A recent landmark legal ruling is set to impact on the popular will trust planning which allows homeowners to avoid inheritance tax (IHT). The ruling may catch out many families where one parent's will has already come into effect and all couples with assets worth over £300,000 should seek expert legal advice to review existing wills.
Many couples aim to use up both their 'nil rate tax bands' to save IHT. One route is for ownership of the matrimonial home to be split with the share of a deceased spouse being transferred to the survivor in exchange for an IOU to the deceased's will trust. The idea is that the value of the debt created will be deductible from the surviving spouse's estate and can pass free of IHT to children or other beneficiaries within the first deceased spouse's nil rate tax band. This sort of planning can produce a potential saving of up to £120,000 or even eliminate IHT altogether for estates up to £600,000.
In the recent ruling it was decided that the debt created on the wife's death was not in this case deductible from her husband's estate. He had been the sole wage earner and it was concluded that his wife had effectively derived her share of the property from him, cancelling out any debt to her will trust.
This ruling will undoubtedly affect individuals who have already implemented the planning provided for in their wills. The case highlights the importance of taking specialist advice when setting up wills and, even more crucially, when implementing trust arrangements i.e. when the first will takes effect.
However, a well drafted 'tax efficient' will should be viewed as a flexible platform for arranging the distribution of an estate so as to give effect to the individual's intentions in the most tax efficient manner in all circumstances when the will takes effect (including the tax laws in force at that time). Wills should then provide for a whole range of options. The key message for people to take away from this landmark ruling is that the need for specialist advice and regular review of any will arrangements made should never be underestimated.
Claire Johnson is head of wills and estates at leading south Wales law firm Leo Abse & Cohen. For further information on IHT planning and will and estates, contact Leo Abse & Cohen on 02920 383252.
Leo Abse & Cohen employs 150 members of staff, including 13 partners, at its offices in Cardiff, Newport and Swansea and offers legal advice to a broad range of private clients, companies and institutions.