30th September
general
But if you are married, or in a civil partnership, there are several advantages to creating a joint financial plan. This has implications around income tax, capital gains tax, protection, and retirement planning.
In this guide, we consider how joint planning can benefit you from an Inheritance Tax (IHT) perspective.
Making Use of Both Nil Rate Bands
As an individual, you have a nil rate band of £325,000. This is the amount that you can pass on when you die before your estate is subject to IHT.
However, transfers between spouses are exempt. This means that you can pass on the full value of your estate to your spouse without any IHT being payable on first death.
Of course, IHT could still be payable on second death. There are some exceptions to this, for example if your spouse has remarried or reduced the value of the estate by spending or gifting.
On second death, the surviving spouse effectively has two nil rate bands to set against their estate. This means that as a couple, you can pass on up to £650,000 free of IHT. This would be reduced if assets passed to anyone else (other than a charity) on first death.
Careful planning is required in the case of second marriages, to ensure the available nil rate bands are not lost.
The nil rate band has remained static now for over ten years, while asset values and house prices continue to rise. This means that if the surviving spouse dies many years later, the nil rate band might not go as far towards eliminating the estate’s IHT liability. One possible solution to this is to set up a trust on first death, as the surviving spouse can still have access to the money, without the growth being added to the value of their own estate. Trusts are a complex area and it’s important to seek advice, particularly around potential tax consequences.
Owning Property Jointly
The Residence Nil Rate Band (RNRB) was recently introduced to provide additional relief from IHT against the value of the family home. This extends the nil rate band by up to £175,000 per individual.
There are a number of caveats to this, but the main conditions are:
Passing on a jointly owned property effectively doubles up on the RNRB, as couples can claim relief of up to £350,000 against the value of their home.
Ensuring Death Benefits are Paid into Trust
If you die, your pension, death in service benefits, or life insurance can be paid out to your chosen beneficiaries.
In the case of pensions, and some company death in service schemes, no IHT will apply when the benefits are paid out. But if your spouse receives a lump sum, this could substantially increase the value of their estate, and therefore their IHT liability.
Life insurance benefits are normally included within your estate. In a similar way to other assets, the payout is not subject to IHT if paid to a spouse, but may be taxed if it is paid to anyone else (assuming your total estate exceeds the nil rate band).
Any of these events could create an IHT liability for a family whose assets would otherwise not exceed the nil rate band.
Having the benefits paid into a trust can help to reduce the tax. No IHT applies at the time of the payout, and the surviving spouse can still access the money providing they are named as a beneficiary.
Some IHT may be payable if the trust holds more than the nil rate band at each ten year anniversary. Additionally, trusts are usually taxed at higher rates than individuals. Advice is recommended if you are thinking of setting up a trust.
Regular Gifts
You can gift up to £3,000 per year, which is immediately outside your estate.
You can carry this forward by up to one tax year, so if you haven’t made any previous gifts, you could give away up to £6,000.
Your spouse has the same allowance, which means that you could jointly gift up to £12,000 in the first year, followed by £6,000 per year thereafter. Over time, this can create significant IHT savings.
Giving Away Lump Sums
The nil rate band is also relevant when making lifetime gifts.
If you give away a lump sum, the amount (over and above any allowances) remains in your estate for 7 years. So if you give away £325,000 and die 5 years later, you have effectively used up your nil rate band.
If you gift money into a discretionary trust, IHT may be payable immediately. If the gift is over £325,000, the tax charge is 20% on the excess. A further 20% would be payable if you died within 7 years. Additionally, periodic charges apply every ten years if the trust’s value exceeds £325,000. A couple could set up two trusts to benefit in full from both nil rate bands.
Joint planning can effectively double the allowances available, resulting in substantial tax savings.
Remember, common law marriages are not legally recognised in the UK. To benefit from joint nil rate bands, you need to be legally married. While it is not the most romantic of reasons to propose, it may be worth considering if you have a substantial estate.
Please don’t hesitate to contact a member of the team to find out more about estate planning.
