Avoid the Death Trap

Avoid The Death Trap

 

While the Government ignores pleas to overhaul the hated 'death tax', there are still ways to reduce a potential bill.

Like many respondents to Financial Mail's survey, John Pebody, 72, a retired local government officer, and his wife Patricia, 75, a retired legal secretary, plan to use trusts to reduce the amount of their estate the taxman finally grabs.

The couple's home in Linton, Cambridgeshire, is worth about £400,000. Without IHT planning, the value of their estate over the nil-rate band threshold of £285,000 would be taxed at a flat 40 per cent on the second death. Assets pass free of IHT between spouses.

John and Patricia, who have two children, Diana, 50, and Malcolm, 46, took advice from their solicitor before setting up discretionary will trusts. These enable both spouses to use their £285,000 tax-free limit.

Couples interested in this type of trust must first change the ownership of their home from joint tenants to tenants in common.
With joint tenants, when one partner dies, their part automatically passes to the other tenant.

With tenants in common owner-ship, homeowners can use discretion over who they pass their 50 per cent of the home to - perhaps their children.
Discretionary trusts are then written into the couple's will so they can pass their half of the value of the home into the trust on death, taking advantage of two £285,000 nil-rate allowances for IHT.

Nick Lincoln, independent financial adviser at Wilson Dean in Borehamwood, Hertfordshire, says more couples are looking to use discretionary will trusts. 'This type of tax planning is permitted by the Government,' he says. 'But it is important to review any trust planning with a solicitor or financial planner regularly to ensure it is within tax law.'

Clive Scott-Hopkins, a retired independent financial adviser with Tbwry Law, believes it would be fairer to allow individuals to have a £285,000 nil-rate band each, rather than charge it on an estate.

'Spouses could then pass on their nil-rate band allowance to the surviving spouse,' he suggests.

'There would then be no need to set up discretionary will trusts and a couple's tax-free limit would be £570,000. This would take most homeowners out of the IHT net.'

Anger at the outmoded, unfair inheritance tax system is growing. Financial Mail has received thousands of I contributions to its 'inheritance tax debate', which asks readers how it should be reformed. We will publish the results shortly.