Inheritance Tax - Why Pay it?
For most home owning couples, a simple amendment to the manner in which you and your spouse own your home, together with tax-efficient Wills can save your Estate £120,000.00 in Inheritance Tax – maybe more. Bearing in mind that you will own one of the largest assets you will ever buy in the later years of your life, why pay the Chancellor more tax when your home has been bought, financed and paid for through taxed income in the first place. Why would you let the Treasury benefit from your hard work over your family? And with escalating property prices in the area, more and more people are finding that they need to carefully consider the size of their Estates, to cut down on the inheritance Tax that may have to be paid.
The Chancellor has dramatically cut down the opportunities for passing on your life savings to your children and grand-children, so by taking advantage of a scheme as described below you will see that it is a relatively inexpensive way of reducing the amount of tax the estate may eventually pay.
The law currently allows you to leave assets worth £300,000.00 without paying any inheritance tax and as such is called “The Nil Rate Band”. Any assets over this are taxed at 40%, regardless of whether or not the deceased was a higher rate tax payer during their lifetime. By spouses establishing a Nil Rate Band Discretionary Trust in each of their Wills, it enables both spouses to use their Nil Rate Band, as transfers of property and gifts between husband and wife, no matter how large in value, are exempt from Inheritance Tax. This type of Trust if correctly drawn up also allows the surviving spouse to gain access to funds if necessary following the death of the first spouse. This avoids the fear of a surviving spouse being in a difficult financial situation with not enough capital to generate the income they require. The surviving spouse would also be entitled to whatever capital is needed out of the trust during his or her lifetime.
With the family home often being the largest owned asset, husbands and wives are usually, but not always “Joint Tenants”. Joint assets pass directly to the surviving spouse and do not pass under the Will. These joint assets cannot be used to fund the Discretionary Trust Fund.
However, where the property is held as “Tenants in common” either party may make a gift in a Will of his or her share of the property. It is therefore often necessary to “Sever” the joint tenancy in the house, and each party giving his or her share in the house to the children with the right for the surviving spouse to live in the property until his or her death.
Although the property would still be owned jointly with your spouse during your joint lifetimes, 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.
We would firmly recommend that you seek legal advice as to the drafting of this type of Trust and of course the staff at Brooker Alexandra Speed are available to provide you with advice and assistance specifically tailored to your family needs.
Amanda Perrotton
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