Inheritance Tax Planning within a Will
You can still do much to reduce the Inheritance Tax burden through effective planning. An appropriate provision can be made in your Will - perhaps leaving an amount, equivalent to the nil rate band, (currently £300,000) at the date of your death, to your children or beneficiaries. The remainder could be left to your spouse/civil partner and no Inheritance Tax would be payable.
Many Wills leave all the assets to the surviving spouse/civil partner. As a result one nil rate band (£300,000) is unused. There would be no Inheritance Tax on the first death, but all the assets would be taxed on the second death with the nil rate band at the first death having been completely wasted. Therefore, potentially saving up to £120,000 tax for your children or beneficiaries (i.e. £300,000 x 2 nil rate bands = £600,000 before tax at 40% is chargeable).
Naturally, the first to die will want the survivor to be secure. Using the nil rate band to give part of the estate to your children or beneficiaries under the Will could be tax efficient, but it may leave the survivor short of funds.
As a consequence, Will based planning involving a Nil Rate Band Discretionary Trust has become popular. Properly drafted, this can substantially reduce the Inheritance Tax liability without prejudicing the surviving spouse/civil partner.
Some of the benefits of a Discretionary Trust
- To protect the surviving spouse/civil partner because the assets in the fund can be used for his or her benefit.
- Reduction of estate for surviving spouse/civil partner - therefore less or no Inheritance Tax payable. If the Discretionary Trust funds are used to maximum effect, the Inheritance Tax saving can be up to £120,000.
- 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 or beneficaries 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 outside the surviving spouse's estate.
Nil Rate Band Discretionary IHT Trust and Will
Mitigating Inheritance Tax with a 'discretionary Will trust' leaves you in control of your assets and income while you are alive. Just as important, it leaves you or your spouse/civil partner in control of assets and income when one of you dies. So unless you actually want to leave up to 40% of the value of your house and savings to the Inland Revenue, this should be the cornerstone of your Inheritance Tax planning strategy.
It includes the following:
- 2 expression of wishes
- 2 Wills
- 2 Enduring Power of Attorneys
- Severance of tenancy of the property to "Tenants in Common"
- Nil Rate Discretionary Trusts with IOU loan notes
Including provisions for a Nil Rate Band Discretionary IHT Trust in both Wills means that upon first death an amount not exceeding the IHT threshold is left to a Discretionary Trust wherein the Trustees may decide who from the beneficiaries may receive any income or capital from the Trust. In this way subject to the agreement of the Trustees, the surviving spouse may have access to assets in the Trust.
Residential Property - Joint Tenants or Tenants in Common
The joint owners of land and property in England & Wales can be registered with the Land Registry in two ways:
- Joint Tenants
- Tenants in Common.
The majority of homes have been purchased as Joint Tenants, this term means that both parties jointly and severally own the property, and as such, if one tenant were to die, the surviving Joint Tenant(s) automatically become the owner(s) regardless of any Will or other instruction.
This means that upon death a share of property owned as Joint Tenants cannot pass to anyone other than the surviving Joint Tenants as there is no quantifiable way of establishing a defined percentage owned. This may not be in accordance with instructions expressed in a Will and could have serious implications for Inheritance Tax liability.
"Tenants in Common" means that each Tenant in Common owns a defined share of the property, generally 50%. Upon death the share passes according to instructions in the Will or the Law of Intestacy if the owner is without a Will. The property share can be left directly to other beneficiaries, for example children from previous marriages or split amongst various beneficiaries other than just the joint owner.
Whilst owning your property as "tenants in common" may appear more flexible it is important to remember that by defining a share of a property the law will require all signatures of all owners to sell or borrow against such a property. Should one partner, in the event of illness become incapable of handling their affairs, without an Enduring Power of Attorney the person's estate would have to go into receivership before any changes could be made. An Enduring Power of Attorney for both parties should be considered as a necessary document when owning a property in this manner. Read more about Power of Attorney here
It is possible to change the manner in which ownership is registered at the Land Registry, we are able to carry this out on your behalf.