Estate planning |
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Your Money > Estate Planning Articles > Limit your Inheritance...
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By Sarah Modlock
If the two sure things in this life are death and taxes then Inheritance Tax is impossible to avoid. Or is it? To find out, I consulted expert Brian Shirreff, of Thackray Williams solicitors. Find your nearest member at www.step.org. 'The second fundamental is to plan early. Some estate planning arrangements involve making gifts and surviving seven years. The government may change the seven-year rule into for example, a ten-year rule, so it is essential to obtain early advice.' How to approach it 'In the case of married couples or civil partners, often the first step is to see if tax-planning wills will eliminate inheritance tax (IHT). If they have a joint estate not exceeding £570k (twice the tax-free allowance or Nil Rate Band (NRB), as it is called) they will not need to look at any other form of estate planning. This is because properly drawn wills can ensure that IHT is paid neither on the first nor on the second death.' Tax Planning in Wills 'Remember two things: 1) gifts from one spouse or civil partner to another are exempt, and the exemption is unlimited; and 2) everyone is entitled to the NRB of £285,000.' 'Take a married couple who are each worth £285,000 and have children. If husband H dies first and in his will gives wife W his entire estate there will be no IHT on his death. W is exempt, remember. But if W later dies worth £570,000, her NRB of £285,000 gets deducted and the remaining £285,000 gets taxed at 40%. So the tax bill is £114,000. What has happened is that H's estate has got bunched with hers, because he has failed to use his NRB correctly. What can H do to avoid this bunching effect? 'One solution - in the above example - is for H to give his estate to the children. That would be free of tax as it is within his NRB. If W dies worth £285,000 she can leave that to the children free of tax, as that too is within her tax allowance.' 'That solution will work for IHT purposes, but there could be problems. One problem is that W may want the assets herself for general financial security or for nursing home fees. Whilst most children will be happy to look after their widowed mother, what happens if one of them dies, divorces, goes bankrupt, is married to a domineering person or just gets awkward? The risks are significant. Such risks in one's later years are undesirable and most will want a better solution.' A better solution - the discretionary trust 'There is a better solution. Instead of leaving the value of the NRB to the children, leave it to a Discretionary Trust. So in your will you give a legacy to the trust of "the maximum sum I can give without paying inheritance tax", not a fixed sum because the allowance goes up each year in the Chancellor's Budget. It must be a Discretionary Trust, because that is the only type of trust that is not taxable when a beneficiary dies. The trust is a "will trust", and does not take effect until the testator dies; it is triggered on the first death.' Trustees 'The will names the trustees. They can be the same people as the executors, whose job it is to administer the estate. The surviving spouse can be one of the trustees. For technical tax-planning reasons there should be at least two trustees. Four is the maximum. If you appoint an adult child as joint trustee you are creating a potential conflict between the interests of the surviving spouse (who will need access to the trust assets during his or her lifetime) and the interests of the children who would like to benefit from the trust sooner rather than later. A dominant son-in-law or daughter-in-law might be a problem. The best is to appoint a professional to act jointly with the surviving spouse. Whatever the decision, it is vital that when the first spouse dies legal advice is taken to set up the trust correctly.' Beneficiaries 'The will names the beneficiaries of the trust. They beneficiaries will be in a "pool", none of whom will have any entitlement to income or capital. The pool will usually include the surviving spouse, the children, grandchildren and also "default" beneficiaries just in case close family die out. The trustees can exercise their discretion in favour of whichever beneficiary or beneficiaries they choose but are often guided by a Statement of Wishes signed by the testator.' Managing the trust 'Managing a trust can be time consuming and costly. The trustees will take possession of the trust assets. On the first death the assets available may be half the house or investments or a combination of the two. Trust income goes into a separate trust bank account. Trustees make annual tax returns, prepare annual accounts and meet from time to time. You will not want the cost or inconvenience of doing that. Is there another way?' Another way - the debt scheme 'Instead of transferring assets to the trustees who manage the trust, the trustees can lend the entire value of the trust fund to the surviving spouse. If they decide to do that all the assets are transferred to him or her in return for an IOU promising to pay £285,000 (or whatever is the NRB) to the trustees. The surviving spouse will then have the entire joint estate under his or control. The trustees will hold an IOU which in practice is repaid on his or her death. The IOU is a liability of the estate and deducted for IHT purposes. On death the trust money can be distributed to the next generation. This is known as the Debt Scheme. Former deputy head of the Capital Taxes Office, Mr Peter Twiddy, was once asked what the Revenue's attitude was to the scheme. His reply: "If you do it right, it works".' Joint property 'The way in which you own joint property can be important for estate planning purposes. You can own property jointly in two ways, either as "joint tenants" or as "tenants in common". These expressions (which have nothing to do with landlords and tenants) apply to any type of asset, including freehold or leasehold properties, bank or building society accounts, shares, a car or household furniture - anything, in fact.' Joint tenants 'Ownership as joint tenants means that on the death of one of the owners, the property passes to the surviving owner (or owners, if there are more than two). No share of the property passes into the deceased owner's estate, but passes outside the estate direct to the survivor(s). You cannot give anything away as a joint tenant. However the Revenue will still treat a share of the property (usually one half) as being part of a deceased person's estate for IHT purposes.' Tenants in common 'If you own as tenants in common, you own a specific share which forms part of your estate and which you can therefore give away in your Will. A tenancy in common is usually advisable for tax planning in your Will. If you have created a Discretionary Trust in your Will along the lines described earlier it may be that the gift of the NRB cannot be satisfied on your death without using part or all your share of the home. So if the home is owned as joint tenants no part of it is available to be put into the Trust and the tax planning cannot be fully carried out. Thus the home should be held as tenants in common. You can convert from one method to the other at any time by signing a suitable document.' A NOTE OF CAUTION: The above contains general pointers. Anyone who wants tax planning wills should have them prepared by a solicitor who is a member of STEP (Society of Trust and Estate Practitioners). A list of members can be obtained from their website www.step.org. Thackray Williams is a Legal 500 firm and one of the largest practices in the South East London/Kent area. www.thackraywilliams.com. Useful links: |
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