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Fri 10th September, 2010
News
The issues surrounding Inheritance Tax |
9th June 2005 |
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It is currently estimated that approximately 2.4 million homeowners in Britain face a potential liability to Inheritance Tax upon their deaths. Although the recent Budget increased the Nil-Band Rate to 275,000 for those who die after the 6th April 2005, criticism has been raised that this has not kept in line with the rise in house prices in recent years. Consequently, although this tax was once considered to be a tax on the wealthy, those who own a property and modest savings and investments are more frequently finding that their families will face a tax bill upon their death.
There are of course methods which can be used to counteract this problem, and once such vehicle is the establishment of a Nil-Band Trust upon the death of a spouse to utilise the Nil-Band Rate otherwise lost. If one spouse dies leaving all their property to the surviving spouse this is exempt from tax. However, upon the death of the surviving spouse, the value of their Estate is likely to include that previously owned by the pre-deceasing spouse and therefore potentially exceed the £275,000 threshold. All assets are taxed at a rate of 40% above this limit without exception.
For this reason, it is often prudent to set up a trust equivalent to the Nil Band Rate (and worded as such to take into account changes in this value as this continues to rise each year). Where spouses have assets such as property it is now possible to place the family home in trust and ensure that the surviving spouse remains able to use this as this is often the most valuable asset available.
The majority of spouses will own their property as joint tenants and as such ownership will automatically pass to the surviving spouse automatically and outside the law of succession. However, it is possible to sever a joint tenancy, to become Tenants in Common and subsequently enable half (or whatever proportion of the property is agreed) to be disposed of by Will. This will free a share of the property to be placed in trust which will have beneficial tax treatment. A discretionary trust is often used for this reason and the beneficiaries and trustees nominated are close family members, including the surviving spouse.
To enable the spouse to continue to reside at the property it is then possible for the use of this asset to be loaned to the spouse for the remainder of their lifetime. An IOU will be signed by the spouse for the value of this asset which will remain trust property and return to the trust upon the spouse’s death. The IOU will then be viewed as a debt of the deceased spouse and will be deducted from the value of their Estate.
The above described scheme is a valuable and important tool which enables the spouse to retain their home whilst also saving tax for future generations and preserving family property. All those who believe that their situation is similar to that described should seek advice as to the options available as tax savings can be substantial.
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