Inheritance Tax Saving Will
The Threat Posed by
Tax is payable on the value of your
estate above the tax free allowance (the
nil rate band) at a rate of 40%. The
nil rate band for 2007 - 2008 is £300,000 per
In October 2007 the Chancellor
changed the rules about how a person's nil rate band
is applied, so that married couples and civil
registered couples can now inherit their partner's
nil rate band when the first partner dies. This
means that the surviving partner then has a combined
nil rate band of £600,000 ( and IHT is paid at 40%
on assets above this amount).
However, this new rule has
not been extended to include unmarried couples,
non-civil registered couples and siblings who live
in the same house. These people will pay IHT on any
assets that exceeds the nil rate band - UNLESS THEY
MAKE AN INHERITANCE TAX SAVING WILL.
Inheritance Tax Saving Will (or, to give it
its proper name, a "Nil Rate Band Discretionary
Trust Will") can currently
prevent your estate from paying up to £120,000
in Inheritance Tax. It is advisable for
unmarried or non-civil registered partners
to make such a Will.
Wills can draw up an
Inheritance Tax Saving Will for you, including a
"Nil Rate Band Discretionary Trust", and will
also register a "Deed of Severance" for you at
HM Land Registry if applicable.
understand how an Inheritance Tax Saving Will works,
it is important to understand the following basic
Your "estate" consists of any
assets held in your sole name less any
debts, and excludes assets held in joint names
(eg house, joint bank accounts etc).
individual has an Inheritance Tax free allowance
(the "nil rate band") - currently
for 2007 - 2008.
an IHT Saving Will, the IHT liability is simply
delayed until the death of the second partner.
maximise potential savings from IHT, it is
important to "equalise" your joint assets (ie
own equal amounts of assets in your sole names
at least to the value of the "nil rate
as jointly-owned assets cannot be gifted in a
often involves changing the ownership of your
home from "joint tenants" to "tenants in
common" by making a Deed of Severance (England
and Wales) or an Evacuation of Special
Tenants" means that both partners own the
whole of the house, and on first death the
property passes wholly to the surviving partner
regardless of what is stated in the deceased's
in Common" means that each partner owns a
specific share of the property (usually 50%
each) which can be left to named beneficiaries
in a Will.
with no IHT Saving Will
- UNMARRIED COUPLE
and Joan's total estate is worth £600,000
(the house being owned as tenants in common).
dies and leaves his share of the estate to Joan
- no IHT is payable (under the NRB).
dies and leaves her estate (worth £600,000) to
their two children.
taxable estate is £300,000 (£600,000 less
Joan's nil rate band of £300,000).
is IHT to pay of £120,000 (40% of
How an Inheritance Tax
Saving Will works
his tax free allowance when he died. Had he
done so, this
IHT bill could
have been avoided. Jim and Joan should have
equalised their assets and made
an Inheritance Tax Saving Will that included
a Nil Rate Band Discretionary Trust (the
nil rate band being the Inheritance Tax free
allowance prevailing at the time of death).
a Will simply leaves a legacy of up to the nil
rate band (£300,000) to the Discretionary
The form that the legacy will take is not specified in the Will.
the death of the first partner, the Discretionary
Trust needs to be set up (and the Trustees should
take further legal advice to do this, which will
involve a modest extra cost).
open to the Trustees of the
One option is for the Trustees to accept, in satisfaction of the £300,000
legacy, an IOU from the surviving partner (ie a
promise to pay £300,000 to the Discretionary
Trust on demand);
the only asset therefore which
passes to the
Trust is an IOU from
the surviving partner, and all other assets pass under
the Will to the surviving partner, including the
the death of the surviving partner, the
value of their estate will be reduced by the
£300,000 debt owed
to the Discretionary Trust, thereby reducing
IHT liability by
up to £120,000
(40% of £300,000).
A second option is for the Trustees to
transfer the deceased's share of the
property to the surviving partner, having first
placed an equitable charge on it in the
amount of the NRB legacy.
Thus the surviving partner inherits the whole
estate, and on their death the charge is removed
and the estate passes to the beneficiaries with no
IHT payable (as per the above figures).
