Don't get caught in the Inheritance Tax Trap

Inheritance tax has, until fairly recently, been considered to be a tax only on the very wealthy. With house price inflation far outstripping the nil rate band for inheritance tax this is no longer the case and the homes of some 1.4 million UK homeowners are now apparently of sufficient value for their owner’s estates to fall into inheritance tax. The first £275,000 of a person’s estate at death is said to be taxed at 0% (the “nil rate band”) and thereafter at 40% on the balance. Put into context, in the last 5 years alone the price of houses in Yorkshire has more than doubled whilst in the same period the nil rate band has increased by less than 20%. People who would not have considered themselves wealthy are now seeing their estates falling into inheritance tax because of house price inflation.

Despite the introduction of a new tax (called the pre-owned assets tax) introduced to stop the more exotic inheritance tax planning schemes, it is still possible for all married couples with an estate of sufficient size to save up to £110,000 of inheritance tax at present rates for the benefit of their ultimate beneficiaries by executing an appropriately drawn will.

The basis of this planning is for each spouse to have a will that creates within it a discretionary trust (one where the trustees have discretion as to who to give the income and assets) which comes into effect on death. On the death of the first spouse assets of up to £275,000, the amount of the nil rate band currently, go into the trust instead of directly to the other spouse. The surviving spouse will be able to enjoy the assets in the trust at the discretion of the trustees, of which he or she will usually be one but they will not form part of his or her estate for inheritance tax purposes. Any type of assets, including a share of the family home can go into the trust, although particular care must be exercised in relation to the family home. This compares favourably to the more traditional form of will leaving everything to the surviving spouse: using the nil rate band of both spouses the joint estate will not be taxed unless it is over £550,000, whereas the joint estate of a couple using traditional wills be taxed when it is over £275,000.

If you want expert advice on this or any other tax planning matter:

Contact Duncan Rann or Geraldine Martin

Tel:  01482 324662

Fax:  01482 223110

Email:  enquiries@sandersonssolicitors.co.uk

Source: The Journal, February 2006