Whilst nil rate band discretionary loan trusts are often the chosen course by practitioners within Wills to save clients inheritance tax, they are not the only option. I have seen a number of married clients recently whose joint estates exceed the nil rate band (currently £285,000) but not by a substantial amount, often by about £75,000. In addition, the vast majority of their estate is tied up in their matrimonial home.
I advise that on the basis that they at least survive until the 6th April 2007 when the inheritance tax threshold is raised to £300,000, their tax liability will be approximately £25000, on the death of the survivor of them. The perceived complexity of setting up a nil rate band discretionary loan trust for the relatively small potential tax liability means that the clients are not always keen to go down the discretionary trust route.
As an alternative, I have proposed Wills in the following manner which has found favour with some clients:-
For the example the following assumptions are made.
The value of the joint married couple's estate in question is £360,000 of which the matrimonial home is valued at £300,000.
The nil rate band is also £300,000 leaving a potential liability on the second death of £24,000 (40% of £60,000.)
The solution is for the matrimonial home to be held as joint tenants in common so that each party owns a 50% share in the property each and for the Will to give a gift of a percentage of the share of the property owned by the first party to die (say 40%) to the children of the couple.
In this example, the children on the first death will own a 20% share of the whole property (40% of one-half with a value of approximately £60,000). This, therefore, reduces the value of the survivor’s estate by a sufficient sum to avoid inheritance tax whilst still enabling the survivor to remain in the matrimonial home. The share owned by the children will be too small for them to force a sale of the property without the consent of the survivor
If the survivor wishes to downsize, then the children will get their relevant cash sum out of the net sale proceeds but the survivor will still generally have sufficient assets left to live comfortably.
As the element of the property left to the children is relatively small, no real capital gains tax issues arise for the children.
Evidently, each case must be judged on its own merits and, in particular, a couple must be confident that they are comfortable with making a gift of this nature on the first death and that they otherwise have sufficient financial resources and pension income in place for the survivor.
Taking all these points into consideration, Wills of the type envisaged by this post (and indeed a Deed of Variation within two years of a first death) do offer a relatively simple inheritance tax solution for smaller, property heavy estates.
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