News : North Devon Insight

On death, Inheritance Tax (“IHT”) is charged at 40% on the value of a deceased’s estate above the “Nil Rate Band” (currently £325,000.00 but due to increase to £350,000.00 in April 2010).  However, gifts to spouses or civil partners are completely exempt from Tax (the “spouse exemption”). If you leave everything to your spouse or civil partner you are not using up any of your NRB entitlement. Under new rules introduced in October 2007, your unused NRB allowance effectively passes to your surviving spouse or partner, who will then have up to double the NRB allowance when they die.

Different rules for unmarried couples.  Unfortunately, the above rules do not apply to couples who are not married or in a civil partnership. This means that they each have only one NRB entitlement and there is no equivalent to the Spouse Exemption. If one dies leaving everything to the survivor, the total estate on the death of the survivor may exceed the NRB allowance, thus incurring IHT on the surplus. However, this can be reduced (or avoided altogether) if the couple make Wills providing for “Nil Rate Band Discretionary Trusts”.

Tried and tested.  Such Trusts were for many years used by married couples prior to the introduction of the new rules referred to above, but are less common now because of the ability to transfer the NRB allowance. However, they still provide a safe, tried and tested method for reducing IHT liability and are particularly useful for unmarried couples and unregistered partners.

How Discretionary Trusts work.  Briefly, the first deceased’s estate (up to the value of the NRB  allowance) is placed in a trust controlled by the survivor, who can withdraw income and/or capital  during their lifetime, if they need to. As the value of the survivor’s own estate is not affected by the deceased partner’s assets, liability for IHT on the death of the survivor is reduced or avoided         completely.

The above is only intended as a brief guide and you should seek detailed advice from a solicitor or other qualified lawyer specialising in Wills and Inheritance Tax planning (preferably one who offers a free initial consultation).

Taylors Solicitors (Legal Helpline: 01271 812811)