2010 - 2017
Making a Will is not about wealth it is about making sure that what you want to happen to your estate does happen. It gives you the opportunity to specify such things as who will administer your estate, who will care for your children and who will receive specific items of your property.
Jim and Mary have assets worth �6,000,000 in total. Jim owns �350,000 of this and Mary owns the balance. If Jim leaves everything to Mary there will be no tax on his death as the spouse exemption will apply.
When Mary dies, there will be a tax bill to pay and this will be on their combined estates minus her nil rate band. Jim's nil rate band has been wasted by passing everything to Mary.
In contrast, if the wills are written so as to utilise the nil rate band in each will, the tax bill will be much lower. On Jim's death the amount of his nil rate band will pass into the trust and the balance pass to Mary tax free.
On Mary's death she will have her nil rate band set against her estate and only the balance will suffer tax.
There are various refinements that can be built into the trust. For instance, the house is frequently the main asset and it is possible to arrange matters so that half the house is placed into the trust.
However, due to potential problems with the Inland Revenue it is important to have professional advice so that the trust does not fall foul of the anti-avoidance provisions. In particular, the Capital
Taxes Office has indicated that where there is half a house involved in the trust it will consider that the surviving spouse residing there has what is termed an 'interest in possession'. The effect of this is to negate the tax-saving advantages of this type of trust unless further steps are taken.
At the time of writing, the problems can be resolved by setting up a debt or charge arrangement. In simple terms, this means that the trustees of the trust give the half share of the house back to the surviving spouse against a charge over the house, thus creating a debt between the two estates. The basic idea is simple but the paperwork required to execute it is complicated and needs careful drafting.
If nil rate band discretionary trusts are put into place, it is also necessary to convert a joint tenancy in the house into a tenancy in common.
Should you enter into such an arrangement and then move house it is essential to purchase the new residence on a tenancy in common basis.
For couples with more valuable estates, further tax-planning measures will be required and may involve the use of lifetime trusts or gift and loan schemes. Where there are funds over and above that required for daily living, use may also be made of the potentially exempt transfer regime.
In simple terms, that involves giving away sums of money and surviving the gift by seven years so that is not taken into account on your death.
Where tax is concerned, it should always be borne in mind that the security of the surviving spouse is more important than saving the tax bill on the second death. Nobody likes giving large sums of money to the taxman but there is no point in avoiding tax if your widow is forced to live in poverty as a result.