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Family matters articles
Inheritance Tax Update
Inheritance Tax is the successor to what used to be known first as Death Duty and then Estate Duty, and is levied on estates (i.e. property, money, investments and possessions, plus the value of gifts made in the last seven years) over £300,000.
An important exemption is that transfers between husband and wife and, in the last couple of years, civil partners, are normally free of tax. Because of the way in which the tax operates, married couples have often ended up paying more tax than is necessary, but with proper advice and planning it has been possible to use special types of trust, or gifts to their children, in their Wills to minimise the tax on their combined estates.
In October 2007 the Chancellor announced changes to the way in which the tax is calculated so that, with immediate effect, a married couple could between them be exempt from tax on combined estates of up to £600,000 – effectively £300,000 for each of them – without using any special planning. These changes will operate even if the first death occurred before October.
On the face of it, this would appear to make the role of trusts redundant in Inheritance Tax planning. Although the overall benefit of trusts (and outright gifts) has been substantially reduced, there are several reasons why married couples may still consider using trusts:
- Although the change in legislation has been announced, it will not be formally passed into law until this year’s Finance Bill is enacted, probably in July. During that time it is possible that further changes may be made.
- The law could be changed again in the foreseeable future, limiting the effect of the changes currently going through.
- The wording of the proposed legislation contradicts the Government’s apparent intention and until this is resolved it is unclear whether £600,000 will always be available or whether this will be limited in some way.
- Although the Government has indicated its intention to increase the £300,000 figure in line with property inflation, it is under no obligation to do so and the amount of any increase after 2010, when it rises to £350,000, cannot be guaranteed.
- Using a trust can allow any growth in value of the trust assets to remain outside the survivor’s estate, possibly saving Inheritance Tax on part of the growth in value.
- In calculating the exempt amount it will be necessary to take into account all gifts made in the seven years before the first death. This may be difficult to calculate if the first death occurred several years ago; more detailed records will have to be kept in future.
- Trusts can be used to shelter assets for passing on to the next generation. For example, if the survivor needs residential care in the future, the trust assets will not be treated as forming part of the survivor’s estate and need not be used to pay for care fees.
- If the survivor has re-married, or re-marries in the future, no more than one additional amount of £300,000 can be used on the survivor’s death, or passed on to the survivor’s widow or widower. Use of a trust may result in tax savings on all deaths.
- There may be an opportunity to distribute assets from a trust to children or grandchildren, so enabling them to receive an inheritance during the survivor’s lifetime.
Our advice on the use of trusts will depend on individual circumstances. However, there is still no tax disadvantage for married couples to have trusts in their Wills to reduce Inheritance Tax in the future. At this stage, we would recommend that you at least consider the potential advantages of using trusts, and we would advise against making hasty changes to existing arrangements.
If you would like further advice on Inheritance Tax planning, please contact David Kingham at our Redhill office on 01737 854529 or email david.kingham@morrlaw.com; Jessica Greenhill at our Woking office on 01483 215010 or email Jessica.greenhall@morrlaw.com or Rebecca Fisher on 020 8971 1037 or email Rebecca.fisher@morrlaw.com