Leonard Kasler & Company
Inheritance Tax
(20 Things to Know)
Note: the law may have changed since this was written
1. The scheme takes advantage of two rules
1.1. There is no IHT between spouses ("the Spouse Exemption")
1.2. The first part of an Estate is free of IHT ("the Nil Rate Band")
2. The Government changes the Nil Rate Band and the IHT rate every year
3. In respect of deaths occurring after 6th April 1998, the Nil Rate Band is £223,000 and that the rate of tax thereafter is 40%
4. Until these figures are changed, a saving of £89,200 (£223,000 x 40%) can be achieved
5. Assume a married, male testator ("H" for husband) and his wife ("W")
6. If H’s Will gives everything to W, there is no IHT payable, but H has not taken advantage of his Nil Rate Band
7. If W dies soon afterwards, her Estate will be all the greater, because it will include the money and possessions that she got from H’s Estate
Example – No scheme
8. To illustrate this, assume that H has about £400,000, that W has about £300,000 and H’s Will leaves everything to W
9. H dies. There is no IHT on his Estate because of the Spouse Exemption
10. W then dies. Her Estate will be £700,000 and will suffer tax of £(700,000 – 223,000) x 40% = £190,800
Example – scheme
11. H leaves an amount equivalent to the Nil Rate Band to their children (or other IHT paying beneficiary) and the balance only to W
12. There is no IHT payable at all on H’s death because the gift to the children is within the Nil Rate Band and the gift to W is exempt under the Spouse Exemption
13. H has taken advantage of his Nil Rate Band
14. When W dies, her Estate too has the benefit of a Nil Rate Band but suffers tax of £[(300,000 - 223,000) & (400,000 – 223,000)] x 40% = £101,600
Warning
15. Consider whether H is wealthy enough to be able to give away £223,000 without W suffering as a result during the rest of her lifetime
16. Nursing homes can cost anywhere from £300 a week upwards. If W survives H by 10 years but is in a nursing home, she may run short of money and may regret the gift of £223,000
Refinement
17. Consider this refinement if W does not want to risk her security or standard of living
18. The gift of the Nil Rate Band is made conditional upon it being lent to W repayable by her Estate on her death
19. Her Loan Note is put into a Trust which will channel the repayment by W’s death to the children
20. Tax has still been saved, the children still benefit (although on their mother’s later death rather than their fathers) and the W’s lifetime position has not been compromised
Michael Breeze
Leoanrd Kasler & Company
Sunday, 13. October 2002