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Inheritance Tax and Deeds of Variation

Inheritance Tax (IHT) begins to be paid on an estate valued at more than £255,000.00, (please check the current figure). This is the individual's personal exemption. That figure must also allow for recent lifetime gifts. This used to seem a large sum, but for very many people now, the rising values of a house, life policies and savings, can bring them near enough to this figure to be concerned that Inheritance Tax might be payable.

People can properly have strong, valid, and widely differing views on tax planning, but it is not normally necessary to make complicated arrangements in a will to avoid the payment of Inheritance Tax. It does become more difficult as the value of the estate rises well above the personal exemption. Inheritance Tax is paid at 40% on the amount over the limit. This is the 'marginal rate'. The effective overall rate starts low, but climbs as the total goes up. At £255,000.00, the tax payable is £2,550.00 (less than one percent overall). At £350,000.00, it is £46,400.00 (12 per cent). At £500,000.00, the figure is £106,400.00 or 21 per cent, and at £750,000.00, the figure is £206,400.00 or 28 per cent.

A gift to a surviving spouse is exempt from IHT. Where husband and wife each have unused personal allowances, a simple gift from one spouse to another of all the estate does not make use of the personal exemption, since the gift to the spouse is exempt in any event. When the second partner dies, the combined estates can be quite considerably larger but only one tax allowance remains available, and a substantial amount of tax can then come to be payable. That sum might have been reduced by use on the first death of the individual IHT allowance.

The law provides a sensible way of dealing with this. The surviving spouse who has been given all the estate can, within two years of the death of first partner, vary the terms of the first partner's will. He or she might vary the benefit under the will, so that a sum is paid direct to the children, or otherwise. This has the effect of making as much use of the first partner's unused Individual IHT allowance as seems appropriate. He or she remains in control.

We must urge some caution. This is a short note attempting to explain something which is, in reality, quite complicated, and we urge you to take advice from us on your own particular and personal situation.

One of the difficulties of making a will, is always that a death can occur under many different circumstances, and a will cannot comfortably predict or provide all of them. The deed of variation is a useful and effective way of allowing for such variations.

Another easy way of mitigating IHT can be for particular life insurance policies to be written in trust. Having done this by a fairly simple deed, and survived the deed by a few years, the policy does not then form part of the estate and is therefore not taxable. Instead instructions are given to the trustees (usually the life insurance company trustees) which will again allow flexibility to distribute the benefit of the life policy between the surviving spouse and children. Again this is something we would be pleased to help with.

Important: Please note that our law-bytes are retained for archival purposes only. The law changes, and these notes are often, now, out of date. You must take direct advice on your own personal situation and the law as it currently stands.
All information on this site is in general and summary form only. The content of any page on this site may be out of date and or incomplete, and you should not not rely directly upon it. Take direct professional legal advice which reflects your own particular situation.
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18 October 2013 217 18 October 2013