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Inheritance Tax Saving Will

***     UNMARRIED COUPLES / NON-CIVIL REGISTERED COUPLES     ***                       You can SAVE up to 120,000 in Inheritance Tax   -    Contact us now to arrange a FREE home visit  ..........  01223 574211

The Threat Posed by Inheritance Tax

Inheritance 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 person.

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.

The Solution

An 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. 

Prime 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.  

Basic Principles

To understand how an Inheritance Tax Saving Will works, it is important to understand the following basic principles:  

  1. 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).

  2. Each individual has an Inheritance Tax free allowance (the "nil rate band") - currently 300,000 for 2007 - 2008.

  3. Without an IHT Saving Will, the IHT liability is simply delayed until the death of the second partner.

  4. To 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 band") as jointly-owned assets cannot be gifted in a Will.

  5. This 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 Destination (Scotland).

  6. "Joint 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 Will.

  7. "Tenants 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.


Example with no IHT Saving Will - UNMARRIED COUPLE

  1. Jim and Joan's total estate is worth 600,000 (the house being owned as tenants in common).

  2. Jim dies and leaves his share of the estate to Joan - no IHT is payable (under the NRB)

  3. Joan dies and leaves her estate (worth 600,000) to their two children.

  4. The taxable estate is 300,000 (600,000 less Joan's nil rate band of 300,000).  

  5. There is IHT to pay of 120,000 (40% of 300,000).  


How an Inheritance Tax Saving Will works

Jim did not use 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).

Such a Will simply leaves a legacy of up to the nil rate band (300,000) to the Discretionary Trust. The form that the legacy will take is not specified in the Will. On 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).

Several options are then open to the Trustees of the Discretionary Trust.

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 Discretionary Trust is an IOU from the surviving partner, and all other assets pass under the Will to the surviving partner, including the house. On 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).


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).


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