Inheritance Tax Planning

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

Outright Gifts - but one problem replaces another!

The property to be diverted away from the surviving spouse could be gifted directly to the children or other beneficiaries. However this may leave the survivor short of income producing assets on the first death. Non income producing assets would have to be allocated to give down directly to the children. But it is often the case that the major non income producing asset will be shares in the house; which in itself can lead to other problems including:

• The children would then become co-owners of the property, with the right to occupy it, and enforce a sale of it.
• Whilst the children may be trusted not to do this, if the children were to divorce, the Courts could take into account the value of the share in the house in awarding a settlement in favour of the child's spouse.
• If any of the children were to become bankrupt then a trustee in bankruptcy could force a sale of the property.
• There are also adverse Capital Gains Tax consequences.

Discretionary Trusts - an alternative solution?

An alternative way of overcoming the problem, rather than giving assets directly to the children, is to set up a Discretionary Trust into which property to the value of the Nil Rate Band is settled. A Discretionary Trust is one where the Trustees hold the assets on terms that they can benefit a range of beneficiaries as to both the income from the assets and the capital of the assets. The class of beneficiaries would include the surviving spouse, the children and any further issue. The property in the Trust would not form part of the surviving spouse's estate and the surviving spouse has no right to call for any part of the income or capital of it. The object of the saving in Inheritance Tax is therefore achieved.

However in the Trustees discretion the surviving spouse can benefit by having income or capital paid to them. There is considerable flexibility and all, or parts of the assets, could be transferred to the children if the surviving spouse had no need of them.

Indeed it is not even necessary that the Discretionary Trust should contain any assets in the normal sense. With suitable powers in the will, the Personal Representatives of the first spouse to die may arrange matters so that the Discretionary Trust contains nothing but a debt owed to its trustees by the surviving spouse. The debt is ultimately deductible from the surviving spouse's estate, so that the Inheritance Tax saving on the second death is still achieved. This alternative (the Debt Scheme) is of particular benefit in cases where the estate passing on the first death is not large enough to satisfy the Nil Rate Band gift unless resort is had to the matrimonial home or a share of it. There are of course advantages and disadvantages with such trusts which we are happy to explore in detail if appropriate.

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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.