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In Part 1 of a series of articles on the subject of Inheritance Tax (IHT), we outlined some basic steps that can be undertaken to plan to reduce the assessable estate for IHT. Here in the next piece, we begin to take a look at other forms of planning which clients may wish to consider.

Since the Pre Budget Report on 9th October 2007 announced proposed changes to the IHT nil rate band, it would be easy to conclude that there is no need for a married couple or civil partnership to consider creating a discretionary will trust (DWT) on first death. However, despite these proposals, we still believe that there is still a place for such planning.

Firstly, let us consider the continued merits of a DWT by way of example. Mr & Mrs Smith have an estate currently valued at £600,000. Mr Smith died on 1st June 2007 and left everything to his wife. No IHT was due upon his death and none of his nil rate band, currently £300,000, was utilised. What happens if Mrs Smith subsequently dies on 1st July 2010, when we know that the nil rate band will be £350,000? Since Mr Smith’s nil rate band was not used, Mrs Smith can enhance hers by 100%, thereby giving her a nil rate band of £700,000. Assuming the estate had grown in value to £750,000 since her husband’s death, this would result in IHT of £750,000 - £700,000 = £50,000 x 40% = £20,000 of tax to pay.

However, what would the situation be if a DWT had been created, either within his will or by way of a properly drafted deed of variation within 2 years of his death? Let us assume that a DWT is created to fully utilise his nil rate band of £300,000. The remaining assets of £300,000 would, upon her subsequent death, then be worth £375,000. No enhancement to Mrs Smith’s nil rate band is available as Mr Smith’s was wholly utilised. This would result in an assessable estate of £375,000 - £350,000 = £25,000. IHT at 40% is £10,000, which equates to half of that which would have arisen had a DWT not been created. This example of course assumes a rise in the value of an estate in excess of the RPI, which is the approximate rate at which the nil rate band increases.

Aside from IHT savings, a DWT has other benefits: -

Access is not lost – despite the use of a DWT, the surviving spouse need not lose access to the monies. The trustees may provide payments, or alternatively a strategy of loans could be utilised to create additional IHT savings.

IHT savings though the generations – it may be fair to say that in many cases, clients nowadays will be wealthier than their parents were at their age. This arises from issues such as the savings and investment culture that prevails compared to yesteryear and perhaps as a result of house price inflation. For the next generation this may be even more so. The accumulation of wealth can only exacerbate whatever IHT liabilities they would also face on their deaths.

However, the benefit of a DWT is that, like Mrs Smith in the previous example, at the trustees’ discretion, any children could also benefit from the trust, without the proceeds being treated as part of their estate. Not only that but the funds would be protected in the event of the children divorcing or being declared bankrupt.

Protection in the event widow marries widower – Taking the example above, what if Mrs Smith marries again, this time to Mr Jones? If Mr Jones, who himself has been pre-deceased, and consequently carries across a £700,000 enhanced nil rate band, subsequently dies, Mrs Smith would not be able to utilise this and it would be lost altogether. A DWT is a solution to this problem.

Protection against means testing – Putting monies into a DWT provides important protection against means testing for long term care costs.

If you wish to engage in straight forward will planning or discretionary will planning, and require the services of a solicitor to do so, Warr & Co is happy to recommend the following: -

Mr Richard Knott or Ms Lindsay Firth
Chafes Solicitors
20 Market Place
Stockport
SK1 1EY
Tel No. 0161 477 1525
Fax No. 0161 480 3731

www.chafes.co.uk
Email Richard at richard.knott@chafes.co.uk
Email Lindsay at lindsay.firth@chafes.co.uk

We receive no financial remuneration from referrals in this manner.

Whilst DWT planning can offer many benefits, there may be a better strategy to IHT planning than simply a DWT on death alone. This is to plan to reduce the assessable estate during the lifetime of an individual. In our next article, we will begin to look at some of the various plans available that may be utilised in this regard.

Date of Article: 25th February 2008