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How to Save Inheritance Tax
14 08 2008
When we die, some or all of our assets can be transferred free from Inheritance Tax (“IHT”). This is known as the “nil rate band” allowance and is currently set at £312,000.
Since October 2007, it has been possible for married couples and civil partners to take advantage of the “transferable nil rate band”, so that if one of them dies without using up their nil rate band allowance it will be available to the other.
The introduction of the “transferable nil rate band” has led many to think that no further steps are needed to reduce IHT, but this short article explains that there are still measures to be taken which would result in significant savings.
Below are three examples of tax saving options.
1. Nil Rate Band Discretionary Trusts
Prior to the recent changes in the law, it was very common for married couples and civil partners to incorporate particular forms of trusts into their Wills to minimise tax liability, and a Will giving the nil rate band to a flexible trust can still be highly advantageous.
This is because the nil rate band threshold is ordinarily increased at a slower rate than the rate of inflation, whereas trust funds can be invested to potentially produce a significantly higher return.
The use of a trust structure also allows assets to be set aside or “ring-fenced”. Ordinarily, this will mean that whatever the surviving spouse, partner or children go through during their lifetime, whether it be marriage, remarriage, divorce or bankruptcy, the property held by the trust will be unaffected and will pass in accordance with the terms of the trust and any letters of instruction.
2. Gifts
Gifts can either be made outright or into trust. Outright gifts are completely free from IHT, irrespective of their value, provided that the donor lives for seven years after making the gift. However, if the donor dies within seven years of making the gift, IHT may be charged.
Gifts into trust can be used to save IHT and/or defer Capital Gains Tax. A trust can be drafted to allow trustees to act appropriately in the best interests of the beneficiaries in accordance with whatever circumstances prevail at the relevant time.
3. Post Death Variations
You may wish to consider redirecting an inheritance you receive, in order save IHT for your children and perhaps even grandchildren. Redirection into a trust can have positive tax saving implications, whilst allowing you to continue to benefit from the inheritance.
You are entitled to redirect any assets you inherit for up to two years after the death of the person who left the assets to you.
For further details or if you would like to discuss any of the issues raised, please contact Lawrence Gibbons by e-mail at lgibbons@odt.uk.com, or by telephone on 01273 221586.