1. Unmarried couples: only married couples or civil partners are able to transfer their Inheritance Tax (“IHT”) exemption (known as the Nil Rate Band (“NRB”)) which is currently £325,000, following the change in law in October 2007. Unmarried couples still need to use what is known as a NRB discretionary trust which is set up as part of a will. In this way both partners’ NRBs can be used, thus saving £130,000 in IHT (40% of £325,000).
2. Business owners: anyone who owns a trading business, whether as a sole trader, a limited company or in a partnership, can take advantage of Business Property Relief (normally 100% of the value of the business) thus effectively exempting the business from IHT. However, H M Revenue & Customs (“HMRC”) will not agree such relief where the value of the business passes under a will to the surviving spouse, as gifts to spouses are exempt from IHT and so no tax is payable. However, if the surviving spouse subsequently sells the business, as often happens, the sale proceeds will be subject to IHT. Yet, by transferring the business into a discretionary trust under a will, HMRC has to decide if BPR still applies. If the business is subsequently sold, the trust holds the sale proceeds which can then be lent to the surviving spouse, interest free, thus keeping value outside the surviving spouse’s estate. If, for any reason, relief is not granted (which might apply if the business had been converted into an investment company), then within two years of date of death the trust can be terminated in favour of the surviving spouse and spouse exemption obtained. The same principle applies to farmers owning agricultural land which can benefit from the similar 100% Agricultural Property Relief.
3. Residential care home fees: residential care home fees are effectively a 100% tax on what an individual owns, unless their capital is below a low limit. Capital is defined as the market value of his assets, which is what local authorities take into account, when assessing whether or not an individual qualifies for funding to help with care home fees. However, if he merely has a life interest under a trust in the property, the value of the property will be excluded from the assessment. If a couple own a house jointly, then on the first death the house passes to the survivor whose capital will now include the whole value of that house. If the first spouse to die leaves his half share in the house in trust for the survivor for life, then that half share will not be counted as part of the survivor’s capital and will be protected from care home fees. The survivor’s half share in the house will still form part of his capital but the value of that share may well be less than 50% of the whole.
4. Children from a previous marriage: the only way of ensuring that the children of a previous marriage inherit the assets of parent who has remarried and left his estate to his second spouse, is by leaving under his will his assets (including his share of the matrimonial home) in trust for his second spouse’s life.When she dies those assets can then be passed to his children under the terms of the trust.
5. Concerns about the age of inheritance for children: it is always difficult to gauge when a child is deemed sufficiently mature to inherit a substantial sum of money. Concerns include financial commonsense, the influence of partners and friends, risky business ventures and the stability of marriages. One solution is to leave the estate, on the death of the second parent, into a life interest trust in equal shares for the children with flexible powers for the trustees to transfer capital to them at times chosen by the trustees not the children. A letter of wishes can accompany the will to set out the times and occasions when the trustees should transfer capital to the children. Unlike discretionary trusts life interest trusts under a will do not attract ten yearly charges.
6. Obtaining more than 2 NRBs where a widowed spouse remarries: a surviving spouse can only receive a maximum of two NRBs. However, where a person remarries after his or her first spouse dies, it is possible, using a traditional NRB trust on his death, to use his first spouse’s NRB but still retain the NRBs of himself and his second spouse (available on his second spouse’s death). A claim needs to be made on the death of the first spouse whose previous spouse is deceased; the drafting of such NRB trusts needs careful consideration. In this way 3 NRBs can be obtained. If both spouses have been previously widowed, it is possible to obtain 4 NRBs.
