Assets assigned to Trust can potentially reduce the Tax payable
- Trusts are also subject to Tax, but appropriate management by the Trustees can reduce any amount due substantially.
- Trusts can significantly reduce the impact of Tax on future generations
Can Trusts reduce or eliminate the Tax I pay?
Trusts have been instrumental in mitigating Tax since Medieval times. Trusts were initially created for the Nobility and wealthy landowners to avoid paying taxes to the Crown.
The introduction of Trusts led to a distinct loss of Tax Revenue and it did not take long for the first Anti-avoidance Statute to be introduced by Henry VIII in 1535.
Since then, there have been many changes to Trusts and their uses and equally to the Inland Revenue Rules which affect them.
Nowadays, you don’t have to be a Nobleman or a wealthy landowner to want to take advantage of the many Tax strategies Trusts can provide.
Many people now look to using Trusts as a means of mitigating Tax which would otherwise be payable. There are four types of Tax which could effect you and your estate:
Corporation Tax
Corporation Tax is paid by limited companies on their profits. Corporation Tax is not payable by the self-employed, but does apply to the following organisations, even if they are not limited companies:
- Members’ Clubs, Societies and Associations
- Trade Associations
- Housing Associations
- Groups of individuals carrying on a Business but not as a Partnership (e.g. Co-operatives)
There are two rates. The two rates of Corporation Tax – the small companies’ and main rate – relate to a level of profit. When a company’s profit level changes from the small companies’ rate to the main rate, marginal relief is available to ease the transition.
Capital Gains Tax (CGT)
Capital Gains Tax is a Tax on capital ‘gains’. If, when you sell or give away an asset, it has increased in value, you may be taxable on the ‘gain’ (profit). This doesn’t apply when you sell personal belongings worth £6,000 or less, or, in most cases, your main home.
You may have to pay CGT if, for example, you:
- Well, give away, exchange or otherwise dispose of (cease to own) and asset or part of an asset.
- Receive money from an asset – for example, compensation for a damaged asset.
You don’t have to pay CGT on:
- Your car.
- Your main home – provided certain conditions are met.
- ISAs or PEPs.
- UK Government Guilts (Bonds).
- Personal belongings worth £6,000 or less when you sell them.
- Betting, lottery or pools winnings.
- Money which forms part of your income for Income Tax purposes.
These are some points to bear in mind:
- If you are married, or in a civil partnership and living together, you can transfer assets to your husband, wife or civil partner without having to pay CGT.
- You can’t give assets to your children or others or sell them cheaply without having to consider CGT.
- If you make a loss you may be able to make a claim for that loss and deduct it from other gains, but only if the asset normally attracts CGT – for example you cannot set a loss on selling your car against gains from disposing of other assets.
- If someone dies and leaves their belongings to their Beneficiaries, there is no CGT to pay at that time – however, if an asset is later disposed of by a Beneficiary, any CGT they may have to pay will be based on the difference between the market value at the time of death and the value at the time of disposal.
Income Tax
Income Tax is a Tax on income. Not all income is taxable- and you’re only taxed on ‘taxable income’ above a certain level. Even then, there are other reliefs and allowances that can reduce your Income Tax bill – and in some cases mean you have no Tax to pay.
Taxable income includes:
- Earnings from employment.
- Earnings from self-employment.
- Most Pensions income (State, Company and Personal Pensions).
- Interest on most savings.
- Income from shares (dividends).
- Rental income.
- Income paid to you from a Trust.
Non-taxable income
There are certain sorts of income that you never pay Tax on. These include certain benefits, special pensions and income from Tax exempt accounts. These are ignored altogether when working out how much Income Tax you may need to pay.
So whether you own your own business and your concern is Corporation Tax, own property or hold other forms of assets which would fall prey to Capital Gains Tax, or believe Inheritance Tax will become an issue for your intended Beneficiaries, can can provide you with the correct type of Tax Planning to ensure as much Tax as possible is saved.
We are experts in providing advice on all aspects of Tax Planning and with the use of Trusts, will provide these ultimate Tax savings.
Go to our main Wills, Trusts & Probate solicitors page
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FAQs Regarding Wills
What is a will?
A will can be described as : “A written legal declaration of an individual’s intentions as to how he or she wishes to dispose of their property after death”.
- It only takes effect on death.
- It is a “living document” so can be changed during lifetime as long as testator maintains mental capacity to do so.
Why is having a Will important?
If you die without a Will, your estate will be dealt with by the strict rules of intestacy, which sets out who inherits from your estate and how much. This means that you will have no control over how and to whom your assets are distributed to.
The rules of Intestacy may not be in accordance with your wishes and someone you did not wish to inherit from your estate may stand to. Equally, if married, your spouse will only inherit a percentage of your estate, whereas you might wish for them to inherit it all.
A Will therefore protects your family and guarantees that parts of your estate are not given to anyone you do not wish it to go to (e.g. an ex-spouse).
Furthermore, having a Will can ensure that your estate is as tax efficient as possible, meaning your family will not have to pay a penny more in inheritance tax than they need to.
What makes a Will valid?
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For a Will to be valid according to English Law it must comply with Section 9 of the Wills Act 1837 which states it shall be executed as follows:
- It must be signed by the testator (or some other person in his presence and at his direction)
- The testator has to sign the Will with his usual signature and any signature may be acceptable as long as it was made with the intention of giving effect to the Will.
- Such signature to be made or acknowledged by the testator.
- In the presence of two or more witnesses both present at the same time, who then each sign or acknowledge their signatures in the presence of the testator (but not necessarily in the presence of each other). This process is known as the “attestation” or “execution” of the Will.
