Unmarried Couples
This is one particular group of individuals who are hit worse of all when it comes to Inheritance Tax. This happens in two ways:
- There is no spouse exemption available on first death and
- When the survivor dies you have only this individual’s nil rate band allowance (currently £325,000) before tax is payable. In the case of a married couple the family also receives the allowance of the previous spouse as will. This is called the transferable nil rate band allowance.
What can be done about it
The most obvious answer here would be to get married. But if the requirement to obtain the transferable nil rate band allowance is not the most romantic of reasons for marriage or if you have other reasons not to “tie the knot” there is a possible alternative by using some clever will planning.
Unfortunately, we cannot prevent a possible tax liability arising on first death if your estate takes you over the nil rate band. However, a well drafted will can minimise the tax on the death of the survivor. Let’s see how this works by firstly looking at what not to do.
The simple wills
George and Alex are unmarried, have no children and each have estates of £400,000. They have made wills leaving everything to each other.
- George dies first. As there is no spouse exemption everything over his nil rate band will be taxed at 40%. This makes a tax liability of £30,000.
- The rest of his estate, being £370,000 passes to Alex.
- When Alex dies the combined estate comes to £770,000. Everything over Alex's nil rate band is likewise taxed at 40% making a tax liability of £178,000.
- The total tax bill comes to £208,000. Had they been married the tax would have been £60,000 a tax saving of £118,000
The big problem here is the inability to take advantage of the transferable nil rate band allowance on second death. Now let’s look at a possible solution.
A Discretionary Trust Will
The facts are the same except that George does not leave his estate direct to Alex but through a discretionary trust in his will. What does this mean?
- George appoints a minimum of two trustees, being Alex and someone else he and Alex trusts.
- The will then sets up a trust which contains a number of beneficiaries including Alex.
- It is then down to the trustees to decide who actually benefits from the trust. In practice this will be Alex. Note the trust can include his share of the property which Alex occupies.
- When Alex dies the trust fund is not aggregated with the estate and the tax is reduced.
Let’s now look on the tax in this later scenario.
- On George’s death £30,000
- On Alex’s death all the estate over £325,000 will be taxed at 40% making a tax bill of £30,000
- This makes an overall tax bill of £60,000 being the same as if they were married.
A small proviso
The trust may face a ten yearly tax bill but even so the beneficiaries of their estates will be much better off with this trust than without it. Also the tax figures change should they have children but similarly there will be a significant tax saving with these wills.
If you would like to know more about how trusts can work for you why not come to one of my free seminars or contact me for an appointment.
