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 that will have to be paid from their estate on their death.

There are many complex "schemes" which can be suggested but they are under constant attack by the Her Majesty's Revenue and Customs (HMRC), meaning the vast majority of them cannot be guaranteed.

Inheritance Tax latest - Transferable Tax-Free Allowances

Everyone is entitled to a tax-free allowance of £325,000 in respect of Inheritance Tax. This means that if the total value of assets is below this sum no inheritance tax will be due and inheritance tax at 40% will be payable only on the marginal amount over £325,000. By way of example, an estate worth £425,000 will only incur a tax liability against £100,000 and tax of £40,000 will be due.

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 value of the Estate is less than the combined allowances of the spouses, currently £650,000 there would be no tax to pay.

Nil Rate Band Discretionary Will Trusts.

Up to now you could attempt to pass on up to £650,000 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 £325,000 tax relief. Since the introduction of the transferable tax-free allowance however, there is no advantage to this.

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 deathbed of say £125,000 in the past, when the Inheritance Tax Allowance was £250,000, there was no immediate tax to pay but he used up half his allowance. If the mother were to die today the family could use her Inheritance Tax Allowance but only half of the father's - this is rather than £650,000 only £487,500 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 HMRC 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 £650,000 Inheritance Tax Allowance a total of £1,300,000. 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 £650,000.

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 can therefore hand over £3,000 to their children in one year, or £12,000 if they have given nothing the previous 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 info@martincray.co.uk.