| The
Pre-Budget Report and Inheritance Tax
Following the recent Pre-Budget
Report by the Chancellor Alistair Darling on 9th October 2007, there has been
much speculation as to what role Discretionary Trusts now play in the mitigation
of Inheritance Tax (IHT). Where a married couple
or the surviving spouse has lived past 8th October 2007, up to double the nil
rate band can now be used on second death for IHT purposes. The level of nil rate
band will be that applicable at the date of second death i.e. if Mr dies in 2007/08,
when the prevailing nil rate band is £300,000 and all assets pass to Mrs
who dies in 2010/11, when the prevailing nil rate band should be £350,000,
the level of the survivors estate that will be free from IHT will be £700,000
(2 x £350,000). If Mr had utilised his nil rate band
on his demise by transferring £300,000 into his trust, then the total amount
of the estate that would be free from IHT on second death would be £350,000
i.e. only the single nil rate band. Adding back the first to dies nil rate band,
together they will have utilised £650,000 from the two estates (£300,000
+ £350,000). It would therefore appear on the face
of it that a married couple would be better off by passing assets to the surviving
spouse on first death. However, since the pre-budget report, Trust Matters have
held the view that this may not be the case, a view that is supported by our solicitors,
Davenport Lyons, following their review of the new legislation and it would seem
by many other tax planners. We still believe that discretionary
trusts have a vital role to play in estate planning during your lifetime and on
first and second death. This is based on the following points that apply to assets
held in trust; - All growth on these assets is outside
of your estate for IHT purposes.
If assets up to the nil rate band
are placed into trust on first death and it grows in line with the increase in
the IHT threshold then the same proportion of the total estate will be free from
IHT. However at the 10 year anniversary of the trust there will be a 6% charge
on any assets over the nil rate band at that time. This is known as the Period
Charge.
If these assets are passed on to the surviving spouse then any
growth beyond the double nil rate band will be in their estate which will increase
the IHT liability on their death. The tax charge is 40%.
- Any
capital gain (growth) on property from the time that it is placed in trust should
be taxed at 18% when it is sold (with effect from 6 April 2008) in line with recent
legislation. If this property had not been placed in trust then any growth could
be subject to 40% Inheritance Tax as it is growing within your estate
As
of 6th April 2008 any Capital Gains Tax payable is now at a flat rate of 18% and
this change will also apply to any capital gains tax payable by discretionary
trusts.
Where an estate is over a certain size i.e. already subject to
Inheritance Tax, any further growth in the estate will of course be subject to
IHT at 40%. In the scenario where the trust has not been utilised and the asset
that would have been conveyed into the trust was property you will be paying 40%
tax instead of 18% on any growth, plus 6% periodic charge (at the 10 year anniversary)
i.e. 24% compared to almost double that.
- These
assets are not counted as part of the surviving spouse's estate for later life
care means testing.
If all assets are passed to the surviving spouse and
later life care becomes an issue then this could have huge financial implications.
This
also applies to any assets placed into trust during your lifetime.
- These
assets are free from Inheritance Tax (IHT) for the trust period i.e. up to 80
years, if kept below the prevailing nil rate band on each 10th anniversary.
One
would hope that their children will be in the position to fully utilise their
own nil rate bands. Any assets that pass directly into their estates will therefore
simply be increasing the IHT that their children, your grandchildren, will have
to pay.
Assets passed to your children / grandchildren in trust are available
to them but are outside of their estates.
- These
assets can be protected from any divorce proceedings that your children / beneficiaries
may be involved in.
- These assets are protected
from bankruptcy proceedings that your children / beneficiaries may be involved
in.
- These assets are immediately available
to the beneficiaries to pay any outstanding Inheritance Tax liability on second
death.
- These assets can be accessed by
the surviving spouse after first death, as you are both beneficiaries of each
others trusts.
- Where an estate includes
a second property - gifting a proportion of this property to trust can reduce
the IHT liability on your estate in two ways.
i) The 7 year rule.
ii)
HMRC discount on jointly owned assets for IHT purposes by up to 15%.
- If
you have remarried or may remarry in the future following the death of a spouse,
utilising discretionary trusts can achieve greater IHT savings and ensure that
the destination of those assets is your children.
Assets
can also be placed into your LATESS Trust during your lifetime to reduce / eliminate
any Inheritance Tax on your estate and once in trust these assets will of course
also benefit from the above points. This currently applies to estates worth more
than £624,000.Another important point to bear
in mind is that it could be a mistake to rely on what could be very unreliable
legislation that could change at the whim of the current or future governments. |
