Inheritance Tax Planning Issues to Consider

Gifting capital in an inheritance tax efficient way, whilst maintaining control of capital, and not losing income is the goal of most. After all if it is possible, within reason, to reduce the burden of IHT, then most taxpayers will take the necessary action.

Deed of Variation (or Deed of Family Arrangement)
It is possible to effectively re-write the deceased's will. There are only two main requirements. Firstly, this re-writing must refer to the will and be made in writing with the signed consent of the beneficiaries concerned. Secondly the Deed of Variation must be made within two years of the date of death, and the Inland Revenue must be notified within 6 months of the date of the Deed. There must be no financial inducement between the parties to the Deed for effecting the Deed of Variation.

Deeds of Variation can be a very flexible way to re-distribute assets in an IHT efficient way. For example a married child of the deceased can use a Deed of Variation to pass on his/her share to his/her children without any impact on that married child's own IHT position. Another example is where a married partner has left all his/her estate to the surviving partner, thus wasting one £275,000 IHT nil-rate band (2005/6). A Deed of Variation can be used to create a discretionary trust, which includes the surviving partner. This trust can then be used for the surviving partner's benefit during his/her lifetime, and then passed on without any IHT consequence to the next generation down. Deeds of Variation should not be used for long-term IHT planning.

Deeds of Variation can be used for Capital Gains Tax planning, and to compound IHT planning. Professional advice should be sought here.

Gifts with Reservation of Benefit
It is possible to gift capital whilst maintaining reasonable control and without losing income provided that you are careful…. If an individual makes a transfer of capital and then continues to enjoy the benefit of that capital, then the transfer will be deemed a 'gift with reservation of benefit'. This means that for IHT purposes, the individual will only be seen to have made the transfer when he can no longer enjoy any benefit from it. Typically this occurs at death. So if someone thinks he/she has made a PET and survived seven years, but still gets a benefit from the capital, they may find that the 'PET' was in fact a 'gift with reservation of benefit'. Appropriate trust planning and non-contentious use of 'carve out' is essential in ensuring that well intentioned gifts are treated as such, and do not fall foul of the rules.

Template Will Writing for married couples
Firstly, everyone should write a will. If a will is not made, then the deceased's estate will pass on according to the intestacy laws, which will probably not be in accordance with the deceased's wishes. Secondly, wills should be reviewed regularly. Not only do personal circumstances change over time, but laws relating to inheritance and taxation also change over time. It should be noted that marriage annuls any Will made before the marriage.

There is a simple template for wills between spouses who want to make sure that the surviving spouse has maximum enjoyment of the capital for the remainder of the surviving spouse's lifetime. Spouses can write their wills leaving everything to each other except for an amount equalling the current IHT nil-rate band at death (currently £275,000 - 2005/6), which is placed into a discretionary trust. The categories of beneficiary of this discretionary trust should include the surviving spouse and the next generations. Thus the surviving partner can enjoy the use of this capital initially, and it can be transferred on subsequently. Care needs to be taken as to the choice of trustees of this discretionary trust (and the surviving spouse can be a trustee).

There are two main disadvantages to using your Wills for Nil-Rate Band Discretionary Trusts. Firstly, your estate will have to wait for Probate (Court & Tax permission to distribute your Estate according to your Will) which can take a long time. Trusts do not have to wait for Probate normally, but if they are formed from the Will, then nothing can happen until Probate has been granted. If you want to be able to help the surviving spouse to tide things over until Probate has been granted, then using a Will to set up the Discretionary Trust may not be the best way forward. Secondly, Wills can be contested and Trusts can't (unless they are a consequence of the Will). Consequently, your wishes may not be complied with. Professional Advice should be sought in the establishment and viability of Lifetime Nil-Rate Band Discretionary Trusts. We are able to assist here as part of our IHT Planning Service to those clients who qualify for the Free Personalised IHT Report.

Priorities
Almost all IHT planning involves the use of Potentially Exempt Transfers (PETs). Before a PET can become fully exempt, the Donor needs to survive for seven years after making the gift. Consequently, all PETs have a seven-year clock. The sooner the clock starts ticking, the better. It would therefore seem to make sense that you deal with PETs first before doing any other IHT planning e.g. re-writing wills (as this can be covered by Deeds of Variation in the very short-term, generally). To top of page

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