Inheritance Tax is usually paid on an estate when somebody dies. It's also sometimes payable on trusts or gifts made during someone's lifetime. Most estates don't have to pay Inheritance Tax because they're valued at less than the threshold (£325,000 in 2012-13). The tax is payable at 40 per cent on the amount over this threshold or 36 per cent if the estate qualifies for a reduced rate as a result of a charitable donation.
Since October 2007, married couples and registered Civil Partners can effectively increase the threshold on their estate when the second partner dies - to as much as £650,000 in 2012-13. Their executors or personal representatives must transfer the first spouse or Civil Partner's unused Inheritance Tax threshold or 'nil rate band' to the second spouse or Civil Partner when they die.
As part of any estate planning exercise you may ask us to undertake for you, we offer our clients several solutions to reduce the Inheritance Tax bill on your Estate which invariably involve the use of trusts.
Trusts can be set up either in your lifetime or on your death (i.e. via your Will).
Lifetime trusts can be used in the following cases:
Trust provisions can also be written into your Will and are therefore not set up until your death.
Note that not all trusts are effective for Inheritance Tax so the correct type of trust must be created.
Out three key trusts for mitigation of Inheritance Tax are:
Note (1) From October 2007 new rules have been introduced relating to the Transferable Nil Rate Band for married couples and civil partners. However, there are still many reasons for drafting tax-efficient Wills using trusts despite this concession.