(AND AVOIDING INHERITANCE TAX)

On death, no Inheritance tax is payable on the first £300,000 of an individual’s estate (this is usually referred to as the Nil Rate Band). Inheritance tax is charged at 40% on the balance over this threshold. However, all transfers between husband and wife are exempt for Inheritance Tax and therefore no Inheritance Tax is payable on the death of the first spouse.

To ensure that maximum use is made of both Nil Rate Bands, you will need to consider writing Wills to redirect an amount equal to the Nil Rate Band into trust to children or another person or persons other than the spouse. The idea is to use both husband and wife’s Nil Rate Bands.

A straightforward Will giving everything to your spouse does not pay any Inheritance Tax. You could have gifted away up to £300,000 (e.g. to children) without Inheritance Tax being payable and given the rest to your spouse. This could leave your spouse in a difficult financial position so it may be better to use a Nil Rate Band Discretionary Trust which allows for the surviving spouse to gain access to funds if necessary.

Nil Rate Band Discretionary Trusts are equivalent to a legacy on first death of an amount equal to the value of the Nil Rate Band prevailing at the time of death. This is placed in a trust fund. Income is paid to the surviving spouse or if they do not want it either to your children or accumulated for a maximum period of twenty one (21) years and added back into the capital. Also, the spouse is entitled to whatever capital is needed out of the trust.

SOME OF THE BENEFITS OF DISCRETIONARY TRUST SCHEMES ARE:

• Access to funds by surviving spouse.
• Reduction of estate for surviving spouse – therefore less or no Inheritance Tax payable. If the discretionary trust funds are used to maximum effect, the Inheritance Tax saving is £120,000.
• 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.

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 respective estates to ensure both spouses have sufficient sole assets to use the Nil Rate Band Discretionary Trust to best effect.

The largest asset owned in most instances is the family home. Often this is held by both parties as joint tenants. In order to ensure 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 can then be used towards satisfying the Nil Rate Band Discretionary Trusts.

By 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 capital 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.

Finally, as stated by using both nil rate bands there is a potential saving of £120,000. However, further substantial savings in Inheritance Tax can be made by placing certain assets outwith the Will. You still own and have control over these particular assets but, by placing them outside the estate, further potential IHT savings are available. We have Consultants who would be pleased to discuss your requirements. The initial discussion as stated previously is normally free of charge.

Click on Estate and Succession Planning to view further specialist Trusts and a case study showing the vast savings available when proper advice is given and Wills are prepared correctly.