The death of you or your partner can have an impact on the taxation of your/their estate, and taking into account current property values, more and more of us will be liable to pay inheritance tax on the estate. The Inheritance Tax threshold currently stands at £325,000 (frozen until 2019), over which all would be taxed at the 40% rate on any inheritance monies over the threshold amount (after funeral costs etc. are covered). This threshold can quickly be surpassed, even by people on modest incomes if there is a property involved in the estate. So, you ask yourself, is there anything my partner or I can do with our wills to minimise the amount of 40% inheritance tax our estate would be liable for? Yes, there is: you can prepare a NRBT which will help the living partner minimise how much 40% inheritance tax is due from your estate. This will arrangement is a helpful tool that comes into play when a married couple want to bequeath what remains of their estates to each other, whilst at the same time ensuring that each makes the best of their inheritance tax allowance.
Circumstances are often such that a husband and wife may have individual funds, but the funds are required by the living spouse to live in a comfortable manner after their partner's death. In such cases bequeathing funds to children and suchlike may not be a feasible option. Should an additional property be part of the estate, no tax would be payable on a property left by one spouse to the other, until the living spouse dies: at which point the total joint estate is liable for tax. Conversely, circumstances may be such that a spouse bequeaths funds to their family, and when they die, the £325,000 nil rate band tax amount to which they are entitled, plus that of the remaining spouse could then be utilised when he or she dies. However, if the entire estate is bequeathed to the living spouse, any advantage of the first spouse’s Inheritance Tax allowance is in effect lost.
A couple should prepare mirror wills so at the first spouses death, their will stipulates that a proportion of their Inheritance Tax zero tax rate allowance is put into a discretionary trust. Beneficiaries of the trust are listed and should include the living spouse. Thus, the trustees use the capital or income to provide for the living spouse.
If the living spouse doesn't need the bequeathed funds in the trust, then the money could alternatively be bequeathed to their children. The Trust will be ended/closed by the Trustees, usually when the other spouse dies, and any remaining funds and assets pass to the couple’s children/grandchildren. Hence full use of both spouse’s Inheritance Tax zero rate provision is made with such a will arrangement, and the living spouse has been able to make use of any capital/assets held in the trust: i.e. their entire joint estates. Other benefits of such an arrangement include asset protection from business creditors or divorce settlements, and trust assets aren't part of means testing should your spouse need nursing home care.