Income tax hike due to inheritance?
Discussion
I’m sure the answer is no as this comes under inheritance tax but …..
I’m about to receive about £140k from a trust my late mother set up, naming me as beneficiary though her will leaves everything to myself, brother and sister, and her intentions with the trust was always for it to be shared between us. She named me on the trust for admin reasons I suppose, it protected the initial investment from IHT.
I’ll be receiving the money and then sharing it straight out the same day. However I’ve received a letter from the investment company alerting me that this payout is a chargable event and may be seen by the tax man as income which would put me into the 40% tax bracket.
I’ll phone the tax man but do you all think they’ll treat it as income or inheritance?
I’m about to receive about £140k from a trust my late mother set up, naming me as beneficiary though her will leaves everything to myself, brother and sister, and her intentions with the trust was always for it to be shared between us. She named me on the trust for admin reasons I suppose, it protected the initial investment from IHT.
I’ll be receiving the money and then sharing it straight out the same day. However I’ve received a letter from the investment company alerting me that this payout is a chargable event and may be seen by the tax man as income which would put me into the 40% tax bracket.
I’ll phone the tax man but do you all think they’ll treat it as income or inheritance?
First up, your post isn't particularly clear.
Leaving that aside,
Income from a trust is taxed as income. It's likely to be paid to you net of a 45% tax charge/credit.
Capital distributions from a trust are just that, capital distributions, so no income tax. If the trust has sold anything to turn it into cash the trust may be liable to CGT.
If you're going to receive stuff and immediately give it to other people you'll obviously be making "gifts" that use up some of your own IHT exempt band of £345,000 for 7 years.
On the phone, HMRC might describe how tax works but they won't give advice.
Leaving that aside,
Income from a trust is taxed as income. It's likely to be paid to you net of a 45% tax charge/credit.
Capital distributions from a trust are just that, capital distributions, so no income tax. If the trust has sold anything to turn it into cash the trust may be liable to CGT.
If you're going to receive stuff and immediately give it to other people you'll obviously be making "gifts" that use up some of your own IHT exempt band of £345,000 for 7 years.
On the phone, HMRC might describe how tax works but they won't give advice.
Thanks, if it clarifies things
Mum put £96k in trust with Canada Life, it was set up so that the initial investment would be protected from IHT but any money it made, wouldn t. She named just me (as one of her three children) on the trust.
All three of us children are sole executors and beneficiaries of mums will, which splits her estate equally between the three of us.
As the trust is now valued at £146k then £50k will have to be factored in for IHT purposes, if that applies
I ve instructed Canada Life to cash in (surrender) the trust which will be paid to me next week, and I ll share it equally between my brother, sister and myself.
So I now need to consider any tax implications of me receiving the money.
All I m doing is becoming the person who the money passes through as per my executor duties, but the tax man might see it as me receiving and gaining from all of the money, when in reality I am receiving just a third, and it is inheritance that will already have IHT rules applied to it. If I had to pay tax on my third wouldn’t that be the tax man having two bites of the cherry? Isn’t inheritance classed as tax free for the recipient?
Mum put £96k in trust with Canada Life, it was set up so that the initial investment would be protected from IHT but any money it made, wouldn t. She named just me (as one of her three children) on the trust.
All three of us children are sole executors and beneficiaries of mums will, which splits her estate equally between the three of us.
As the trust is now valued at £146k then £50k will have to be factored in for IHT purposes, if that applies
I ve instructed Canada Life to cash in (surrender) the trust which will be paid to me next week, and I ll share it equally between my brother, sister and myself.
So I now need to consider any tax implications of me receiving the money.
All I m doing is becoming the person who the money passes through as per my executor duties, but the tax man might see it as me receiving and gaining from all of the money, when in reality I am receiving just a third, and it is inheritance that will already have IHT rules applied to it. If I had to pay tax on my third wouldn’t that be the tax man having two bites of the cherry? Isn’t inheritance classed as tax free for the recipient?
Edited by The Gauge on Sunday 12th October 15:34
I can't assist any further. Sounds as though that might be a life policy written in trust which is beyond my knowledge. Also it's not clear whether this trust is (a) within her estate, or (b) outside her estate. It can't be both. I anticipate b would give the better outcome but do not know the facts. Probably the whole purpose was to keep outside the IHT net.
If Canada life are obliged by law to deduct any tax they will obviously do so and pay you net. I'd expect them to send you some sort of statement about what they are paying out, and why. Put simply, if they say some or all of it is income then it's almost certainly income chargeable to tax in your hands.
If Canada life are obliged by law to deduct any tax they will obviously do so and pay you net. I'd expect them to send you some sort of statement about what they are paying out, and why. Put simply, if they say some or all of it is income then it's almost certainly income chargeable to tax in your hands.
Thanks Panamax
Mum put that money in trust purely to protect it from IHT.
Initially it provided her access to the money should she need it, but in 2022 she changed it to put the initial invested money out of IHT and thus denying her access, which I think made it a Gift Trust, which was sensible as she realised she no longer needed the money, but by making that change it meant the growth now falls within IHT as the 7yrs hasn't passed to make it IHT free, but thats another story!
If I have learnt one lesson from sorting her financial affairs then it's to keep my investments simple because it can cause unwanted stress for the person who is left to unravel it all, and I wouldn't want to put that stress on my son.
Mum put that money in trust purely to protect it from IHT.
Initially it provided her access to the money should she need it, but in 2022 she changed it to put the initial invested money out of IHT and thus denying her access, which I think made it a Gift Trust, which was sensible as she realised she no longer needed the money, but by making that change it meant the growth now falls within IHT as the 7yrs hasn't passed to make it IHT free, but thats another story!
If I have learnt one lesson from sorting her financial affairs then it's to keep my investments simple because it can cause unwanted stress for the person who is left to unravel it all, and I wouldn't want to put that stress on my son.
Edited by The Gauge on Sunday 12th October 18:01
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