- The witnesses must be able to see the testator sign; therefore, they must not be blind.
- The Will must be dated, either at the beginning or at the end of the Will.
What are some examples of acceptable signatures?
- A Will signed by a mark only.
- An incomplete or indecipherable signature.
- A Will signed by some other person in the presence of and at the direction of the testator.
- In these circumstances it may be signed by the other person with the testator’s name or their own name.
- A Will signed in foreign characters or in shorthand.
- A Will signed with words such as “Mum” or “Your Loving Mother” as long as there is no doubt as to whom the signature belonged.
- Sometimes a hand-written Will may appear on the face of it to be unsigned and therefore invalid. (Wood v Smith [1992]).
What makes a Will Admissible to Proof?
For a Will to be entitled to proof in England and Wales under section 9 of the Wills Act 1837 it shall:
- be in writing – a Will may be in handwriting, but may also be printed e.g. typed or produced by word processor. In fact, “in writing” means any visible form of representing words, including shorthand, Braille and code, provided that the code can be deciphered.
- take a gift of property situate in England and Wales or appoint an executor – The testator must have attempted one or both of these things.
Exception – Guardianship of Minors Act 1971 S 4.
Who can Witness a Will?
Section 15 of the Wills Act 1837 states that the witnesses should not be:
- Beneficiaries named in the Will or;
- The spouses/civil partners of such beneficiaries.
- If someone witnesses a Will and later on marries one of the beneficiaries, this will be acceptable, as they were not married at the date of the Will. If the witness is either a spouse of a beneficiary or the beneficiary himself, then according to the Wills Act, the Will is valid but the gift to the beneficiary will fail.
- Witnesses do not have to be over 18, but they have to be capable of understanding the nature of the document they are witnessing and the implications of it.
What are my responsibilities as a witness?
The witnesses are there to ensure that the testator:
- Is making his Will of his own volition and understands what he is doing.
- The witnesses do not have to see the content of the Will but have to see the testator sign in the presence of him/her self and the other witness and then sign in the presence of the testator.
- Witnesses are bound by law to give the Probate Registry or any other proper authority (e.g. police, Crown Court) any information asked for regarding the execution of the Will. If the witness refuses to give such information they may be subpoenaed to attend and give evidence. If a subpoena is issued and they still do not attend they can be arrested.
Who can make a Will?
- Anyone who has the relevant capacity.
- The test for capacity was set out in the case of Banks v Goodfellow (1870) – The testator must understand;
- The nature of the act (i.e. making a Will) and its effects;
- The extent of the property of which the testator is disposing, although just a broad recollection is enough;
- The claims to which the testator ought to give effect i.e. the persons who are fitting of the testator’s bounty or rather those who ought to receive a benefit.
- What if I am not mentally capable of making a Will?
Statutory Wills – If a proposed testator is not mentally capable of making a Will, then there are provisions under the Mental Capacity Act 2005 and the Court of Protection Rules 2007 which give the Court of Protection (COP) power to authorise a Will made on his/her behalf. In order for a Statutory Will to be made, an application has to be made to the COP.
- Testator must be over 18.
- Can you make a Will if you are under the age of 18?
Privileged Wills – If a proposed testator is 17 or over and is on active military service with the armed forces, then he/she is entitled to make a Privileged Will under Section 11 of the Wills Act 1837 and the Wills (Soldiers and Sailors) Act 1918. This can be made in accordance with a different set of rules, other than those set out in Section 9 of the Wills Act 1837 (e.g. it does not have to be in writing, but any Will made in writing, need not be witnessed).
Can I revoke/cancel my Will if I wish?
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- A will can be revoked (cancelled) during the testator’s lifetime as long as he/she has the requisite capacity to revoke it.
- A will may be revoked by:
- Marriage (unless made in contemplation of marriage).
- Destruction.
- Later Will or codicil.
- Dependant Relative revocation.
- Revocatory Instrument.
Some Important Keyword Definitions:
- A testator (male) / testatrix (female) who has made a Will or given a legacy.
- A beneficiary is someone who receives something in a Will.
- An executor is someone who is named in the Will as responsible for dealing with the estate.
FAQs Regarding Probate
What is Probate?
In English Law, Probate is the word used to describe the legal and financial processes involved in dealing with the assets of a person who has died.
Before the executor of the Will can claim, transfer, sell or distribute any of the deceased’s assets, they may have to apply for a Grant of Probate (a legal document which gives them special legal authority to deal with the deceased’s estate).
How Does the Probate Process Work?
The exact probate process can vary depending on the instructions left in the Will and the assets, creditors, and beneficiaries the estate has.
The basic process for an executor is:
- Gather the full details of the estate’s assets and debts.
- Apply for Grant of Probate (authority to distribute assets from the deceased’s estate).
- Complete an inheritance tax return and pay any tax due.
- The receipt of a Grant of Probate.
- Repay any of the deceased’s outstanding liabilities.
- Distribute the rest of the estate according to the instructions left in the Will.
How Long Does Probate take?
For most estates, this will take around a year. However, the answer really depends on the size and complexity of the estate (i.e. if there are any disputes between the executor, beneficiaries, creditors, or HMRC).
Who Can Apply For Probate?
Only the executor can apply for probate to administer the deceased’s estate.
What if the deceased does not have a Will?
If someone dies without a Will, they are said to be ‘intestate’. The rules of Intestacy will dictate who can apply for a Grant of Administration to administer the estate instead. The then appointed administrator must distribute the assets from the deceased’s estate in accordance with The Intestacy Rules.