Is your Will tax efficient?

With rising property prices, far more people are feeling the burden of Inheritance Tax (“IHT”).

IHT is charged on the value of your estate exceeding the nil-rate band (“NRB”). The NRB has been frozen at £325,000 since April 2009. With property prices increasing and further rises of up to 30% expected by the end of the decade, more people are going to find themselves subject to this avoidable tax.

October 2007 saw the introduction of new tax legislation that enabled married couples and civil partners to transfer the unused proportion of their NRB to the survivor on the second death. It appeared that overnight the tried and tested tax planning device of including a Nil Rate Band Discretionary Trust (“NRB Trust”) in a Will had become redundant for all but the wealthiest individuals; instead simple Wills leaving the estate to the surviving spouse or civil partner became popular.

However, abandoning the NRB Trust may have been premature. Depending on the nature of the assets within the estate of the first to die, an NRB Trust can provide an opportunity to shelter their growth in value from IHT on the death of the second spouse or civil partner.

It is not only growth assets which could be at risk from a potentially increasing IHT charge, but also assets that attract IHT reliefs. These include assets upon which a claim for Agricultural Property Relief (“APR”) and/or Business Property Relief (“BPR”) could be made, which, with careful planning, can be passed via an NRB Trust to the survivor, whilst maximizing the IHT reliefs available.

In addition, an NRB Trust may offer some level of protection of assets from care home fee assessments, and the opportunity to retain wealth within the family should the surviving spouse or civil partner re-marry.

HM Revenue & Customs have indicated that there may be changes to the IHT regime that applies to so-called “relevant property trusts”, including discretionary trusts. There is a possibility that there will be announcements in the Budget on 18 March, including measures to counter perceived tax avoidance using “pilot trusts”. If new legislation is announced it will be increasingly important to ensure that no trust tax planning opportunities are missed.

You should review your Will on a regular basis to ensure that it is IHT efficient and to avoid your legacy to your family being eroded by taxes.

When undertaking any tax planning you should ensure that it is tailored to your own personal circumstances in order that the impact of all taxes, and indeed non-tax issues, are considered in full.

For more information on this subject visit our Wills, Trusts and Probate page or to speak to our Tax Manager, Carolyn Byrne, please call 01522 541181 or email carolyn.byrne@chattertons.com