For Married couples...

Nil Rate Band Discretionary Trust Wills

Where married couples have combined assets worth more than £263,000 (the current inheritance tax threshold), inheritance tax is potentially payable on the second death. Inheritance tax is charged at 40%.

By preparing tax-efficient Wills, we can ensure that: (i) combined assets worth £526,000 are capable of passing free of inheritance tax; and (ii)  following the first death the surviving spouse will have access to all of the combined assets.

As a result the sum which ultimately passes on the second death to your children or to other beneficiaries can be increased by up to £105,200 (which would otherwise have passed to the Inland Revenue).

We achieve this by ensuring that in your Wills, you leave the maximum sum which can be left free of inheritance tax (the 'Nil Rate Sum') to a Discretionary Trust. 

We can ensure that the surviving spouse can have continued access to all of your combined assets by allowing the Trustees of the Discretionary Trust to either: (i) make cash distributions from the Trust Fund to the surviving spouse as and when required; or (ii) accept a 'promise of payment' from the surviving spouse at the outset which will itself then form the Trust Fund (rather than actually requiring payment of the Nil Rate Sum to set up the Trust). If the 'promise of payment' method is used the Trustees can wait until after the surviving spouse's death before requiring repayment of this sum.

Below are some illustrations of the savings that could be made in hypothetical situations (Standard Wills = all to each other on first death):

1. Combined assets of husband and wife: 

3. Combined assets of husband and wife: 

Flexible Life Interest Trusts of Residue

Nil Rate Band Discretionary Trust Wills can be used to ensure that a married couple can pass £510,000 worth of assets free of inheritance tax without reducing the assets which the surviving spouse can have access to after the first death.

If your combined estate is worth more than £526,000 the good news is that it is not only that part of your estate which forms the ‘Nil Rate Band’ (the first £263,000 per individual) which can be left in a way which can avoid liability to inheritance tax.

We can also create a trust with regard to the ‘residue’ of your estate (the sum over and above the ‘Nil Rate Band’) whereby the surviving spouse may benefit if required, but whereby the option to transfer this residue outright to your children or other beneficiaries will remain available. If this option to transfer is taken and the surviving spouse then lives for a further seven years, the amount transferred will not be subject to inheritance tax.

This is done by using your Will to create a trust under which the basic terms are: (i) that your spouse will be entitled to any income from your residuary estate (eg. share dividends, unit trusts distributions, rent from property, bank or building society interest, etc) during his/her lifetime; and (ii) that following your spouse’s death the ‘capital’ of your residuary estate (eg. shares, unit trusts, houses, bank or building society account balances, etc or the cash proceeds of such assets) will pass to your children or other beneficiaries.

The real benefits of ‘flexible life interest trusts of residue’ come from the flexibility which your trustees are given:

(1) You need not be concerned about whether your spouse will be adequately provided for as your trustees will be given the right to transfer all or part of the ‘capital’ of your residuary estate to your spouse at any time after your death.

(2) Powers will be inserted into the trust which allow your trustees to end the trust in whole or in part at any time, so that the assets are then effectively transferred to your children or other beneficiaries. As stated above, if your spouse survives for seven years after this option is exercised, the amount transferred will not be subject to inheritance tax.

(3) We can ensure that the residuary estate can be transferred to your children or other beneficiaries in a way which is revocable. In other words, the trust can be ended in whole or in part in order to ‘start the seven year clock ticking’, but in such a way that the trustees remain free to claim back the relevant assets at a later date (if required by your spouse). In practice, your trustees would retain possession of the assets throughout the relevant period, they would simply be ‘legally’ transferred to create the opportunity for an inheritance tax saving.

(4) A particular potential benefit of this type of trust is that, for example, your house could be transferred to your children but your spouse could continue to live there until his/her death, in which case inheritance tax would still be avoided if your spouse survived for seven years after the transfer.

For unmarried individuals...

The main category of inheritance tax exemption is the 'spouse exemption', which obviously does not help unmarried individuals with their inheritance tax planning.

There are, however, other categories of inheritance tax exemption which may be considered, such as charities and certain other organisations or purposes.

In appropriate circumstances, inheritance tax 'reliefs' such as Business Property Relief and Agricultural Property Relief may also be available.

Lifetime Tax planning (see next section) can also be particularly important to unmarried individuals.