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Following on from our latest column article in which Zahra Siddiqui provided a review as to what happens if you die without a will, Zahra has now updated the position regarding inheritance tax (IHT) planning following on from the announcement by the Chancellor in his Pre-Budget Statement.
The old law
Married couples would often leave the entirety of their estate to the surviving spouse on the first death. The deceased's IHT nil rate band would be wasted. A Discretionary Trust would often be set up on the death of the first spouse in order to make use of the deceased's nil rate band allowance. The funds held in that Discretionary Trust could then be managed for the benefit of the survivor but without the funds forming part of the survivor's estate for IHT purposes on his/her subsequent death - hence a tax saving. Potential problems often arose if the main asset was the family home, particularly if the Will wasn't properly drawn or if the arrangements put in place following the first death were not properly documented.
The new law
On 9 October 2007 the Chancellor announced in his Pre-Budget Statement a major change to the IHT rules - on the death of the first spouse any unused IHT nil rate band can be transferred to the surviving spouse (or civil partner) and can then be used by the survivor on his/her subsequent death (at the rate applicable on the second death).
In some cases it might be better not to make any use of the IHT nil rate band on the first death but instead allow the surviving spouse two full nil rate bands on his/her subsequent death.
It might be tempting to think that a married couple can now put in place simple Wills now that the IHT savings will effectively arise automatically under the new rules but in practice there will be very few situations where this particular course of action will be appropriate. Specialist advice should still be taken to ensure that the married couple maximise the tax saving opportunities and put in place a structure which will be appropriate given their particular circumstances.
Reasons for making a properly structured Will
If you have business assets or agricultural property (which qualify for IHT relief) you can include provisions in the Wills which effectively allow you to secure double tax relief.
If you are concerned about passing an IHT problem on to your beneficiaries you can include a Discretionary Trust in the Wills which will provide them with long term financial flexibility.
You might be concerned about beneficiaries losing part of their inheritance in the event of a divorce. Again, a properly structured Will can provide them with protection.
Setting up a Trust under the terms of a Will can facilitate income tax savings after you have died - your children, for instance, may be able to make use of their own children's tax allowances.
If you are concerned about the surviving spouse requiring long term care you can set up a Trust under the terms of your Will to provide a degree of asset protection.
If you are party to a second marriage you may wish to set up a Trust to support your surviving spouse whilst at the same time controlling the ultimate destination of your estate.
If the surviving spouse is likely to re-marry it may still be prudent to include a nil rate band Discretionary Trust in the Wills.
For advice on the implications of these new rules or to discuss the options now available with regard to structuring Wills please contact Zahra Siddiqui on zahrasiddiqui@georgedavies.co.uk or on 0161 234 8861.
Disclaimer
The content of this article does not constitute legal advice. You should always consult a suitably qualified lawyer for professional advice about any specific legal matter of concern to you. George Davies Solicitors LLP, its partners and staff do not assume any responsibility for information contained within this article and disclaim all liability relating to such information.
George Davies Solicitors
George Davies was highly rated, in the North West, in 11 different categories of the 2007 Legal 500 review and in Chambers and Partners UK Directory. They specialise in all aspects of commercial law and boast a specialist niche Construction team with experience in a full spectrum of construction law services. The team was commended in the Legal 500 for its breadth of expertise, efficiency, and ability to provide specialist advice. Chambers specifically mention its achievements in Construction. Catherine Kay can be contacted on 0161 234 8861 or emailed at catherinekay@georgedavies.co.uk. http://www.georgedavies.co.uk/
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