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Useful Information
Inheritence Tax
(AND AVOIDING INHERITANCE TAX)
On death, no Inheritance tax is payable on the first £312,000 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 £312,000 (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 £124,800.
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 contactus with brief details.
Finally, as stated by using both nil rate bands there is a potential
saving of £124,800. 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.