The first slice of any individual's estate, including gifts, which they have made in the last seven years, is generally free of Inheritance Tax (IHT). This slice, referred to as the 'nil-rated band' (NRB), was increased to £300,000 from 6 April 2007. IHT is charged at 40% on any amount, which exceeds this NRB.

However, upon the death of the first spouse, married couples often waste one of their NRBs. Many couples choose to leave all of their estates to the surviving spouse on the first death, e.g. "I leave all of my estate to my wife provided that she survives me”. There is no IHT when you leave everything to your Spouse (IHTA 1984, s18), but everything they subsequently leave over the ‘NRB allowance’ figure of £300,000 will be taxed at 40%. Therefore, an extra tax charge of up to £120,000, on the death of the survivor, could have been saved if both NRBs had been used. The NRBs of both spouses are normally utilized by a provision to create a ‘discretionary trust’ in each of their wills. This kind of trust is called a 'nil-rated band discretionary will trust'. Avoiding IHT with a ‘discretionary will trust’ is perfectly legal and leaves you in control of your assets and income while you are alive, whilst allowing both partners to leave £300,000 each, free of IHT.

The ‘Will Trust’ arrangement is two separate Wills, each with a direction that the first partner to die may leave up to the NRB (currently £300,000) ‘in trust’ for the beneficiaries of the Trust (normally the surviving partner and the children). The trustees dictate how these assets are used or disposed of and therefore can appoint benefits to the surviving spouse such as income from the trust, the ability to continue to live in the family home and as much of the trust capital as they need. However, when the second partner dies, any funds remaining in the trust may pass to the children free of IHT. However, it is very important to note that by using a discretionary trust, whilst the surviving spouse is able to enjoy these benefits from the trust, the assets will not fall into that spouse’s estate for the purpose of calculating IHT. At the discretion of the trustees, the surviving partner can spend all the capital in the trust. However, this can be arranged as a loan, which has to be repaid to the trust upon their death, with interest, thus potentially increasing the amount that passes to the other beneficiaries (normally the children) beyond £600,000 (two times the NRB).

In summary, the net effect of the whole arrangement is that instead of leaving £300,000 tax-free to the beneficiaries of your joint Estate, you can leave £600,000. Thus creating an IHT saving of £120,000. Please Note: It is very important to seek professional advice when seeking avoid Inheritance Tax via Will planning or trusts. Speak to one of our consultants on FREEPHONE 0800 032 1419