When married couples draft a will, it is now common practice for solicitors to provide that on the death of the first partner, their £285,000 IHT-free amount is passed into a trust for the family and the rest of the estate passes free of tax to their spouse.
This ensures that the surviving partner does not have to pay tax on the estate, and that it is not swelled when they die.
This ‘nil band rate trust’ is easy for the super-wealthy who are able to pay cash upfront, but for those for whom the family home makes up the lion’s share of the wealth, this is a lot harder.
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One popular solution is that the estate passes in its entirety to the surviving partner, who then gives some form of an IOU to the trust. This means that on their death, the money owed is taken out of the estate while having a knock on effect and reducing the amount of IHT payable.
However, a case just like this that was recently brought to court by the HMRC has highlighted a major pitfall in this type of tax planning.
The outcome saw the court rule that the IOU taken on by the second partner could not be deducted when calculating the tax due on the estate after his death, as the debt related to the wife’s half of the home – which was gifted to her many years before when she was made the joint owner.
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Gifting assets between spouses is usually free of Capital Gains Tax (CGT) and IHT, however the existence of the gift in the first place had implications on the IHT due after the death of the surviving partner.
Karen Harwood, senior manager at Target Accountants says: “This could affect thousands of families, as many people who have structured their wills to benefit from these tax savings will have also made gifts between each other at some point in their lifetime. It is still possible to achieve these tax savings, but advice should take account of such gifts, and the will should show sufficient flexibility as to how the gift is constituted.”
