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Inheritance Tax & Married Couples/Civil
Partners
In 2007
Alistair Darling to some extent effectively enshrined in law
what many people were already doing with a Will Trust. Some
headlines suggested that this "doubled" the Nil Rate Band
for married couples/civil partners. What he did was to allow a husband or
wife to inherit their deceased partners unused Nil Rate Band
on the second death.
So a couple/civil
partner
with an estate of of £650,000 would (assuming they both have
their full Nil Rate Band) not have any liability to
Inheritance Tax should both die.
Many people
felt that this would be the end of the
Will Trust for Inheritance Tax Planning. However it is still
worth considering because it can still
be effective in reducing Inheritance Tax.
Below is an
example. This uses of a clause in your will stating that
should you die first, an amount up to the value of your
available nil rate band should be placed into a trust. This
escapes inheritance tax as it is within your nil rate band.
The balance of your estate is left to your spouse or civil
partner. The clause will also make provision to permit the
trustees to advance income, capital, or loans to your
surviving spouse or civil partner during their lifetime.
When
your spouse or civil partner eventually dies they can
leave up to their available nil rate band free of
Inheritance Tax. Both individuals have used their available
nil rate bands up to a total of £650,0001. So far
there is no difference in tax payable with or without the
clause creating the will trust. The will trust becomes
effective if the assets in the trust grow in value at a
greater rate than the increase in the nil rate band.
1 This is the Nil Rate Band
amount for the 2009/20010 tax year
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The
following shows the effects of using a trust upon
first death to reduce your Inheritance Tax liability |
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Mr
Smith's Assets £325,000 |
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Mrs
Smith's Assets £325,000 |
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↓ |
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↓ |
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Combined
Estate = £650,000 |
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↓ |
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Mr Smith dies |
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↓ |
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↓ |
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Situation
with a Trust |
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Situation
without a Trust |
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↓ |
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Mr Smith
leaves £325,000 in Trust, - this is not liable to Inheritance Tax as it
is below the NRB |
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Mr Smith
leaves £325,000 to Mrs Smith, but this is not liable to
Inheritance Tax as they are husband & wife, and it is also below the NRB |
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↓ |
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Mrs Smith has
assets of only £325,000, but there is also £325,000 held in trust. |
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Mrs Smith now
has assets of £650,000 |
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↓ |
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Mrs Smith dies
- eight years later. Her asset have increased to £600,000. The Nil Rate
Band has increased to £400,000. The assets in the trust have also
increased to £600,000. |
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Mrs Smith dies
eight years later - her assets have now increased in value to £1,200,000
and are now partly liable to Inheritance Tax. (The Nil Rate Band has
increased to £400,000) |
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Liability using a Trust |
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Trust |
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£600,000 |
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Mrs Smith's estate |
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£600,000 |
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Exempt ( Nil Rate Band) |
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£400,000 |
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Trust
and its growth - exempt |
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£600,000 |
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Inheritance Tax |
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@40% of £200,000 |
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£80,000 |
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Liability not using a Trust |
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Estate |
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£1,200,000 |
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Exempt (two Nil Rate Bands) |
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£800,000 |
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Net balance |
= |
£400,000 |
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Inheritance Tax |
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40% of £400,000 |
= |
£160,000 |
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The example above shows the
potential advantage of using a will trust. The problem arises in
this example because the asset growth exceeds the increases in
the Nil Rate Band. The will trust route means that on the first
death up to the Nil Rate Band can be placed out of the estate of
the surviving partner, and that any future growth on those
assets remains outside of their estate. The surviving partner
can still benefit from the asset but they don't own it. The
example assumes that annual allowances have been fully utilised.
The figures used in the example for future values of the assets
and Nil Rate Band are to illustrate the principle only and there
is no implication that the values will be achieved.
There are of course
some downsides to placing assets in Trust, including the lack of
total access to the asset, and the increased administration and
costs.
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We can provide you with a
plan for reducing your Inheritance Tax liability which takes
account of the available methods that are suited to your
circumstances. We will discuss all the strategies available,
explain the advantages and disadvantages of each method and
ensure your solution suits your wants, needs and circumstances.
We are happy to work with your existing solicitor or recommend
someone qualified to write your will if you don’t have an
existing solicitor. |
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If you want to know how
you can reduce your Inheritance Tax liability and want to speak
to an adviser without cost or obligation, then call us now on
08000 112 034 or contact us
online.
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Rational Finance Ltd is
authorised and regulated by the Financial Services Authority
under reference 470362.
Registered Office: 137 Goddard Avenue, Swindon, Wiltshire, SN1
4HX. Company Registration Number: 6283642. |
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The guidance and/ or advice contained in this website is subject to UK regulatory regime and is therefore restricted to consumers based in the UK. Tax rates, thresholds, and allowances quoted may be subject to change. |
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