Inheritance Tax Planning Will
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This area of planning is called a Discretionary Will Trust and is a legitimate area of tax planning that is often overlooked. The average cost of preparing this type of tax planning is £1,000, however in some cases up to £2,500 has been charged.
The first slice of an individuals estate, including gifts, which they have made in the last 7 years, is generally free of Inheritance Tax. This slice, referred to as the 'Nil-Rate Band' was increased to £300,000 from April 2006 to April 2007. This figure will rise to £300,000 from April 2007. Inheritance Tax is charged at 40% on the amount which exceeds the 'Nil-Rate Band'
The 'Nil Rate Band' is often wasted by married couples or civil partners on the death of the first spouse. Where all of the estate is left to the surviving spouse, the deceased nil rate band is not used, except to the extent that the individual made certain gifts during his/her lifetime.
Currently, an extra tax charge of up to £120,000 on the death of the survivor could be saved if the Nil Rate Band is used. This figure will rise to £120,000 from April 2007 tax year. It is therefore far more tax effective to use up the nil rate band of both partners by creating a Discretionary Trust in the will. This kind of trust is called a 'nil rate band discretionary trust'.
The surviving spouse can be included as one of the beneficiaries of the trust. The Trustees can be empowered to pay out income or the underlying capital to the surviving spouse at their discretion. Thus the surviving spouse can enjoy both the capital and the income of the trust. However with this type of trust the capital is not added to the estate of the surviving spouse on his or her death and is not charged Inheritance Tax on that occasion.
Leaving a 'letter of wishes' with the Will leaves a guide to the Trustees. Such letters are quite usual and are read alongside the Will, though they are not binding on the Trustees. It is quite normal for such a letter to state that the first aim of the trust is to ensure that adequate provision is made for the surviving spouse / civil partner for the remainder of their days. The letter will usually say what is to happen thereafter, such as passing assets to the children.
The Executors will pass the assets, which are to be the 'trust property' to the trustees. Very often the trustees are also the executors. In this case they simply own the property as trustees, as opposed to holding it as executors.
Upon the first death the executors hand over the property to the trustees. They will need to register the trust with the Inland Revenue who will send a short form to the trustees to complete. This form will enable the Inland Revenue to register the trust.
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