Inheritance Tax (IHT)
What is Inheritance Tax?
Your estate is everything you own at the date of your death. Including PEP’s., TESSA’s, ISA’s, bank a/c’s insurance policies (not held in trust), shares & investments, pensions, house contents, jewellery, cars, boats, holiday homes, the family home, etc..
We all have what is called a 'Nil Rate Band'. This is the amount we can have in our estate before Inheritance Tax (IHT) becomes due (i.e. free of tax). Currently (2009 allowance) this is £325,000. Anything above this amount is taxed at 40%.
Married Couples/Civil Partners
Gifts made between spouses or civil partners are exempt from inheritance tax. On the death of the second the unused portion of the first spouse or civil partner’s nil rate band can be added to the second – i.e. 2 x £325,000 = £650,000. Therefore on the second death the joint estate could potentially be free of tax up to £650,000*.
*Although this is free of inheritance tax the estate of the survivor is at risk should he/she need to go into nursing care. See and ‘What Can You Do’ below.
Couples not in a Marriage
You do not have this protection. If nothing is done about the 'nil rate band' of the first to go then it is lost (There is no spouse exemption and the nil rate band of the first to go cannot be carried over to the second). Therefore, everything above £325,000 (2009 allowance) will be taxed at 40%. Equally, on the death of the second everything above £325,000 will be taxed at 40% unnecessarily.
What Can You Do?
By using a Discretionary Nil Rate Band 80 year Will Trust an amount equal to the 'nil rate band' is given to the children (or other beneficiaries) 'in trust' and the Trustees will always regard the surviving partner during his/her lifetime as the primary beneficiary in relation to both the income and capital of the Trust Fund. There is, therefore, no risk of children benefiting and a surviving partner being left in financial hardship. The surviving partner can use any or all of the Trust fund for his/her benefit. This Trust is set up in both Wills and would need property to be owned as ’Tenants in Common’. See Protect your Home.
Setting up this Trust in both Wills gives the same protection from inheritance tax on the death of the second as in a marriage. i.e. Everything up to £650,000 is potentially free of Inheritance Tax. It also addresses issues regarding nursing care for the survivor and protecting your estate.
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