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Wills and Inheritance Tax Planning in the Age of Stealth Taxes

Will drafting has long been a key planning tool to mitigate Inheritance Tax (IHT), but it is especially important in an age of stealth taxes! Well drafted Wills can help to maximise the value of all these:

  • NRB: the IHT Nil Rate Band (still £325K, frozen for 19 years to 2028) and any transferable NRB (TNRB) from a late spouse)
  • RNRB: the new Residence Nil Rate Band (frozen at £175K for 7 years until 2028)
  • Spouse exemption: invaluable for use, at the right time, by outright gifts or life interest trusts
  • BPR & APR: Business and Agricultural reliefs, which can often be “banked” on a death, by a trust, rather than left to a spouse
  • The 36% lower IHT rate where 10% of a net estate is left to charity – a much under-used relief, especially when looking at the 10% after deducting any NRB and TNRB, so that in many cases a charity gift can increase the net estate.

Why does the stealth tax regime make a difference? 

All the frozen figures above, with another five years at current levels, are designed by Government to increase the amount of IHT raised. The IHT “tax take” is increasing by one third in the five years to 2027, so that’s lots more people paying much more IHT as a result.

This tax squeeze will affect mid-sized estates greatly, as more estates are caught for more tax with increases in asset values. Then the £2m threshold for RNRB (above this value the allowance is tapered away) is also frozen until 2028, meaning estates up to £2.7m (and over that) can lose out. RNRB, where it applies to two estates, can save IHT of £140K (or even up to £280K if both a couple are widowed and plan carefully).

Considering the Residence Nil Rate Band

Everyone with a home and descendants should consider how RNRB works, if the estate may be able to claim this allowance, to ensure the right property interest is owned in the right form to qualify (one form of trust on the death of a first spouse may enable a second spouse’s estate to claim). Will drafting needs to take into account the right people “closely inheriting” at the end of the day, either outright or through the right form of trust, and IPDI (Immediate Post-death interest) trusts which can have great flexibility are important here.

Flexible Wills or variations? 

Many clients wish to “keep it simple”, but a “simple Will” risks missing the opportunity to mitigate IHT as well as adapt to changing personal and tax situations. It’s always best to have some flexibility in a Will, with a separate letter of wishes to guide the executors/trustees in the exercise of their discretion, to adapt to new tax opportunities or issues like divorce, addiction or health issues among beneficiaries.

I will suggest a few trust ideas worth considering, although best solutions always depend on personal circumstances, but if the benefits are outlined clients can choose whether to accept the advice. A simpler option may be chosen but cannot always be put right after death.

Many anticipate doing a deed of variation within two years of death, a great option if things need to be put right or a better option implemented, but it’s not a good plan to rely on doing this. Circumstances and individual health may make it difficult for some to consent to changes, after the event, and there’s always a risk of someone being “bloody minded” and not cooperating! Variations also don’t have all the same tax results as wills done in lifetime. So, what might be useful?

 Spouses (married couples and civil partners) should consider:

  • A Discretionary Trust for the NRB (NRB D/T), any TNRB, RNRB (which can be secured by creating a special fund out of the Will trust within two years of death) to use these allowances on the death of the first spouse; taking the assets out of the tax net on the second death including the estate considered for the £2m RNRB threshold.
  • Including BPR & APR assets in the NRB D/T, so that any relief is “banked” on the first death, not least in case the farm or business is sold or given away by the time of the second death, or the nature of the business or the tax rules change (e.g. hybrid businesses which are currently “mainly trading” but may not always be). The great thing about BPR & APR is that the assets qualifying for 100% relief can be added to the trust on top of the NRB etc. and any with 50% relief can double the benefit (e.g. land owned by a partner outside a partnership, worth say £600K can be put into a D/T using £300K of the NRB.)  This is especially valuable in planning for RNRB as business and agricultural relief are disregarded in looking at the £2m threshold.   
  • A Flexible IPDI trust of the residuary estate, to claim spouse exemption but allow for post death planning, is then the ideal addition to an NRB D/T.  You take the maximum amount out by “using” the allowances you can on first death, then have no IHT to pay on the rest, but can take capital out of that trust during the lifetime of the survivor. That may then save more IHT if the second spouse lives for more than seven years.  

Anyone leaving a property (or share of one) in trust, e.g. to a co-owner, should carefully consider the options of a life interest, right to occupy, discretionary trust or outright gift with an expression of wish. These have different IHT effects that  will need to be taken into account.

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