Inheritance TaxWillsOptions for Inheritance Tax Planning

Continuing from last week’s article, there are options available to the testator(s) when it comes to Inheritance Tax (IHT) planning. Some planning can simply be done by a well drafted Will, whilst others will require lifetime planning. The best approach will depend on the factors covered in last week’s newsletter.

What options are available with a Will?

This can vary depending on the long-term goals and the assets the testator(s) has. Obviously, we would want to make as much use of the reliefs that are available as possible, but the testator(s) may also wish to protect their assets as well.

In the case of married couples or civil partners, they have the Transferrable Nil-Rate Band (TNRB) and the spousal exemption available to them, therefore it would be wise to ensure the Wills utilise these. But if the clients wish to protect assets as well, then it would be advisable to use a Life Interest in some, if not all of their assets. All Life Interest Trusts set up upon death are treated as Interest in Possession Trusts for IHT purposes. This means that the Life Tenant the Trust is seen as inheriting the assets held by the Trust, as this is usually the surviving spouse the spousal exemption will apply and therefore the unused Nil-Rate Band (NRB) of the deceased spouse can be transferred to the other.

The most common Trust for married couples who own their main residence is the Protective Property Trust (PPT). This is a Life Intertest Trust that is specifically used for the property which will protect the deceased’s share of the property, while still allowing the surviving spouse to live in the property for the rest of their life. This Trust has been made more appealing since the introduction of the Residence Nil-Rate Band (RNRB) as the RNRB is also transferrable between spouses, therefore the PPT has remained IHT efficient.

For more information on the PPT and the RNRB, please see the WillFacts in the members area.

For IHT options for unmarried couples, please see the previously published article ‘Inheritance Tax Planning for Unmarried Couples’.

What can I do during lifetime?

The sooner the testator(s) realise they have an IHT liability, the more time they have available for lifetime IHT planning.

As previously mentioned in the last article, the main option available for lifetime IHT planning is by making Potentially Exempt Transfers (PETs). A PET is a transfer of value which is made during the lifetime of an individual; in other words, it is a gift of an asset and provided certain conditions are met, the PET can be exempt from IHT.

The conditions which must be met are:

• The individual must have made the transfer on or after 18th March 1986.
• It must be a gift to another individual or to a specified trust.
• No benefit from the transfer must be retained.
• The individual must survive 7 years for the full value of the asset to fall completely out of the Estate for tax purposes.

PETs can be made by either gifting assets directly to the beneficiary, or by placing assets into a Trust. If the testator(s) place assets into a Lifetime Trust, they must be mindful of the value of the assets going into Trust. If the Trust assets exceed the value of the NRB, a lifetime IHT charge of 20% will be immediately incurred, as well as periodic tax charges.

For further information on PETs, please see our previously published article on PETs.

(* all references to a spouse includes a civil partner)