USING TRUSTS FOR ASSET PROTECTION AND TO MITIGATE
FOR INHERITANCE TAX
Despite the changes brought about by the Finance Act 2006 and the
Chancellor’s proposals for the tax threshold as it applies
to married couples and registered civil partners, wills and trusts
still remain an important estate planning mechanism for us all.
We could be forgiven for thinking that the Chancellor in his pre-budget
speech has rendered wills and estate planning for married couples
unnecessary; and that it is safe to sit back in the “knowledge” that
the Chancellor has made planning unnecessary by “increasing” the
threshold for married couples.
It is fair to say that for those married couples who had not taken
appropriate advice previously on how to save Inheritance Tax by
utilising both nil rate bands, this recent news will be of some
assistance - however, it is by no means the whole story.
Transfers between husband and wife are exempt for Inheritance
Tax and therefore no Inheritance Tax is payable on the death of
first spouse. However on the death of the surviving spouse, Inheritance
tax is payable on their estate if it exceeds £650,000. Inheritance
tax is charged at 40% on the balance over this threshold.
A straightforward Will giving everything to your spouse does
not pay any Inheritance Tax. You could have gifted away up to £325,000
(e.g. to children) without Inheritance Tax being payable and given
the rest to your spouse, but this could leave your spouse in a
difficult financial position.
As stated above Nil Rate Band discretionary Trusts are no longer
necessary for joint estates of less than £650,000 (2010 – 2011)
but they are of great importance in other circumstances.
Band planning is not now normally considered for mitigation of
Inheritance Tax however it is still used regularly to protect
against some or all of the following situations.
SOME OF THE BENEFITS OF DISCRETIONARY TRUST SCHEMES ARE:
Access to funds by surviving spouse.
Interest free loans can be made to surviving spouse repayable on
his or her death reducing their IHT liability further.
Ensure that the assets held in trust are not assessed as capital
of the surviving spouse should he or she require long term care.
Guarantee that the trust assets pass to your children rather than
say your spouse’s new partner should he or she remarry.
Protection to some extent against bankruptcy
IT IS ALSO NECESSARY
TO CONSIDER THE FOLLOWING:
Joint assets pass direct to the surviving
spouse and do not pass under the Will. These joint assets cannot
be used to fund the
Discretionary Trust Fund. It may be necessary to equalise your
to ensure both spouses have sufficient sole assets to use the
Nil Rate Band Discretionary Trust to best effect.
asset owned in most instances is the family home. Often this is
held by both parties as joint tenants. In order
that each spouse has sufficient sole assets to satisfy the Nil
Rate Band Trust it may be necessary to split the joint tenancy
of the property. Each spouse would then own the property jointly
as tenants in common. Although the property would still be owned
jointly with your spouse, the significant difference is that
on the death of the first spouse the 50% share owned by them
be used towards satisfying the Nil Rate Band Discretionary Trusts.
specialist wording within the trust the surviving spouse can continue
to own the whole property but the value of deceased’s
share in the property will be outwith the surviving spouse’s
estate. Although Stamp Duty Land Tax may be payable at the time
of the deceased’s death it will only be a fraction of the
potential Inheritance Tax (IHT) liability. The assets within
such a trust arrangement will not be regarded as the spouses
should he or she require Long Term Care.
If you wish to make a
Will taking advantage of these schemes, including Nil Rate
Band Discretionary Trusts, please contact
us with brief
details, either by phone (details at top of page) or email.
See Estate and Succession
view further specialist Trusts and a case study showing the vast
when proper advice is given and Wills are prepared correctly.