Client Guide: Wills and Inheritance Tax Rules

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In his 2006 Budget, the Chancellor proposed radical changes to the Inheritance Tax (IHT) treatment of trusts.  With the passing of The Finance Act 2006, these changes became law.

How do the changes concern you?

The amended tax rules may affect your Will.  You will need to think about changing your Will if under the terms of your Will you: 

  • give assets to your children or step-children at an age greater than 18
  • give assets to any other children (including your grandchildren) at a specified age
  • give assets to an existing trust
  • create a trust which gives a person the right to receive income from the trust fund, but after this person’s interest comes to an end, the trust continues.

Why you need to think about changing your Will?

The reason why you need to think about changing your Will is that the Finance Act 2006 has introduced new IHT charges. Before the Budget, if your whole estate was worth more than the nil-rate band for IHT, there was one IHT charge on your whole estate on your death.  This has now changed.

Gifts to your children and step-children

If your Will states that your children or step-children are to receive their legacy or share of your estate at an age between 18 and 25, and they are under that age at the date of your death, there will now be additional IHT to pay.  The charge will be up to 4.2% on the value of the fund that is over the nil-rate band (£325,000 for 2014/2015).

If your Will states that your children or step-children are to receive their legacy or share of your estate at an age over 25, and they are under that age at the date of your death, there will also now be additional IHT to pay.  The charge will be up to 6% on the fund that is over the nil-rate band on each ten-year anniversary of the date of your death and a further charge of up to 6% when the legacy or share of the estate is paid out to your child or step-child.

Gifts to your grandchildren or to other children

If your Will states that your grandchildren or other children are to receive their legacy or share of your estate at a specified age, and they are under that age at the date of your death, there will be additional IHT to pay.  The charge will be up to 6% on the value of the fund that is over the nil-rate band on each ten-year anniversary of the date of your death and a further charge of up to 6% when the legacy or share of the estate is paid out.

Gifts to an existing trust

If your Will leaves a legacy or a share of your estate to an existing trust, there will be additional Inheritance Tax to pay.  The charge will be up to 6% on each ten-year anniversary of the creation of that trust and a charge of up to 6% when the beneficiaries of that trust become entitled to their share of the trust assets.

Creation of trusts

If your Will creates a trust which gives a person the right to receive income from the trust fund, but which continues after this person’s interest comes to an end, there will be additional IHT to pay.  The additional charge will only apply after that person’s interest comes to an end.  The charge will be up to 6% on each ten-year anniversary of the date of your death and a charge of up to 6% when the beneficiaries become entitled to their share of the trust assets.

Gifts untouched by the changes

Wills creating Discretionary Trusts, or which include legacies of the available nil-rate band for IHT, gifts to charities, gifts to individuals which do not specify the age at which they are to receive the gift and gifts to your children and step-children at age 18 or under all remain within the previous rules.  There will be no additional IHT to pay in relation to these gifts.

Will review

While the above gives an overview of the new tax rules, you will need to take specific advice as to whether your Will is affected and as to whether you should make any changes to it.

Trusts

The new tax rules may also affect you if you have set up an accumulation and maintenance trust or an interest in possession trust (sometimes known as life interest trusts) or if you are a trustee or a beneficiary of one of these types of trust.  You will need to take advice on how the new tax rules affect your position.

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