Trust in your future - Tax efficient vehicles
Even though the government has simplified the situation on inheritance tax (IHT) for married couples and registered civil partnerships who own more valuable houses, are there still merits in setting up trusts? The choice of trusts isn't simple any more. Wealthy parents may also wish to consider giving executors as much flexibility as possible in their Wills as to which trusts should be created, as the situation is changing so fast that it is impossible to predict what trust, if any, will be most suitable in the future.
The need to make provision for an IHT strategy centres round those with assets below or hovering near the IHT threshold. If you are cohabiting, then marriage or a registered civil partnership still has the potential to save a considerable sum of money in tax. It is still a very effective way to ensure that you do not have to pay IHT when the first of you dies.
If you are married or in a registered civil partnership and have already made provision for tax planning in the form of setting up nil-rate band trusts in your Wills, you may be left wondering how the changes announced to the IHT system could affect you. The main thing to remember is the importance of obtaining professional advice to assess your particular situation before any action is taken.
For couples with assets likely to appreciate at a faster rate than the nil-rate band or with assets which qualify for relief from IHT, such as business assets or agricultural property a discretionary trust is likely to be the preferred option.
Since the nil-rate band is now expected to be increased in relation to average house-price rises, couples who have assets increasing at a faster rate may be better off setting up trusts. If a Will establishes a discretionary nil-rate band trust, then the executors can choose not to set up that trust if they think it is better for the survivor to inherit outright. They have two years in which to decide and if they eventually decide against a trust the survivor's estate would attract two nil-rate bands.
Depending on your situation people who use trusts should probably have more than just their home in the way of assets. Putting part of the family home into a nil-rate band trust is not a guaranteed way to reduce the IHT bill and HM Revenue & Customs could decide to challenge such arrangements. Instead, these nil-rate band trusts, if used, should be for assets such as shares and other property investments.
Wealthy married couples and registered civil partnerships could also create lifetime versions of nil-rate band trusts by putting in assets equal in value to the prevailing IHT allowance (currently £325,000) every seven years.
Lifetime nil-rate band trusts are much less often made by single people, as the main reason to do this would be to stop a child getting the assets straight away. But if this is not an issue, it may be more beneficial for single people to make outright gifts rather than using a trust as they are not, like couples, trying also to provide for a surviving partner.
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Levels and bases of, and reliefs from, taxation are subject to change.