Inheritance Tax Planning

Make a Will, Save a Fortune and Get Your Own Back on the Tax Man!

Most people who are told that for a small outlay of, say a few hundred pounds, they would immediately stand to make £110,000 would no doubt jump at the chance. But that is just what can be achieved by making a tax effective Will to minimise the Inheritance Tax liability of your estate after your death.

The Tax Charge - in a Nutshell

When you die Inheritance Tax is charged on the value of your assets. There is a "Nil Rate Band" which is currently £275,000 on which no Tax is paid. The remainder of the estate is taxed at 40% of its value over the Nil Rate Band. If you have made any lifetime gifts of over £3,000 per annum and fail to survive each of the gifts by seven years then the value of the gift will be brought in to accumulation with the remainder of the value of your assets on death. If you survive the gift by seven years the gift will become free of any Inheritance Tax.

There is however one major exemption, in that all gifts whether made during life or on death as between husband and wife are exempt from Inheritance Tax. Therefore if your will leaves everything to your husband / wife the Deceased's estate would be exempt from Tax (no matter how large this was) because of the spouse exemption.

The Problem

The problem however is that the assets in two estates will bunch together on the second death and, subject only to a deduction representing the Nil Rate Band available on that death, will be fully taxable at 40% before they reach the children or other ultimate beneficiaries. The children would therefore have inherited the whole estate having had the benefit of only one Nil Rate Band!

A Possible Answer

The wills of each spouse could divert away from the surviving spouse sufficient property to absorb the Nil Rate Band available on that death and leave everything else to the surviving spouse. There would still be no Inheritance Tax to pay on the death of the first. The property thus diverted would escape Tax altogether on the second death. At present Tax rates the savings could amount to £110,000 (40% of the present Nil Rate Band of £275,000).

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The articles on legal topics published in these pages are for interest only and are necessarily general in their terms. You should not act (or refrain from acting) on the basis of the information given without specific advice, as the principles and laws concerned may change, and their application will vary according to the particular circumstances.