home loan finance blog
Inheritance Tax is a subject which most people think of very infrequently if at all. The attitude is normally that it wont apply to me its just something for rich people to worry about or that Ill be dead so it wont worry me anyway. The fact is people dont like thinking about death at all, let alone any financial consequences! The fact is, if your estate is worth over a certain threshold amount (which currently stands at 300,000 (from 6th April 07) then any money over that so called nil-rate band WILL BE taxed after you die at the rate of 40 pence in the pound.
The fact is that the tax man has the first claim on you Estate. The fact is that you will probably be leaving your loved ones with less than you think you are. With both property ownership and the value of property increasing in the UK at an unprecedented rate, more and more people have actually got more than the nil-rate band to leave to their families. There is a straight forward way for a married couple, owning property (which is normally where a couples taxable wealth is tied up) to save sometimes large sums of money from the taxman. That is to set up a Discretionary Trust as part of their Will. When the Wills are written, the couple will have made sure that they own their property as Tenants in Common rather than Joint Tenants i.e. that they each own a specific percentage of the property.
Then, on first death, when no Inheritance Tax is payable, the nil-rate band is used up in full by leaving this amount to the Trust. Actually no money or property passes into this Trust what does happen is that the surviving spouse draws up an IOU for the amount in the Trust to the Trustees, which is payable on the surviving spouses death (plus the interest on the debt which has accrued since the death of the first spouse). On second death, therefore, the IOU has to be redeemed (possibly plus interest), which will often mean that assets have to be liquidated (property sold). Any money remaining after all debts have been settled can then be distributed as long as the tax man has his percentage of anything over the surviving spouses nil rate band. If you look at the maths, with a nil rate band currently standing at 285,000, this type of Trust written into a Will can save an Estate up to 114,000!