When people make a standard Will, they usually leave everything to the survivor and then to their children. It may come as a surprise to know that your children could end up with a substantial tax bill which will require to be paid to the government prior to them actually inheriting from yourselves.
It has been forecast that the government could bring in to the treasury around 4 Billion pounds in Inheritance Tax (I.H.T.) in the next year. Around 10 million people maybe directly affected by I.H.T. and the whole of the country is affected indirectly.
In October 2007 the government announced changes to the Inheritance tax laws. Before this date spouses and registered civil partners were unable to carry forward their deceased partner’s Inheritance Tax Nil Rate Band Allowance. This basically meant that when the second person died, only that persons current allowance could be passed to beneficiaries free of Inheritance Tax.
Now the government have changed the legislation to allow the equivalent of two allowances to be passed on following the second death.
This may at first glance appear very generous, however, looking more closely at the situation, you will see that a serious tax bill for your beneficiaries could still be lurking just around the corner, unless you have Inheritance Tax saving wills in place.
The problem is that history and trends will show you that the government continually fail to increase the I.H.T. Nil Rate Band Allowance in line with increases in asset values, in particular, property prices. This means that following the death of the first spouse, the surviving spouse normally inherits all the deceased’s assets which continue to grow at a rate well above the nil rate band. This in turn means that upon second death there could be a hefty tax charge for your beneficiaries, despite the government allowing you two allowances.
The solution to this is simply to arrange your wills with Inheritance tax saving clauses in them to allow for the formation of a discretionary trust on first death. Once the assets are inside the trust following the first death, they continue to grow FREE from Inheritance tax, thus substantially reducing your loved one’s tax bill on second death.
One of the advantages of the I.H.T. saving will is that there is flexibility given to the trustees on first death, to decide how much is actually put into the trust. The wording in the will can usually be drafted so as to allow the surviving partner a say in which assets and how much in total is actually entered into the trust. The trust does not have to be fully funded unless the surviving partner wishes.
Having I.H.T. saving wills in place now also means that your wills would not have to be rewritten, should the government change the goal posts again. Something that has been known to happen in the past!
Filed under: Legal Advice
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