Inheritance Tax

Subject to certain exemptions in respect of agricultural property and business property inheritance tax will be chargeable on all assets which you own at the date of your death to the extent that the value of such assets exceeds £285,000.00. Tax will be chargeable on the excess at 40%.

 

Inheritance tax will be payable on the value of your house and any investments which you may own as well as on the value of any life policies together with any death benefit payable in respect of a personal pension. If you have the right to income from a trust this will also be taken into account as will any gifts which you make in the seven years prior to your death.

 

Inheritance tax is not payable on assets which pass to a spouse or to a charity.

 

If a spouse leaves the whole of their estate to their surviving spouse then no inheritance is payable on the death of the first spouse. On the death of the survivor, however, inheritance tax is payable on the total value of the survivor’s estate including assets which they have inherited from their spouse. Accordingly, if a husband and wife each have assets of £200,000.00 no inheritance tax will be payable on the first death. On the second death, however, inheritance tax of £46,000.00 is payable (ie, £400,000.00-£285,000.00 = £115,000.00 x 40%).

 

If, alternatively, the first spouse leaves the maximum sum which can be given without incurring inheritance tax (“the nil rate band”) to the children the surviving spouse will have that much less in their estate when they die; this could result in a saving of up to £114,000.00 inheritance tax.

 

Few spouses are in a situation where the surviving spouse can maintain a reasonable lifestyle without inheriting the whole or the majority of the estate of the first to die. We therefore suggest that on first death that the spouse wills to the trustees of a discretionary trust a sum not exceeding the nil rate band with any excess passing to the surviving spouse. On first death no inheritance tax will be payable.

 

The trustees of the discretionary trust will have a discretion as to which of the beneficiaries of the trust shall receive any income or capital; the beneficiaries will normally include the surviving spouse, children and grandchildren. The trustees will be guided by a letter of wishes in which the deceased indicates the manner in which they wish the trustees to exercise their discretion. The letter may include a request that the surviving spouse should have full access to the income and capital of the trust and that on their death any monies remaining in the trust should be paid to the children. Hence the surviving spouse (subject to the discretion of the trustees) can have access to the whole of the estate of the first spouse without it being subject to inheritance tax on their death. This can give rise to a maximum tax saving on second death of £114,000.00.

 

Where there is insufficient money available to put into the trust, property, or a share of property, can be used instead. In the case of the matrimonial home it would therefore be usual in a tax saving scheme such as this to provide for each spouse to own a specific share of the property as tenant in common ie, instead of the property automatically passing to the survivor the deceased’s share would be capable of being held within the trust.

 

If the trustees allow the surviving spouse to occupy any trust property it is likely that the Inland Revenue will treat the surviving spouse as having an “interest in possession” in that property and as such tax will be payable on that share on the second death. However, there is authority to support the suggestion that if the trustees grant to the surviving spouse a tenancy of the property at a nominal rent e.g. £1.00 per year, then this would avoid an interest in possession.

 

It is desirable for the trust to include a power authorising the trustees to make an indexed-linked loan to the surviving spouse, thus enabling the whole of the estate of the first to die to be paid to the surviving spouse on the basis that the surviving spouse gives to the trustees an IOU confirming they owe the trustees the amount which should have gone into the trust. As inheritance tax is payable on the net estate of the surviving spouse the amount of any IOU is deductable in calculating the inheritance tax. Accordingly, in the example mentioned above, although the surviving spouse would die with an estate of £400,000.00 there will be an IOU of £200,000.00 to the trustees giving a net estate of £200,000.00 upon which no tax is payable

 

We also recommend discretionary trusts are used to save inheritance tax in the following cases:-

 

(a) Life policies should be transferred to a discretionary trust in order that:-

(b) The death benefit under a personal pension policy should be transferred to a discretionary trust with the same benefit accruing as in (a) above.

 

(c) Although a death in service benefit under an occupational pension scheme will not usually be liable to inheritance tax on the death of the employee the monies which might otherwise be payable to a spouse can be sheltered from inheritance tax on the surviving spouse’s death.

 

(d) Where cohabitees each have a share in a property which has a significant value inheritance tax problems will arise if the surviving cohabitee is given a right to continue to occupy the property either for their lifetime or for a specific period following the death of the first to die. This may be avoided by putting the share of the property of the first to die into a discretionary trust following which the trustees would allow the surviving cohabitee to continue to occupy the property on payment of a nominal rent.

 

 

It is our view that all inheritance tax planning should start with well drawn Wills. However, if inheritance tax is still likely to be an issue, then consideration can be given to use of the following:-

 

(a) Annual Exemptions

 

Each person is entitled to make gifts totalling £3,000.00 in any financial year without incurring any inheritance tax. It is also possible to use any unutilised part of the previous year’s exemption.

 

(b) Gifts of £250.00 per donee

 

It is possible to make gifts of up to £250.00 to as many people as you wish. These people should not be people who have benefited from any gifts utilising the annual exemption.

 

(c) Regular gifts utilising the normal expenditure out of income

 

Regular gifts can be made to a donee if it can be shown that taking into account your income and expenditure those gifts can be made out of income.

 

(d) Gifts in consideration of marriage

 

Gifts up to a specified sum – depending upon the relationship between the donor and the donee - can be given at the time of marriage.

 

(e) Potentially exempt transfers

 

Gifts of any amount can be given to an individual, to an interest in possession trust or to an accumulation and maintenance trust and providing that the donor survives that gift by seven years and does not reserve any benefit for themselves the value of the gift will be ignored for inheritance tax purposes.

 

(f) Chargeable transfers

 

Assets can be transferred to a discretionary trust under which the donor is precluded from receiving any benefit. If the total gifts into discretionary trusts in any seven year period does not exceed £285,000.00 then no tax will be payable unless the donor dies within seven years of the last gift. If however the total value of those gifts in any seven year period exceeds £285,000.00 the excess will be subject to inheritance tax at 20% with a further 20% being payable in the event that the donor dies within seven years.

 

Lifetime gifts into discretionary trusts can be particularly useful where the donor wishes to retain some control over the assets given e.g. by being a trustee of land or shares in a family company which are gifted, or where the donor is not certain as to which, if any, beneficiaries he actually wishes to benefit at this stage; in the latter case a decision can be made at a later date as to which of the persons named in the trust are to benefit.

 

(g) Deed of Variation

 

Where you have inherited assets following the death of a person who has died in the last two years it is possible to redirect the benefits which you have received into a discretionary trust. The monies which you would otherwise have received outright can be loaned to you by the trustees thus enabling those assets to be sheltered from inheritance tax on your death.

 

Other more complicated tax schemes are also available upon which we would be pleased to advise you.

 

To discuss any of these matters please click here to contact one of our specialists.