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“Higher, Lower” – How Your Will Structure Affects IHT

“Higher, Lower” – How Your Will Structure Affects IHT

Inheritance tax has hit the papers once again in recent weeks, with it being reported that Bruce Forsyth left his £17m fortune to his wife ‘to avoid inheritance tax’. Various reports then go on to describe how his wife can distribute various funds ‘tax free’, with some of these reports being inaccurate and misleading with regards to the sums involved.

So, what are the inheritance tax (IHT) rules? Simply put, a person can leave up to £325,000 free of IHT and thereafter IHT is payable at 40%. Transfers between spouses and civil partners are also free of IHT. However, as with most tax, it’s not as straightforward as that. As well as a person’s own nil rate band, executors can claim a deceased spouse or civil partner’s transferable nil rate band, providing (and to the extent) it was not used on his or her own death.

In addition to this, and introduced from 6 April 2017, is the residential nil rate band. This is available in certain circumstances and generally applies where a house is being left to a person’s direct descendants, although there are also provisions for it to be claimed where a house has been sold prior to death. Once again, a deceased’s spouse or civil partner’s unused transferable residential nil rate band may also be claimed, giving an overall exemption, by tax year 2020/21 of up to £1 million.

So, how has Bruce Forsyth allegedly structured his Will to avoid IHT? Simply put, if reports are accurate, it would appear that he has left his estate to his wife, with spouse exemption being available. Of course, IHT will be payable on her estate, but the intention here seems to be that she will give away her inheritance during her lifetime. Reports state that she can give away up to £650,000, but in fact, she can give away any sum she wishes to. If however she dies within 7 years of doing this, the sum given away will be aggregated with her remaining estate on her death and subjected to IHT accordingly.

However, given her current age, it is likely, but not of course definite, that she will survive for 7 years, meaning that the assets will indeed pass to the children free of IHT.

Writing a Will in this way does of course rely on a spouse or civil partner following through a person’s informal wishes that assets are passed to children after death and there is no guarantee that this will be the case. However, instead of leaving assets absolutely to a spouse or civil partner there are also options available using a trust which also qualifies for spouse exemption but more importantly leaves the discretion to pass assets to the children, to the trustees appointed.

If you would like more information regarding inheritance tax or how to structure your Will in the most tax efficient way possible please contact a member of the Private Capital team or sign up for our upcoming seminar on modern succession planning here.

Claire Macpherson