Married couples or those in a legally recognised civil partnership often pass their wealth to each other when they die through their Will. Usually, everything is left to the surviving person on the first death and then any children (if applicable) when the second dies. This is potentially the easiest way of passing on money, but using a trust can provide more protection.
The main advantage of leaving money outright to your husband, wife or civil partner on death is that it is extremely straight forward. The surviving member of the couple has total access to and control of their inheritance.
No Inheritance Tax is payable between married couples and civil partners and any unused nil rate band (up to £325,000) belonging to the first person to die can be used on the death of the second (the transferrable nil rate band). On the second death, a nil rate band of up to £650,000 could be claimed by the deceased’s estate.
It’s important to note that the nil rate band can only be transferred between married couples and civil partners and not cohabitating couples. It is also not automatically transferred and needs to be applied for through HMRC.
Although leaving assets outright to your husband, wife or civil partner is efficient in terms of both administration and tax, it is still in many instances a good idea to use a trust established in your Will.
Using a trust
Although thinking about your husband, wife or civil partner being with someone else could be difficult, it is important to remember that people sometimes remarry when they are widowed and this could have an impact on the money that you have left behind.
The surviving member of the couple could leave all of their money to their new husband, wife or civil partner, and exclude children from the first marriage or civil partnership. This could even happen unintentionally. When a marriage or civil partnership takes place, it revokes any previous Will and under the rules of intestacy, a surviving husband, wife or civil partner is always prioritised over a child.
Placing assets into a trust can avoid this issue while also passing on the money tax-efficiently.
A discretionary trust gives trustees control over who benefits from the assets contained within it. The trustees can also decide when the proceeds are paid out.
On the death of the first married person or civil partner, a discretionary trust can be established up to the value of £325,000 (the nil rate band). As the band is not exceeded, no Inheritance Tax is payable. The trust’s assets will not form part of any beneficiary’s estate. These beneficiaries could include the surviving member of the couple, their children or anyone else chosen by the deceased.
If there is any growth on the trust’s assets, this will fall outside of the survivor’s estate. Therefore, if in between the first and the second deaths the growth in trust assets is greater than the growth in the nil rate band, the Inheritance Tax liability on the second death could be lower.
Another benefit of discretionary trusts is the level of protection that they provide. If a remarriage occurs, the assets should be protected under the terms of the trust and help to make sure that the money goes to the right people.
Interest in possession trust
By establishing this type of trust in a Will, the surviving husband, wife or civil partner is entitled to any income generated by the trust along with the right to occupy the family home. The trust could also contain the right to provide this person with capital payments. On the second death, the assets within the trust pass to any children, or other beneficiaries set out by the person who died first.
In terms of Inheritance Tax, the value of the assets pass to the person with the entitlement to income from the trust (in this instance, the surviving husband, wife or civil partner) and on their death, the value of the trust assets will form part of their estate. No Inheritance Tax is payable on the first death, as the assets are still passing between married couples or civil partners. The transferrable nil rate band can still be used if this type of trust is set up.
Talk to Tilney
Care needs to be taken before placing any money into a trust. A trust could be liable to tax and the complexity of running it is dependent upon what it holds.
Tilney offers a variety of financial planning services and help people to decide on the best way to pass on their wealth. If you would like to find out more about how they can help, book a free no-obligation consultation online.
Issued by Tilney Financial Planning Limited.