don’t know how serious the situation of your daughter and her husband is, based on what you have said here.

However, I will proceed with caution and suggest a number of organisations that you can contact to discuss your concerns in confidence, if you feel that this is justified. I wish you and your family all the best.

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