Leading Estate Planning and Trust Services company, Solidus explain how you can maximise your clients inheritance tax allowances using trust arrangements.
Where the deceased is entitled to his or her own residence nil rate band and a full transferable residence nil rate band from the estate of a previously deceased spouse, the deceased’s estate will, prima facie, be entitled to a total residence nil rate band of, currently, £350,000, if an interest in a private residence the passes to a lineal descendant such as a child or grandchild.
It is well known that, if the value of the deceased’s assets on death exceeds £2 million, any entitlement to the residence nil rate band is reduced by £1 for every £2 of the excess. Assuming there was no abatement of the residence nil rate band under the £2 million test on the first death, this means that, if the survivor’s assets on death exceed £2.7 million in value, all entitlement to the residence and transferable residence nil rate band will be lost. This can cost the estate an extra £140,000 in inheritance tax.
For those situations where the combined value of both the husband’s and wife’s assets is likely to cause a reduction in the residence nil rate band (typically where the combined value is between £2 million and £3 million), it can make sense for them to consider planning to reduce the value of the survivor’s assets on the second death without necessarily reducing the survivor’s financial security.
In such a case, the couple could consider changing their wills so that, on the first death, £325,000 of the deceased’s assets pass into a nil rate band discretionary trust under which the surviving spouse is a potential beneficiary. The rest of the deceased’s estate would pass to the surviving spouse. The implications of this action would be:
- The survivor’s estate will be reduced by £325,000 which, assuming no increase in asset values and no increase in the residence nil rate band, could reinstate up to £162,500 of the survivor’s residence nil rate band, saving up to £65,000 in inheritance tax.
- Growth on the £325,000 held in the trust would be outside the survivor’s taxable estate although there could be ongoing 10-year periodic charges any exit charges on the trust, albeit at a low rate of inheritance tax. It is also worth remembering that a trust has its own nil rate band.
- As a potential beneficiary of the trust, the survivor could, if cash is needed, benefit by the trustees making appointments to him or her. If payments are made by interest-free loans repayable on demand, these would, if spent, build up debts on the survivor’s taxable estate so further reducing inheritance tax liabilities on the survivor’s subsequent death.
- Each of the husband and wife would need to own assets of at least £325,000, in their own name, in order to satisfy the legacy. Where there are insufficient liquid assets to pass to the trust on the first death, the family home could be placed into ownership as tenants-in-common and, on the first death, a part of the deceased’s share equal to the nil rate band at that time could be transferred by the deceased’s will to the trust, possibly by way of a debt on the property. If the home was used in this way, its value, for inheritance tax purposes, would reduce by between 5% and 10% after the first death.
