Inheritance and tax planning
Inheritance Tax is charged at 40% on the value of anyone’s estate above the nil rate band threshold (your tax free allowance) which, for the 2015/2016 tax year, stands at £325,000.00.
Historically, money passing between married couples or between civil partners has always been tax free however the effect of this “tax free allowance” is to postpone the payment of tax until the second spouse’s death. What this means, for example, for a couple with an estate worth £650,000 is that on the husband’s death where he leaves all his estate to his wife there is no tax payable. On the wife’s death the money in her estate would be taxed at 40% above the nil rate band threshold (£325,000) which would result in a tax bill of £130,000.
New rules, which took effect from the 9th October 2007 have changed the tax legislation to allow married couples or civil partners to transfer their element of Inheritance Tax free allowance unused on the first death to their spouse when they die. Accordingly married couples and those in civil partnerships now receive a combined tax free allowance of £650,000.00.
The new rules do not impose a time limit on these provisions so all widows and widowers will benefit from these arrangements no matter how long ago their spouse died. However, these new rules do not cover co-habiting couples or single people.
We made Wills with nil rate band Discretionary Trusts in to make the most of our IHT allowances, what should we do now?
If you made these simply to use your and your spouse’s nil rate band for tax saving purposes then these may now be obsolete and you should have new Wills made without these trusts included. However it may not be as simple as this as other factors may have to be taken into account.
When might I want to keep the trust I have set up?
Despite the changes in the law trusts can still have an important role to play in many people’s estate planning. For example, you may wish to ensure that money is passed on to children or grandchildren from a previous marriage. Or you may need a trust structure to ensure that assets are managed for minors until they have come of age. Or you may wish to have a large estate managed on behalf of your spouse. These can also be effective for protecting assets from being taken into account for care home fee assessment.
In all these instances we would advise that you discuss this with a member of our Private Client Team who will be able to advise you on the best course of action for your individual needs.
What can we do if our estate is worth over £650,000?
Each year you can give away £3,000 free of Inheritance Tax or £6,000 if you did not make a gift in the previous tax year. A married couple giving a gift for the first time would therefore hand over £12,000.00 to their children in one year.
- If a gift is made on a regular basis out of your normal income and this does not affect your standard of living any amount can be given away Inheritance Tax free.
It is possible to make further tax free gifts provided you survive for seven years after making the gift. If you die within those seven years and the gifts are valued at more than the nil rate band threshold they are taxable on a sliding scale.