Inheritance tax – is it still a concern?
Inheritance tax is the hot topic of the moment, with wildly differing political party
proposals constantly hitting the headlines. The Chancellor has attempted to take the heat out of the political situation in his Pre-Budget statement. He made much of his generosity in ‘doubling’ the current inheritance tax threshold from £300,000 to £600,000,which removes the majority of homeowners from its reach. He backdated this increase indefinitely so that those already widowed will be able to benefit from their deceased spouse’s unused allowance.
However, the Chancellor has not been as generous as might first appear. He has rewarded those who have not planned ahead.
Couples who had already consulted a solicitor will commonly have put in place Wills, which utilised their individual nil-rate allowance for inheritance tax, usually by means of a discretionary trust which named a number of potential beneficiaries, including the surviving spouse or partner. With the right paperwork, married couples and civil partners could, therefore, already pass on between them assets up to £600,000 free of inheritance tax and still ensure the second of them to die had use of all the joint assets during their lifetime. This saved families considerable amounts of inheritance tax so was not popular with the Inland Revenue.
Now that the dust has settled on the political front there has been much publicity in the press that Wills involving such a nil-rate band discretionary trust are now unnecessarily sophisticated. There have also been scare stories about how much it will cost to rewrite these Wills and that solicitors will once again benefit from the law changing.
In fact, there are good reasons why such Wills are still worth having in place. A discretionary trust did not just have tax advantages. Families can be complicated, and a discretionary trust is a very flexible mechanism for ensuring that future perceived problems are avoided.
Worried parents can shelter assets for the next generation against the risks of divorce or bankruptcy of one of the beneficiaries. The differing future needs of grandchildren can be anticipated. Wealth can be preserved rather than swallowed up by nursing home costs. Vulnerable beneficiaries, perhaps children with learning difficulties, can be protected. The children’s inheritance can be ringfenced against the claims of a future second spouse.
When a person writes his or her Will incorporating such a discretionary trust, he or she also writes a letter to the future trustees setting out their wishes for the administration of the trust. This direction can be as detailed as desired and allow for any number of contingencies. The trustees of a discretionary trust are able to give capital or pay income to any of the beneficiaries as and when they so wish. The choice of trustee is therefore very important to ensure the person’s wishes are followed.
With all this in mind, couples should not rush to tear up their existing arrangements but should take proper advice and review all their circumstances. The decision may be to leave well alone or indeed still to put a discretionary trust in place, despite the Chancellor’s best efforts to discourage their use.
Monday, 05 November 2007
