MCP Solicitors' Guide to Inheritance Tax
Following the rapid rise in property prices over the last few years more and more people are being affected by Inheritance Tax. However, it is possible to lessen its impact by using a correctly written Will. MCP Solicitors' Team of Wills & Probate lawyers have the knowledge and the skill to help you with this complex area.
Will I have to pay Inheritance Tax?
The present Inheritance Tax threshold is £325,000. This means that when someone dies no tax is payable if their Estate is less than this sum. However, if it is more than this sum then the excess is taxed at 40%, unless spouse or charitable exemptions apply.
I've heard that we can save tax if we own our home as tenants in common, is this true?
If you own your home as Tenants in Common then you can leave your share in the property to your children, with everything else being left to your spouse. For more information on this please visit our page on Buying Together.
If you die first, and your share of the house is less than the Inheritance Tax threshold, then no tax will be payable. This is the case even if the combined total of your share of the house and what is passing to your husband exceeds the Inheritance Tax threshold. This is because all gifts passing between husband and wife are exempt from Inheritance Tax.
However, the disadvantage of this is that the gift to your children must be "absolute" and there must be no explicit right for your spouse to continue to live in your half of the house. Otherwise, the Revenue will say that there is a "reservation of benefit" and the gift will not be valid in terms of tax saving. However, following changes announced on 9th October 2007 this method is less necessary.
Is the Inheritance Tax threshold different for a couple?
On 9th October 2007 the Chancellor announced that if the first spouse dies leaving everything to the survivor, then on the survivor�s death the Inheritance Tax threshold is doubled (i.e. the first spouse's unused allowance was passed on).
Previously, if the tax threshold was not used by the first spouse to die (because everything was left to the surviving spouse) then the threshold was lost. Now the unused balance of that first threshold can be used in addition to the survivor's own threshold - and it will be at the prevailing rate at the time of the survivor's death.
Why could a Will Trust Arrangement still be the most suitable method?
Will trust arrangements are still potentially very useful for Inheritance Tax planning and also for other practical reasons. Issues with leaving everything to the surviving spouse include:
- The surviving spouse could spend all the money, or even give it all away and the people that the deceased wanted to benefit might get nothing.
- The surviving spouse might get into financial difficulties and their creditors might take everything they have. Again, this leaves the people that the deceased wanted to benefit with nothing.
- The surviving spouse might remarry and leave everything to their new partner.
- The surviving spouse may enter means-tested long term care.
- The surviving spouse may lose the mental or physical capability to handle their own affairs.
- If the first spouse to die has any business or agricultural property eligible for Inheritance Tax Business Property Relief or Agricultural Property Relief then, unless certain things are done, the benefit of that type of valuable relief is lost.
