IHT and Discretionary Trusts

 

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 £325,000.00 (the current nil rate band). 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, in some cases, with any death benefit payable in respect of a personal pension. If you have the right to income from a trust this may 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 (UK domiciled) spouse or to a charity.

 

 

Where the surviving spouse dies after 9 October 2007 if the first spouse or civil partner to die has not utilised all their nil rate band that unused part of the nil rate band is available for use by the surviving spouse at the nil rate band prevailing at the date of death of the surviving partner. For example, if on the first death only half the nil rate band is used (because say half of it passes to the children) then on the death of the survivor the tax free amount would be 150% of the prevailing rate. On today’s rates that would mean an effective nil rate band on the survivor’s death of £487.500.

 

The transfer of the nil rate band is however not automatic. A formal application is required and there are time limits to claim the transfer. If you believe this applies to an estate you are dealing with we strongly advise you do not delay in taking advice on how to make an application. The Revenue do require evidence to show what happened to the estate on the death of the first spouse or civil partner. If you are a widow, widower or surviving civil partner and you have concerns about this issue please contact us.

 

 

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. It is important that in these cases you keep proper records of your income and expenses for each year in which a gift is made, the amount of the gift, to whom it is made and the date it is made.

 

(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 or to a disabled person's trusts 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

 

Following the Finance Act 2006 assets transferred into any Trust other than a Disabled Persons Trust constitute chargeable transfers. If the total gifts into trusts in any seven year period does not exceed the nil rate band 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 the nil rate band 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.