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Inheritance Tax 2010 - Time To Revisit

by Ashley Clark, Director - August 2010

Many people used to put their money or their share of the house in trust on death using something called ‘Tenants in Common’ and a simple clause in their Will called a ‘Will Trust’ to protect property from inheritance taxes.

In October 2007, Alastair Darling introduced the ability to transfer the inheritance tax ‘nil rate band’ allowance between married couples and civil partners making it no longer necessary for many couples to ensure their nil rate band tax allowance was used on first death.

In the March 2010 Budget Mr Darling also announced that the nil rate band threshold of £325,000 would be frozen until 2015 and in the recent Con-Lib 2010 Budget, no changes were made to the freeze.

In practice, this means that if a husband dies and leaves everything to his wife tax free, his full nil rate band of £325,000 is also passed on to her. This means that when she passes away, the estate has two nil rate band tax thresholds of £325,000 meaning that £650,000 can be passed to beneficiaries on second death without incurring an inheritance tax charge. Many of us now think we have no inheritance tax worries and our family will inherit all our money but is it just a con?

The Care Fees Trap

I believe by allowing any unused nil rate allowance to be passed to your spouse, rather then being a benefit to your family, as it would appear, it was actually a ‘stealth tax’ move by the Labour Govenment to encourage people to not do any tax planning. By not using your allowance on first death and not putting assets in trust, the surviving spouse will keep full ownership of all property and money and be worth much more. This can then ultimately be used as part of any means test to pay for care fees if you go into a care home.  Up to £325,000 more money may be exposed to the means test to pay for care in your old age rather than money being protected for your family.

Time to Review your Estate Planning

In my opinion, we are no better off as a result of the introduction of transferability and the limit is also now frozen meaning it is actually getting worse. In addition, if you are not married but common law partners, you cannot benefit from this double allowance option anyway.

If you have not reviewed your estate planning and Will in the last three years, you should do so now. It may be that no change needs to be made to your existing arrangements but it is better to be safe than sorry.

Even though a revised inheritance tax strategy may not reduce your tax bill, it may help protect your hard earned money from other issues such as Bankruptcy, Creditor Protection and of course Care Fees funding.

Reducing Inheritance Tax - Using Trusts

• Your money is left to who you want it to be left to.
• Investments can grow free of any inheritance taxes.
• Depending upon where you live or retire to in the future, a trust could provide tax efficient and even tax free access to income or growth for you.
• Some trusts offer you income but any growth is left for beneficiaries.
• Some trusts you keep access to the capital, but any income and growth is left for beneficiaries.

It is Complex?  Is it Expensive?

Using trusts for property or your investments is actually very simple for you - it is a matter of a few signatures on some declarations. The costs to set up can be as little a few hundred pounds for a simple Will trust and a severance of Joint Tenancy through to a few thousand pounds for investments in special Loan Trusts or Discounted Gift Trusts.  When thinking about value for money, never forget you are looking at saving and protecting many thousands of pounds from inheritance tax.