Steven and Tracey, from Sudbury, ask: "You have mentioned in one or two columns how having a discretionary trust in the wills of a married couple can save inheritance tax when used in conjunction with part of the family home. Could you explain how this works?
Most couples make wills leaving their estate to each other. So, when one partner dies, the survivor owns everything.
Unfortunately, with rising house prices this means that when they die, their total estate is likely to be well above the nil rate band for inheritance tax – currently £285,000.
Their beneficiaries will therefore pay inheritance tax at 40 per cent on anything above that threshold. However, by including a discretionary trust in each of their wills, a couple could make use of two nil rate bands.
On first death, instead of everything being inherited by the partner, some of the deceased's assets are held in a discretionary trust created by their will.
Subject to certain rules, the surviving partner will still
have access to those assets. The trust assets can be investments, such as investment bonds, or even a part of a house. To use their house, the couple would need to have the joint ownership of their home changed to 'tenants in common' ownership.
They would then each own half of their house, rather than owning it jointly. This means that instead of all of the house being owned by the surviving partner on first death, they would only own their half.
The half owned by the deceased would pass into a trust established by their will. The deceased's remaining assets would pass to their spouse with no tax due to the inter-spousal exemption being applied.
By using a special IOU clause, the trustees could then 'lend' their half share of the house to the surviving spouse. On their death, the IOU would be called in by the trustees, and the half-share of the house would be restored to the trust.
It would then pass to the ultimate beneficiaries outside of the joint estate, with no inheritance tax being due on that share of the house at all.
Contacting NickNick Plumb is an independent financial adviser. Send your questions to Nick at Bright Financial Planning, 58 Station Road, Sudbury, Suffolk, CO10 2SP, email them to
nickplumb@aol.com or telephone Nick on 01449 675674.
Nick's answers to reader questions in this column are provided only as a general guide and do not constitute personal financial advice. For any readers requiring specific advice on their own circumstances, Nick is happy to offer a complimentary initial meeting.
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