Time To Put Things In Order
Nicholas Evans | 01/08/2004
It is estimated that less than 40% of the UK adult population have a Will. At first glance, this is a frightening statistic as the other 60% probably rely on the intestacy provisions. Intestacy provisions specify which relatives are to receive your estate on death. The problem with the intestacy provisions is that they give you no control over what happens to your assets. If the main asset is the matrimonial home, they can mean the house being divided between the surviving spouse and children. The intestacy provisions can be avoided quite simply by the preparation of a Will.
Why Is A Will Important?
Having a Will enables you to appoint Executors and Guardians if you have young children. Wills are not expensive to put in place but it is important proper advice is taken and that Wills are regularly reviewed. By making a Will it also provides an opportunity for Inheritance Tax planning.
Inheritance Tax has become a major area of concern in recent years given the increase in value in most properties – particularly in the Southeast. In the last budget the Chancellor of the Exchequer increased the threshold at which Inheritance Tax becomes payable (the Nil Rate Band) from £250,000 to £255,000. This increase has been criticised for not being high enough and for not keeping pace with increasing house prices. Many homeowners are pushed into the Inheritance Tax net and the number of estates paying Inheritance Tax has risen by a quarter in this year alone. In short, Inheritance Tax now affects many households that it was never designed to effect. The Times reports that, according to figures released by the Halifax, since May 1997 the Chancellor has raised the IHT threshold by 18.6%, whereas the average UK property price has risen by 84% (115% in London). If the Chancellor had raised the Inheritance Tax threshold in line with the rise in average house prices since 1997, the threshold would now be £395,000.
Why is Inheritance Tax a problem?
One of the most frequently used exemptions from Inheritance Tax is the spouse exemption. Everything passing through the husband and wife (or vice versa) is exempt from Inheritance Tax. Therefore, there is often no Inheritance Tax payable on the first death. However, the problem is that the survivor has only one Nil Rate Band and all the assets.
How To Use The Nil Rate Band
There are a number of ways in which to use the Nil Rate Band for both spouses and, by doing so, couples can effectively leave £510,000 on death tax free. Individual circumstance must be considered and proper advice is crucial. The most popular way of using the Nil Rate Band on the first death is to draft Wills to incorporate a Nil Rate Band Discretionary Trust. Such arrangements have become increasingly popular as they allow the surviving spouse some access to the Trust funds without owning them for Inheritance Tax purposes. A variation, which we use with many clients, is to combine the Nil Rate Band Discretionary Trust with an IOU or loan arrangement. Instead of putting money or assets into the Trust, an IOU or loan or mortgage becomes the asset and the debt is repaid out of the survivor’s estate.
Finally, there are other ways in which Inheritance Tax can be saved or mitigated. Many clients simply chose to take out a whole of life policy written in trust for the benefit of the Executors. Whilst not necessarily saving Inheritance Tax, such schemes have virtually been a simple way to provide a fund to pay Inheritance Tax, which can be set up many years in advance.
If you require further details or advice on the Nil Rate Band Discretionary Trust, please ask one of our Private Client Partners or ask to see our information sheet (available in all receptions).
The information and options contained in this article are only intended as a general view of the subject concerned. Specific advice concerning individual situations should always be obtained from the usual contact at Griffith Smith Farrington Webb LLP. No part of the publication may be produced without the express written permission of the individual author.
