Saving Inheritance Tax

People these days tend to be more aware of the fact that inheritance tax will be charged on their estate when they die, particularly in view of the recent years’ house price rises which have taken the total value of their estate over the ‘nil rate band’ threshold where inheritance tax will become payable at 40% of the value of the chargeable transfer.

It therefore follows that when clients come in to make their Will or to simply review their existing Will generally, consideration needs to be given as to possible inheritance tax saving measures that may be taken to reduce any liability to tax upon their death.

One way of saving inheritance tax is for an individual to make certain transfers during their lifetime which reduce the size of their estate:- 

1) Lifetime transfers are exempt from inheritance tax if they are:-

a) gifts to charity,

b) the first £3,000 of transfers made by an individual in any one tax year (any unused annual exemption may be carried forward one year),

c) small gifts, not exceeding £250 to any one person per year.

2) ‘Potentially exempt transfers’. These are chargeable transfers where no charge applies at the time the transfer is made and which are exempt from any inheritance tax liability as long as the individual who made the transfer does not die within the seven years following the date of the transfer.

In addition to the above, inheritance tax planning may also be incorporated into an individual’s Will. This is a popular route for married couples to take where, together with careful financial planning so that each spouse holds assets in their sole name up to at least the value of the current ‘nil rate band’ (known as ‘equalisation of estates’) in order that they may make the most of each / both of their lifetime exemptions to give a larger combined amount that will be exempt from tax.

In taking into account the above, married couples’ Wills were usually drawn up so that upon the first spouse’s death, a legacy equivalent to the value of the ‘nil rate band’ would be left to his or her children and / or grandchildren and the remainder of the deceased’s estate would go to the surviving spouse, so using the spousal exemption to prevent tax being incurred on the remainder of the estate over the threshold. The draw-back to this however, is that the surviving spouse would lose the use of these assets during the remainder of his or her lifetime which could compromise their financial position and standard of living quite dramatically – especially where the majority of the value of the estate is held in one main asset such as the family home.

The possible solution to this is to set up a discretionary trust within the Will whereby the initial nil rate band legacy is gifted into a trust where no-one in particular actually owns the assets in it but the surviving spouse is named as one of the discretionary beneficiaries who can have the advantage of having or using the income and / or capital contained within the trust fund, possibly in return for a debt or loan that may be created under the terms of the Will and deductible against the surviving spouse’s estate upon his or her death.

No doubt these are some complex issues to consider when making a Will, which require consideration based on each individual client’s circumstances, and we will be happy to discuss them with you.

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