IHT-Solutions

Another reason why inheritance tax is pro-marriage

It's now the Wedding season. It is difficult now to drive around your own local area on a Saturday afternoon without seeing at least one Wedding party.

And guess what, the Government wants to add to the merriment by allowing substantial inheritance tax free gifts to be made to the newly wed couple (civil partners). I'm not sure the Government sees it like that but dependent on the circumstances of a newly married couple's family, it is possible that they could receive a sum of up to £40,000 as tax free gifts from both sets of parents (£5000 exemption per parent) and £20,000 from a possible four sets of grandparents (£2500 exemption per grandparent).

In addition, each guest at a Wedding can make a gift of up to £1000 tax free.

Evidently, parents and grandparents can make gifts to the exemption level for each child of the family who marries or enters into a civil partnership. As such, if they can afford it, the family with the largest number of children essentially gets an additional tax advantage by exercising fully the IHT marriage exemptions available to them.

In simple terms, if on a marriage, say just two parents and two grandparents are able to make use of the full IHT marriage exemption, then a tax-free gift of £15,000 can be made with an effective potential inheritance tax saving of £6000. (40% of £15,000).

Of course, once you take into account the average cost of a wedding today, the potential tax savings are quite small but even so, they should not be forgotten.

As a final aside, I am fairly sure that there are very big tax savings to be made if a child was to enter into multiple weddings followed by quickie divorces in one of States with a liberal marriage code in the USA. Not that I am advocating such a solution, of course.

2nd generation tax-planning and the Deed of Variation

I have often discussed the great benefits of utilising a Deed of Variation within 2 years of a death to save inheritance tax.

One ordinarily utilises the Deed of Variation (DOV) to ensure the use of a nil-rate band upon the first death of a spouse within a marriage.

The DOV can also be very useful in arranging the payment of a specific gift to a donee by the beneficiary named under a Will. The great benefit in this scenario is that the amended gift is treated as a gift by the deceased rather than the original beneficiary and as such there is no requirement to wait 7 years to make the gift tax-free.

One use of the Deed of Variation which is certainly becoming more prevalent in my experience is what I would call the 2nd generation tax-planning DOV.

By way of example, I would set out what is a fairly common scenario. An elderly person in their 80s has died and leaves a net estate of £400,000 after tax. The estate is divided equally between the two children of the deceased in their early 60s who are both homeowners with reasonable pension provisions in place.

Due to house price rises in recent years, both of the children of the deceased already have estates which are
worth substantially in excess of the IHT nil rate band. By virtue of their deceased parent's Will as stated above, they will now receive a further £200,000 into their estates which will potentially add a further £80,000 IHT liability (40% of £200,000) to their own estates.

The IHT solution is the Deed of Variation under which the parent's legacy can be directed away from the beneficiary child and instead placed into a discretionary trust which falls outside the estate of the surviving child. As the child can remain a potential beneficiary of the Trust created they can still benefit from the Trust whilst making sure that the legacy from their parents will not become taxable within their own estates.

As always, a suitably qualified professional adviser should always be employed to ensure that the documentation is correctly drawn up to ensure that you benefit from the potential tax savings.