How to save £114,000 Inheritance Tax

(Inheritance Tax Nil Rate Band Discretionary Will Trusts)

In the Budget in April 2006 the Chancellor of the Exchequer increased the Inheritance Tax nil rate band to £285,000. Most gifts of assets made by an individual up to the value of the nil rate band within seven years of his death, or by Will are therefore free of IHT.

Thereafter IHT is charged at 40%.

Gifts between spouses are exempt from IHT.

A husband and wife who make Wills leaving everything to each other waste one IHT nil rate band. Ideally therefore on the death of the first spouse, assets to the value of the IHT nil rate band should be left to non-exempt beneficiaries e.g. children.

Without a crystal ball, a couple cannot know what the survivor’s financial circumstances will be following the first death. Most couples, understandably, are therefore reluctant to make an irrevocable decision to deprive the survivor of £285,000 by leaving it to the children on the first death.

The solution is to create a nil rate band Discretionary Trust within the Will. Under a Discretionary Trust, no beneficiary has any right to benefit, but only the right to be considered for benefit. The Trustees have absolute discretion as to the distribution of capital and income from the Trust Fund among the potential beneficiaries named in the Will. These will typically include the surviving spouse, the children and grandchildren, spouses of beneficiaries, charities and anyone else the Testator wishes to name.

Because of the wide discretionary powers given to the Trustees it is important that they are carefully chosen. Trustees usually include the surviving spouse and one or more additional Trustees whom the Testator is confident will exercise their discretionary powers wisely and sympathetically with the spouse. A professional Trustee is often included to provide disinterested advice.

It is useful to leave a Letter of Wishes addressed to the Trustees indicating how the Testator wishes them to exercise their discretionary powers. This confidential document is not legally binding but of invaluable assistance to the Trustees. There is no reason why the Testator should not express the wish to his Trustees that during his or her lifetime the surviving spouse should be considered as a primary beneficiary. The Discretionary Trust is wound up on the second death, it having served its purpose.

The Trust must be discretionary, the key being that no beneficiary has a right to income or capital.

David Endicott

Managing Partner

Spratt Endicott Solicitors

Banbury

OX16 9AB

Web: www.se-law.co.uk

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