Inheritance Tax and the Use of Discretionary Trusts
Inheritance tax is payable on the value of your house and any investments which you own as well as on the value of any life policies together with any death benefit payable in respect of a personal pension. If you have the right to income from a trust, this will also be taken into account as will any gifts which you have made in the 7 years prior to your death.
Inheritance tax is not payable on assets which pass to your spouse or to a charity.
If you leave the whole of your estate to your spouse no inheritance tax is payable on the death of the first spouse. On the death of the survivor, however, inheritance tax is payable on the total value of the survivor’s estate including assets which they have inherited from their spouse. Therefore if a husband and wife each have assets of £200,000 no inheritance tax will be payable on the first death. On the second death, however, inheritance tax of £58,000 is payable, ie, £400,000 minus £255,000 equals a £145,000 x 40%.
If the first spouse leaves the maximum sum which can be given without incurring inheritance tax (the Nil Rate Band) to the children, the surviving spouse will have that much less in their estate when they die and this could result in a saving of up to £102,000 in inheritance tax.
There are very few of us who are in a situation where the survivor can maintain a decent lifestyle without inheriting the whole or the majority of the estate from the first to die. Is there a solution? Yes – set up a discretionary trust in each will of the Nil Rate Band – all excess passes to the survivor. On the first death no inheritance tax is payable.
You can name the trustees of the Discretionary Trust in your will, who will use their discretion as to which of the beneficiaries of the Trust shall receive any income or capital. You will specify the beneficiaries but they would normally include your surviving spouse, children and grandchildren and possibly children’s spouses. The trustees would be guided by a Letter of Wishes signed by you directing the manner in which they wish the trustees to exercise their discretion.
If there is insufficient money available to put into the Trust, we can advise you on the way in which other assets (usually your house) can be used for the Discretionary Trust.