Saving tax
If your estate is worth more than £325,000 (the current nil rate band) at the date of your death your estate may be liable for inheritance tax.
Generally speaking, if you are married or in a registered civil partnership and you leave your entire estate to your spouse or registered civil partner then there will be no inheritance tax to pay on your death regardless of the value of your estate.
On the surviving spouse's or civil partner’s death their estate will have the benefit of the combined value of two nil rate bands uplifted to the value of the nil rate band at the date of the survivor's death.
For example, Jack dies in April 2007 with an estate of £400,000 which he leaves entirely to his spouse, Jill. Jill dies in June 2009 leaving an estate of £600,000 equally between her two children.
When Jill dies the nil rate band is £325,000. As 100% of Jack’s nil rate band was unused, the nil rate band on Jill’s death is doubled to £650,000 (£325,000 x 2).
As Jill’s estate is £600,000 there is no inheritance tax to pay on her death
When deciding how your estate is to be divided you must also consider the taxation of trusts legislation.
If the residue of your estate is greater than the prevailing nil rate band at the date of your death a further charge to inheritance tax (‘IHT’) will be payable if you choose an age for your child(ren) or grandchild(ren) to receive their entitlement which is beyond 18.
The maximum rate is 4.2% of the value of the residue over the prevailing nil rate band where entitlement falls in at 25. For ages in between, the percentage reduces accordingly by 0.6% a year, so a beneficiary entitled at 21 will bear 1.8% tax (0.6 x 3 [for years 18-21]).
Understandably this charge to tax needs to be set against the prospect of your child(ren) or grandchild(ren) having unfettered access to what could be a sizeable inheritance at a time when, arguably, he/she/they should be concentrating on their studies, among other things.
If you stipulate a vesting age over 18 the Trustees of your Will, nevertheless, can consider: -
1. Whether the income earned on the assets will be sufficient to offset the IHT that will be payable and/or
2. Make distributions of capital to your child(ren) or grandchild(ren) for their maintenance, education or advancement which will reduce the taxable value if not avoid IHT altogether.
All the solicitors in the Wills, Trusts and Probate team are experienced in advising clients on saving tax. Please call one of us to arrange a meeting to discuss whether you can save tax.
If you would like to discuss the above, please email us or go back to our other contact details.