Inheritance tax

The firm, through a team headed by Martin Cray and Martin Mitten, advises individuals on ways in which they can reduce the amount of Inheritance Tax they ultimately pay on their death.

There are many complex “schemes” which can be suggested but they are constantly under attack by the Inland Revenue and the vast majority of them cannot be guaranteed because of the constant and continuing work by the Inland Revenue.

Inheritance Tax latest – what has changed in the pre-budget special.

Up to this point the value of anyone’s estate above the nil rate band threshold, £300,000, has been taxed at 40% when that person died. Family money passed from a wife or husband or between civil partners are tax free however, unless other arrangements have been made this just delays the payment of the tax until the second spouse’s death.

What this means is that up to this point a husband and wife with a £600,000 home, when the husband dies the wife will have no Inheritance Tax to pay but if the wife dies a few months later her money will be taxed at 40% on the amount above £300,000 and that will result in an Inheritance Tax bill of £120,000.

What has changed, under these new rules, is that married couples or civil partners can transfer the element of their Inheritance Tax free allowance which they did not use to their spouse when they die. If, for example, the Estate’s value is less than the combined allowances of the spouses, currently £600,000 there would be no tax to pay.

A significant point to note is that the nil rate band threshold rises in 2010 to £350,000 and so a married couple would not have to pay tax on £700,000 by doubling up the allowance.

Nil Rate Band Discretionary Will Trusts.

Up to now you could attempt to pass on up to £600,000 to children tax free by using one of these Trusts. This would operate so that when the first person died they could leave the maximum amount allowed within the tax free bracket in a Trust for their children rather than giving it directly to their spouse. That way both partners preserve their £300,000 tax relief, therefore since the new rules which come into force immediately no-one has to bother with these Trusts.

No Time Limit.

There is no time limit on these provisions so all widowers and widows will benefit from these arrangements no matter how long ago their spouse died.

Those not covered.

The arrangements do not include co-habiting couples, brothers and sisters who live together, divorcees and single people.

What to do if you have already set up a Trust?

You will probably need to rewrite your Wills so that when you die all your assets pass to your husband or wife. A Will can also be altered and the Trust negated in the two years after the first spouse dies. It is however a little more complicated after death as any changes need to be subject to the consent of the Trustees – you therefore need to move quite quickly on this aspect if it is relevant to you.

Do all Wills need to be rewritten?

We believe the answer is no because a Will Trust does give you control over what happens after your death. If you want to ensure that assets go to your children then you may want to leave the Will Trust in place.

Other considerations.

If gifts are made less than seven years before death to anyone other than your husband or wife they are treated as using part or all of your nil rate band.

If for example, children were given a gift by their father on his death bed of say £125,000 five years ago, then at that time the Inheritance Tax Allowance was £250,000 meaning that there was no immediate tax to pay but he used up half his allowance. If the mother was to die today the family could use her Inheritance Tax Allowance but only half of the fathers – this is rather than £600,000 only £450,000 would be exempt from Inheritance Tax. Because there is no time limit relevant deaths could be a very long time ago and it is important to note that the Revenue can check on the circumstances and whether the allowance was fully used or not.

Remarriage.

If you have remarried and your former spouses have died you each have a £600,000 Inheritance Tax Allowance a total of £1,200,000. When you get married the present advice is that you can each retain your double allowance but an individual can never claim more than his or her maximum.

What to do if your Estate is worth over £600,000.

1. Each year you can give away £3,000 free of Inheritance Tax or £6,000 if you did not make a gift of this kind in the previous tax year. A married couple giving for the first time would therefore hand over £12,000 to their children in one year.
2. If a gift is regular, comes out of your income and does not affect your standard of living, any amount of money can be given away Inheritance Tax free.
3. With potentially exempt transfers (PETS) it is possible to make further tax free gifts but you have to survive the seven years after making the gift because if you die within seven years and the gifts are valued at more than the nil rate band threshold the tax reduces on a sliding scale.

Discounted Gift Trusts.

If you would like to give away assets but you need to draw an income but do not think you will need the capital then a discounted gift Trust may be relevant for you. You make a gift into a single premium insurance bond for your children, fixing how much income you will draw until your death. If you survive the seven years the bond does not count as part of your estate.

If we can assist please contact us on 01273 673226 or by email at mcray@martincray.co.uk.