Example with IHT Saving Will - UNMARRIED COUPLE

1. Jim and Joan each have an estate worth £300,000. 

2. 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.  

3.  Joan 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 her death.  Joan's estate is now worth £600,000.

4. 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.

5. The Trust also passes the £300,000 from Jim's estate to the children and no IHT is payable.

6. In effect, two people's tax free allowances have been used and IHT of £120,000 has been avoided.

7. Further professional/legal advice may be needed to set up the Discretionary Trust after the first death.

8. An 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).

 

 

Please note that for unmarried and non-civil registered partners, 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.

Additional Methods to Reduce IHT Liability

1. 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.

2. Gifts exempt from IHT
   
   ·   Annual Exemption
   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.
   
   ·   Small Gifts Exemption
   You can make any number of gifts to different people up to a value of £250 each in any tax year.
   
   ·   Normal Expenditure out of Income
   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.
   
   ·   Other Exemptions
   Gifts to charities, museums, universities and certain political parties (!) are exempt from IHT.





3.  Potentially 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.

However, 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 debts).