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Are Mirror Wills and IHT Trust still an Effective form of IHT Planning in 2020

Guy Myles, 15 October 2019

Q: In 2003 a husband and wife were advised to make mirror Wills which put the full Inheritance Tax Allowance into a Trust for their daughters on the death of the first spouse. The Trust then put a Charge on the estate of the remaining spouse who inherited the rest of first spouse’s estate. The current (2019) situation allows the full Inheritance Tax Allowance to transfer between spouses, so is this type of Will still effective or do the married couple need to seek further advice and make new Wills?

Also, if the current Wills are still effective would the “House IT Allowance” be included in the transfer to the Trust? The house is held as "Tenants in Common".

Inheritance tax planning

There are a couple of principles that should apply to inheritance tax (IHT) planning. The purpose is to help one minimise an estate’s future tax liability but also ensuring the balance is struck between minimising tax and maximising a quality of life. For example, gifting inheritance early on in life may risk future comfort and the ability to pay for care.

IHT laws have changed over the years for various reasons but mainly to strike a balance between the political agenda and tax revenue. In 2018/19 tax year the total collected was £5.4 billion but total Government tax receipts that year were £623 billion. Even though IHT raised less than 1% of the total, many people feel strongly about it and its importance politically means we should expect changes to continue.

IHT planning and the tax rules around it are different to other types of planning for tax purposes. IHT tax is always a future liability and a client could pass away today or in 30 years time. As a result, rules could potentially change considerably when it comes to IHT tax. On this basis it is possible that today’s plan will be ineffective compared to the landscape in 30-years’ time, therefore, we would advise you to stay on top of your IHT tax planning with regular reviews with an IFA as well as considering diversification of your pot to minimise the tax. Sometimes reversing plans put in place in previous decades is difficult and having a few mechanisms could be helpful.

Here at Flying Colours we believe that simple plans are often better than something complicated (it costs less and there is less risk it will go wrong). For example, straight forward direct gifting is always a good option to consider depending on whether you are happy with your beneficiaries having full access to the money now without recourse.

Tenants in Common as an IHT Tax solution

To answer this scenario we feel there is a simple solution. With tenants in common each spouse owns a set share of the property. One member of a couple can pass on their share of the home on death, say to their children, while the other member of the couple can continue to live there, passing on their half on death. Tenants in common can also prevent you having to sell your home if you need to go into long-term care.

The use of tenants in common arrangements by couples was attractive and grew as a way of minimising inheritance tax liability. Then in 2007, then Chancellor Alistair Darling announced that married couples and civil partners would be able to transfer their inheritance tax allowance to each other. The changes meant that married couples and civil partners could pass on their individual inheritance tax allowance on death without any planning, therefore, this removed much of the benefit of holding the property as tenants in common for IHT purposes.

Currently in 2019 we enjoy an IHT allowance of £325,000 for individuals and therefore £650,000 per couple. In addition, a Residence Nil Rate Band was introduced in 2017 with the intention of protecting the family home from IHT. The individual RNIB is currently set at £150,000 (set to rise to £175,000 in 2020/21). This is available where a home is inherited by direct descendants of the deceased. Therefore, every married couple or civil partnership can bequeath up to £900,000 tax-free if they can fully utilise both IHT allowances.

To make IHT planning fully work for you under the new rules takes some care but it isn’t too complex if you can understand the IHT rules, however, I would always recommend that you take professional financial planning advice on this area. You can avoid problems, such as children forcing a sale after inheritance, by willing the first half to a nil rate band discretionary trust with them as beneficiaries. You could appoint somebody other than them, such as a trusted friend or family member, as trustees. On the first death, the trust accepts a debt equal to a share of the home worth up to the IHT threshold, which is repaid when the surviving partner dies. In effect the part of the home owned by the deceased is lent to the surviving partner until they die.

We advise you contact a solicitor, however, you should be able to switch simply by writing to each other saying the property will be owned as tenants in common and then to the Land Registry. Alternatively, you can fill in form RX1, available from the Land Registry, but it's best to have legal help to do this. You will also have to specify in your will that you intend to leave your share to your specified beneficiary. It can cost as little as £30 for legal documents to be drawn up but if you want more in-depth legal advice it can cost more.

If you would like to discuss any IHT planning issues you may be facing or would like to have an assessment of your potential IHT liability and how to mitigate it we are ready to help either by telephone or request a call back from a member of our team who will be able to help.

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