Do your assets exceed £325,000?
Historically, relatively few estates attracted Inheritance Tax (IHT) but this has changed radically in recent years because of soaring house prices, particularly in London and the South East. According to recent estimates, this sharp increase in property values and the slower rise in the “Nil Rate” (tax exempt) Band has left around 1.8 million homeowners now vulnerable to IHT.
When you die, your heirs pay 40% IHT on everything you leave above £325,000 (in the current tax year). Married couples (and civil partners) can certainly avoid exposure to IHT on first death as there is no tax liability on assets that pass between spouses or civil partners. However this only delays, not avoids, a tax bill.
A far better option is to consider leaving your Nil rate band to your children (or other beneficiaries) in order not to waste that exemption on your death. This is accomplished by special wording within your Will which can also ensure that your surviving spouse or partner can access the funds placed in trust. Your spouse or partner will then have a further exemption on their death, thereby doubling the tax free allowance available to set against any IHT bill at second death.
Whilst, in principle, the ‘Combined Married Person’s Allowance’ – if still available in the future – would achieve much the same result and even, in some circumstances, an even greater tax saving, (assuming the tax exempt rate is raised again as promised), its terms are far less flexible and discourage, for example, prior lifetime gifts. An additional advantage of the Nil Rate Band Discretionary Trust strategy is that it provides a framework to ensure that any intended beneficiaries will receive their due inheritance, irrespective of subsequent changes in circumstances and legislation. In any event, if it is clear at second death, that the individual circumstances of the case mean that it would be more tax efficient to set aside the NRB Trust, the Executors are empowered to do so.