By careful drafting, Inheritance Tax (‘IHT’) can be saved on the estate you leave behind. IHT considerations are important, particularly as the estate may easily exceed the current nil rate band (£275,000 from 6th April 2005). Remember that there is at present no specific IHT exemption for the family home. IHT is presently charged at the rate of 40% on the value of the assets exceeding the nil rate band (with some exception see in particular as to business and agricultural property below). Thus, an estate consisting of a home worth £300,000 and a further £50,000 of other assets will pay tax of £30,000.
Although assets passing to a spouse are exempt from IHT, today an increasing proportion of couples choose Law Courses or to live together rather than marry and in those circumstances the spouse exemption does not apply. Moreover, if everything is left to the surviving spouse, the two estates will be bunched into one on the survivor’s death, causing unnecessary IHT to be paid.
It is therefore vital that you ensure that you and your spouse each use the available nil rate band. A simple form of discretionary trust in the Will can achieve this and save at the stroke of a pen some £110,000 of IHT. (The nil rate band of £275,000 at 40%). The surviving spouse is normally included as the principal beneficiary so the arrangement should not give rise to any major difficulties.
For example, assume that husband and wife each have an estate of £300,000; and that the husband dies first, wishing his widow to be the primary beneficiary. Under a commonly used, but wasteful alternative, the husband could give his widow his £300,000 estate (absolutely or by way of life interest) ensuring that no IHT was payable on his death. On her death however, having regard to the bunching effect, other things being equal, IHT would be payable on an estate of £600,000 (currently £ 130,000 of IHT – over twice as much as need be paid!).