IHT Saving Will - UNMARRIED COUPLE
Jim and Joan each have an estate
Jim dies and he leaves assets worth up to
£300,000 to a Nil Rate Band Discretionary
Trust (the ultimate beneficiaries being their
two children). The residue of his estate (if
any) is left to Joan. No IHT is payable
writes an IOU to the Trust for £300,000 and
receives all of Jim's estate under the terms
of his Will, including the house in her sole
name. She has full use of the property until
Joan's estate is now worth £600,000.
Joan then dies and her IOU is paid to the
Trust, reducing the value of her estate from
£600,000 to £300,000. Her estate passes to their two
children and no IHT is payable.
The Trust also passes the £300,000 from
Jim's estate to the
children and no IHT is payable.
In effect, two people's tax free allowances
have been used and IHT of £120,000 has
Further professional/legal advice may be
needed to set up the Discretionary Trust after
the first death.
added advantage is that the assets within such
a Trust arrangement will not be regarded as
the partner's capital should he or she require
Long Term Care (you may also wish to read
about a Property Protection Trust Will).
that for unmarried and non-civil registered
if the first partner to die has an estate valued
in excess of the nil rate band, then IHT may be
payable on this excess. However, there are additional
ways to avoid or mitigate paying IHT on larger
estates - see below.
Methods to Reduce IHT
Consult an Independent Financial Adviser
Many Financial Advisers believe that IHT can
be reduced if not eliminated with some
straightforward planning. Single people
(including divorced and widowed people)
should perhaps consider this option as they
cannot make an Inheritance Tax Saving Will. An
Independent Financial Adviser can do a full
fact-find of your situation, take account of
all your current and likely future
circumstances and advise you as to your best
course of action. Options include a Whole
of Life Insurance Policy (if you
are aged under 80), Gift and
Loan Schemes, Discounted Gift Schemes, and
Retained Interest Trusts - and this
is by no means an exhaustive list. An
explanation of such options is outside the
scope of Prime Wills, but we work in
association with a leading group of
Independent Financial Advisers and would be
pleased to put you in contact with an adviser
in your area.
exempt from IHT
Everyone can give away up to £3,000 per tax
year, say, to one child or shared between
other children. If this allowance hasn't
previously been used, then this allowance can
be backdated one tax year, so in effect £6,000
could be given per donor. Obviously, for a
couple this would mean a maximum of £12,000.
Marriage Gifts Exemption
Parents can make wedding gifts of up to £5,000
to each of their children. Grandparents can,
however, also make gifts. They can give up to
£2,500 to each marrying grandchild. Also, you
can give up to £1,000 as a wedding gift to
anyone else. The gifts must be made before the
wedding day, not after.
You can make any number of gifts to different
people up to a value of £250 each in any tax
Normal Expenditure out of
You can give away any amount on a regular
basis from your income (not from capital),
provided it does not affect your standard of
living - eg savings or a life policy or a
stakeholder pension, all for someone else.
to charities, museums, universities and
certain political parties (!) are exempt from
Exempt Transfers (PETs)
You can simply
give away part of your estate (over and above
the IHT threshold) before you die in order to
reduce your IHT liability, and as long as you
survive for 7 years after the gift, it will
not incur Inheritance Tax for the recipient.
If you die within the 7 year period, IHT would
be payable at a diminishing rate (called
"taper relief"). Examples:
if you die
within 3 years of making the gift, IHT is
payable at 40%;
if you die
4 years after making the gift, 80% of the
40% is payable;
if you die 5
years after making the gift, 60% of the 80%
is payable; and so on.
not all of us can afford to give some of our
assets away. In fact, be wary of gifting your
house to your children and living there
rent-free for life in the expectation that you
can reduce your IHT liability! Unless you pay a
market rent, this would be seen as a "gift
with reservation of benefit" which could make
you liable for income tax on the "benefit".
On death the property may also still be counted
as part of your estate for IHT purposes. (And,
of course, should your children get into debt
the whole house could be lost to pay those