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Clever couples can avoid high IHT
07/08/2007
Married couples or those in a civil partnership can help to cut inheritance tax (IHT) by writing a nil rate band discretionary trust will, Willcare has advised.
Couples in Britain and Northern Ireland can write up a will that incorporates two discretionary trusts, which means that upon death the will-maker's money can be paid tax-free into a trust, which can later be paid out along with their taxed estate, increasing the beneficiaries' inheritance.
This sort of set-up also provides a solution to the problem of extra tax after the second partner's death if everything goes untaxed to them on the first death.
Mark Jackson, managing director of Willcare, explained: "Everyone has a personal tax allowance for inheritance tax purposes and this needs to be used on first death. However if the entire estate is passed to the remaining spouse/partner, there is no IHT to pay due to inter-spousal exemption. Therefore, their IHT allowance is not used and on second death there is only one allowance left.
"This type of will incorporates two discretionary trusts. Each trust that is set up nominates the remaining spouse and other beneficiaries. On first death there are extra powers built into the will for the trustees to accept a binding promise of payment to the trust to the value of up to the nil rate band allowance in force on the date of the first death.
"This IOU can be left outstanding until second death and is treated as a debt on the second person's estate and passed to the trust prior to the estate being calculated for IHT purposes. This, in effect, doubles the IHT allowance for a married couple or a couple in a civil partnership to £600,000 (as of today's tax rates). Beneficiaries can save up to £120,000 in IHT just by writing their wills the right way."
Mr Jackson said that another option would be for the trustees to put a charge on the family home on first death which goes into the trust. However it is vital that people visit a solicitors to ensure that the trust has been set up correctly. "The set up costs are minimal but they must be done correctly otherwise the mechanism may not work and the family would be liable for the IHT on second death," he advised.
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Couples in Britain and Northern Ireland can write up a will that incorporates two discretionary trusts, which means that upon death the will-maker's money can be paid tax-free into a trust, which can later be paid out along with their taxed estate, increasing the beneficiaries' inheritance.
This sort of set-up also provides a solution to the problem of extra tax after the second partner's death if everything goes untaxed to them on the first death.
Mark Jackson, managing director of Willcare, explained: "Everyone has a personal tax allowance for inheritance tax purposes and this needs to be used on first death. However if the entire estate is passed to the remaining spouse/partner, there is no IHT to pay due to inter-spousal exemption. Therefore, their IHT allowance is not used and on second death there is only one allowance left.
"This type of will incorporates two discretionary trusts. Each trust that is set up nominates the remaining spouse and other beneficiaries. On first death there are extra powers built into the will for the trustees to accept a binding promise of payment to the trust to the value of up to the nil rate band allowance in force on the date of the first death.
"This IOU can be left outstanding until second death and is treated as a debt on the second person's estate and passed to the trust prior to the estate being calculated for IHT purposes. This, in effect, doubles the IHT allowance for a married couple or a couple in a civil partnership to £600,000 (as of today's tax rates). Beneficiaries can save up to £120,000 in IHT just by writing their wills the right way."
Mr Jackson said that another option would be for the trustees to put a charge on the family home on first death which goes into the trust. However it is vital that people visit a solicitors to ensure that the trust has been set up correctly. "The set up costs are minimal but they must be done correctly otherwise the mechanism may not work and the family would be liable for the IHT on second death," he advised.
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