What is included in estate planning?
In simple terms, estate planning is a structure of Wills with embedded immediate post death interest trust and some additional trusts.
Effectively, it is a methodology of setting up a series of trusts and wills so that when you die, your assets then fall into the created structure.
How does estate planning benefit my successors for inheritance tax purposes?
1) Putting part of your main residence into a trust:
If you are a married couple and you have a main residence worth £1million. When the first person dies, they have an allowance of £325,000, instead of passing that allowance to their spouse, it passes into a trust.
It is not just the allowance that passes, you actually get a conveyancing solicitor to put a percentage of the house into the trust as well or use a deed of transfer.
The percentage of the property would depend on the overall value of your main residence. If you have a main residence worth £650,000, half the value of the house would go into the trust, if it is worth £1million, just under 1/3 of the property would go into the trust.
It is important to understand that only a percentage of the property is now owned by that trust. The rest of the assets go to the surviving spouse, unless there is a case where the surviving spouse is likely to have assets that exceed £2million, in which case an immediate post death interest trust is put into place.
The basic premise is that the property is likely to grow a lot faster than your inheritance tax allowance (the allowance has already been frozen 10 years and it's frozen until 2026).
A married couple puts a percentage of their main residence into a trust and the property grows at 3.5% a year for every year there is a gap between husband and wife dying, there will be a £4,500 tax saving per annum.
2) Advantages when more than one person owns a property:
On top of that when an asset is owned by two separate people, or when using a trust, two separate legal
entities (the surviving spouse and the trust), when the surviving spouse dies, the value of the property in
their estate is reduced by 10% (the figure currently used by HMRC).
For example, a married couple owns a property worth £1million, £325,000 goes into trust when the first
spouse dies, but by the time the second spouse dies, the property value has increased and the amount
held in the estate of the second spouse is now £1.1million.
In ths case her £1.1 million is reduced by between 10 and 15% which at the lower figure is £110,000
reduction for OHT producing a further saving of £44,000.
If we get a phone call from the children saying that the surviving spouse just gone into hospital, and they
have not been given long to live, we could put various assets into one of our lifetime trusts, while that
person is still alive.
It would fail for inheritance tax purposes because of the potentially exempt transfer rules being seven
years, but it would reduce the estate for probate purposes. If it brings the assets below £2 million the
Residential Nil Rate band would be reinstated thus saving significant IHT.
That is how inheritance tax is reduced by using estate planning.