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JayJay
Newbie
Joined: 25 Oct 2006
Posts: 18
Cash Points ££ 333.60
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 Posted: Wed Oct 25, 2006 2:47 am Post subject: Any tips on cutting / reducing Inheritance Tax Liability ? |
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I am in the process of organising my finances and need to plan a head with regards inheritance tax.
A lot of people are probably in the same boat as us now, with house prices having risen we would now well be beyond the inheritance tax bracket of £285,000.
So there must be some relatively easy ways to cut the tax liability ?
I can't imagine giving the tax man £100k ! when we both die !
I don't run my own business so what Ive seen regarding the business is not of much use, but any other pointers to what to look into would be appreciated thanks ! And great site ! |
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Nadeem
Veteran Investor
Joined: 11 Jul 2004
Posts: 639
Cash Points ££ 13955.74
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| Posted: Sat Oct 28, 2006 3:57 am Post subject: |
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You could look into Discretionary Trust Wills.
Discretionary Trust Wills save Inheritance Tax for married couples by making use of the Nil-Rate band of both
spouses, rather than just that of the surviving spouse (as would normally be the case). The following example
explains what happens without Discretionary Trust Wills, and then how the IHT liability changes if Discretionary
Trust Wills are used.
Assume that a husband and wife each have an estate of £280,000. They wish to give everything to the survivor when the first one dies, and on the second death they wish everything to go to their children.
On the husband's death he gives all his property to his wife (when addressing the issue of IHT, “property”
means everything of value including money, shares, buildings, land, business interests etc). No Inheritance Tax
is payable on the husband's death as there is an IHT exemption for property passing between spouses.
On the wife's death, she leaves all her property to the children. For arguments sake we shall assume that her
estate now consists of her own £280,000 plus the £280,000 she inherited from her husband, a total of
£560,000.
Assuming the rate is £280,000, the first £280,000 would be taxed at the “nil-rate" with the remainder
being taxed at 40%. This gives an Inheritance Tax liability on her death of £112,000.
If, instead of leaving his £280,000 to his wife, the husband had left it directly to the children, then on his death
there would still be no tax payable as his estate would be within the current nil-rate band. On the wife's death
her estate would amount to £280,000 and would again be free of tax. The result of making use of the husband's
nil-rate band by passing assets directly to the children would therefore give rise to an Inheritance Tax saving of
£112,000.
Passing assets directly to the children on the first death is fine in theory, but it does mean that the wife may be
left short of money following her husband's death, she may even have to sell the marital home, and she would
have no control over the money held by the children. The risk of making use of the nil-rate band on the
husband's death (by passing his estate to the children) may therefore be deemed to be too great.
There is, however, a way to make use of the nil-rate band on the husband's death whilst still permitting the wife
to continue to benefit from, and control, his estate. This is achieved by using the Nil-Rate Band Discretionary
Trust Will.
Instead of leaving £280,000 directly to the children, the husband, by his Will, leaves it to the trustees of a
purpose made "discretionary trust”. The wording of the Trust would permit the £280,000 in the Trust to be –
instead of money or property worth £280,000 – a charge on a property or a promise of payment from the wife,
or alternatively for the wife to borrow or draw income from the Trust. Thus – and this is important if most of the
estate is tied up in the marital home – the wife is not left short of money and the marital home does not have to
be sold.
Because the capital from the husband’s estate has been passed to a discretionary trust and not to the wife, it
will be outside of her estate and will not be taxable on her death.
When she dies her own estate will still only amount to £280,000 and, therefore, be tax-free.
Thus, the Inheritance Tax liability is still reduced from £112,000 to nothing, but without the hardship and
inconvenience suffered by the wife were she only to inherit £280,000. |
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