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When someone dies, the job of managing their estate may involve dealing with trusts. The deceased may have wanted their assets put into trust when they die. Or part of their estate may have already been held in trust. This guide looks at the Inheritance Tax responsibilities of personal representatives.
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Settling someone's estate can be complicated. The executor or administrator of the deceased's estate - known as the 'personal representative' - must find out the total value of the estate. Inheritance Tax is due on everything above the Inheritance Tax threshold (£325,000 for the tax year 2013-14). This can become more complicated when a trust is involved.
There are three main ways that the deceased's personal representative may have to deal with a trust when working out whether Inheritance Tax is due.
Some trusts are set up so that the beneficiary has ownership or a legal right to the income or assets in the trust. This will affect what's included in the estate of the beneficiary when they die.
A bare trust is one where the beneficiary is entitled to both the income and the assets in the trust. Therefore, when they die, both income and assets are considered part of their estate. The personal representative needs to work out whether there is any Inheritance Tax to pay and include the deceased's interest in the bare trust, on form IHT400 Inheritance Tax Account.
An interest in possession trust is one where the beneficiary is entitled to only the income from a trust. When they die, there are certain circumstances where the value of this 'interest in possession' is calculated as part of their estate. These include when the trust:
If you're the personal representative you'll need to work out the value of an 'interest in possession' and complete questions 45 and 75 on form IHT400. You'll need to liaise with the trustees to get this information. It is the trustees' duty to complete an IHT100 Inheritance Tax Account form. This form must also be completed when an interest in possession trust comes to an end.
There may have been an Inheritance Tax charge of 20 per cent when assets were transferred into a trust. Use the link below to check the rules. If you're the personal representative you must find out whether the deceased made any transfers into a trust in the seven years before they died. If they did, and they paid Inheritance Tax at that time, the tax will be recalculated at 40 per cent and a credit allowed for the tax paid when the trust was set up. The trustees will be liable to pay the extra tax. You must show this on form IHT400 at question 28.
Even if no Inheritance Tax is due on the transfer you may need to add its value to the deceased's estate when you're working out the value for Inheritance Tax purposes.
Someone might ask in their will that, when they die, some or all of their assets are placed in a trust. A trust set up under these circumstances is known as a ‘will trust’. The personal representative must then make sure that the trust is set up properly and all taxes are paid on assets going into it.
Once it's set up, it is the trustees' duty to make sure Inheritance Tax is paid on any further transfers into or out of the trust. They do this by completing the IHT100 Inheritance Tax Account form.