Inheritance tax planning can be a complex
and long-term affair. However, a tax-efficient Will employing appropriate
trusts can reduce the tax liable on an estate substantially…and
at a low cost.
Inheritance tax
The law allows you to leave an estate worth up to £285,000 (as
at April 2006) without having to pay any Inheritance Tax upon it.
This
£285,000 is called the 'Nil Rate Band'. After the first £285,000,
or the Nil Rate Band, the remainder of your estate will be charged
40% Inheritance Tax.
How can a Will save tax for married couples?
Transfers of property and gifts between husband and wife no matter
how large in value are exempt from Inheritance Tax. This is known
as the inter-spouse exemption rule. Each partner's estate is assessed
individually at the time of their demise for Inheritance Tax purposes
and each partner qualifies for the Nil Rate Band providing together
an aggregate exemption of £570,000.
So if you are a married couple, one of the simplest and most effective
ways of avoiding some Inheritance Tax, is simply to take advantage of
two Nil Rate Bands. For example:
If Mr. & Mrs. Smith have a joint estate worth
£650,000, they may upon the death of the first spouse give away
to their beneficiaries £285,000 without having to pay Inheritance
Tax, thereby utilizing a Nil Rate Band. However, if they do not do
this and simply pass the estate to the remaining spouse, when the
estate is eventually split it will only be allowed a single Nil Rate
Band, rather than the two which could have been used.
Using 2 Nil Rate Bands:
Mr. & Mrs. Smith have £650,000 upon the death of
the first spouse. £285,000 is given away free of Inheritance
Tax, using the Nil Rate Band, leaving £365,000 to the second
spouse. Upon the death of the second spouse, another £285,000
will be allowed free of Inheritance Tax, using the Nil Rate Band,
leaving only
£80,000 liable to Inheritance Tax at 40%, resulting in Inheritance
Tax of £32,000.
Using only 1 Nil Rate Band:
Mr. & Mrs. Smith have £650,000. Upon the death of
first spouse, all the money is left to the remaining spouse without
using the Nil Rate Band. Upon the death of the remaining spouse, only
the one Nil Rate Band of £285,000 will be allowed, leaving an
estate of £365,000 liable to Inheritance Tax at 40%, resulting
in Inheritance Tax of £146,000.
However, this could leave the surviving spouse
in a difficult financial position with not enough capital to generate
the income they require. The solution is for each spouse to establish
a Nil Rate Band Discretionary Trust which allows for the surviving spouse
to gain access to funds if necessary. An amount equal to the Nil Rate
Band on death is placed in a trust fund and income is paid to the surviving
spouse. The spouse is also entitled to whatever capital is needed out
of the trust.
Joint assets
Often the largest asset owned is the family home. Husbands
and wives are usually, but not always, "joint tenants". Joint
assets pass directly to the surviving spouse and do not pass under the
Will. These joint assets cannot be used to fund the Discretionary Trust
Fund. However, where the property is held as "tenants in common"
either party may make a gift in a Will of his or her share of the property.
It is therefore worthwhile considering "severing" the joint
tenancy in the house, and each party giving his or her share in the
house to the children with the right for the surviving spouse to live
in the property until his or her death. 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.
Loan Trust Will
The first spouse to die gives £285,000 (or prevailing
Nil Rate Band) to a loan trust which then lends on the assets to the
survivor. [These assets can be in the form of property or other illiquid
assets.] This scheme is well established and is not affected by the
new pre-owned assets tax. An advisor will be able to illustrate how
this works more fully
