How to use a Discretionary Trust to reduce Inheritance Tax in the
|This example is done at 2006/2007 rates. The threshold is now £300,000 so the
potential saving is £120,000 not "114,000. For further information visit tenminutewill.co.uk
Most married couples, and civil partners, who make Wills simply leave
everything to each other. However, that is not always the best thing to do, and it could mean that long
term beneficiaries end up paying far more Inheritance Tax than is necessary..
If your estate (your savings, house, possessions, any insurance policy payouts,
etc) is worth over £285,000, then Inheritance Tax is charged at the rate of 40% on any amount above this figure.
That may sound a lot of money but just add up the value of your house, your life insurance etc.
Many people exceed the current Inheritance Tax threshold of £285,000 who
would not have done so a few years ago simply due to the high rises in property prices in recent
If a husband and wife make Wills leaving their estates to each other, there’s
no tax payable on their estate when the first one dies. However, a tax liability arises when the second partner
dies. Often a large inheritance tax bill is inevitable when the estate is finally passed on to the children. This
means that your family and loved ones could lose a sizeable part of their inheritance.
Proper planning using Discretionary Will Trusts can reduce or
even remove the Inheritance Tax liability!
Mr & Mrs Johnson (or a civil partnership equivalent) have an estate - including home, cash, investments,
life insurance, etc, worth £570,000. They wish to give everything to each other when the first partner dies, and on
the second death, they wish everything to go to their children. Mr Johnson dies first and leaves everything to his
wife. There is no tax payable on his death, because gifts between spouses are exempt from Inheritance tax.
However, by only making "normal" wills, the problem arises when Mrs Johnson dies.
Tax is payable on Mrs Johnson's death as follows:
Mr Johnson's assets of £285,000 pass to Mrs Mrs Johnson on his death. On Mrs Johnson's death, all her
assets pass to their children. Tax is payable at 40% on amounts over £285,000, therefore Mrs Johnson's estate will
incur a tax charge of £114,000. This means that their children will only receive £456,000, instead
This Inheritance Tax Bill COULD have been avoided!
By leaving everything to his wife in his Will, Mr Johnson wasted his tax-free allowance of £285,000, and more
tax was paid than was necessary.
Inheritance tax would have been avoided had Mr Johnson simply left his assets directly to the children on Mr
Johnson's death as according to UK law, Mr & Mrs Johnson each own 50% of their joint estate. This way Mr
Johnson's tax free allowance would be used.
However there is a problem leaving his half directly to the children in that it could leave Mrs
Johnson short of money. She may even have to sell the marital home, and her standard of living could suffer
badly. She would also have no control over the money held by the children.
A better way of avoiding Inheritance Tax is to use a Discretionary Will
By incorporating a Nil Rate Band Discretionary Trust into his Will, Mr Johnson can enable Mrs Johnson to
continue to benefit from their estate, while minimising, or in this example eliminating, inheritance tax.
Discretionary Will Trusts work by making use of the Nil-Rate band (£285,000) of BOTH
spouses, rather than only that of the surviving spouse (as is normally the case).
It works like this
Assuming that the total value of their estate - including home, cash, and investments - is £570,000. In his
Will, Mr Johnson puts his share of the estate (£285,000) into a trust which takes effect on his death. A loan of
£285,000 is made to Mrs Johnson from the trust, in return for an I.O.U. from her. There is no interest to pay on
the loan, which will be paid off on her death. On Mr Johnson's death, Mrs Johnson's estate equals £285,000.
However, she will also have access to the trust money. Giving her a total of £570,000.
On Mrs Johnson's death, her assets pass to her children and the loan is repaid out of her estate. Therefore, the
total value of Mrs Johnson's estate was £570,000. Less the I.O.U. of £285,000 from Mr Johnson's Trust, leaving Mrs
Johnson with a net estate of £285,000, which is at the Inheritance Tax threshold, therefore no tax is
due. The children, therefore, get £285,000 from Mr Johnson's Trust plus £285,000 from Mrs
Johnson's estate. Because both these sums are just at the Inheritance Tax threshold, there is no tax to pay. The
children receive a total of £570,000 and the taxman receives nothing.
Setting up a Discretionary Trust Wills takes a little more time and costs slightly more than an average Will,
but for most people the advantages are well worth the effort.
Although they ARE a little more complicated than normal Wills it is NOT necessary to incur the costs of
using a solicitor.
You can make a Discretionary Will Trust Online AND download a FREE Guide to Discretionary Trust Wills
A pair of Discretionary Will Trusts Online costs just £79.95 or less than £40 each.
Read more about making Discretionary Wills Online here