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Passing on your wealth effectively

Author: ICAEW

Published: 08 Mar 2022

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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.

Making an outright gift

The biggest advantage of gifting money outright to your husband, wife or civil partner on death is that it is very straight forward. The survivor has complete access to and control of their inheritance.

Inheritance tax is not payable between married couples and civil partners. If the nil rate band is not used either totally or partially on the first death, (up to the value of £325,000), it can be transferred on the death of the second person. On the second death, a nil rate band of up to £650,000 could be claimed.

The nil rate band is only transferrable between married couples and civil partners and not cohabiting couples. The transfer is not applied automatically but can be applied for through HMRC.

Passing on your wealth to your husband, wife or civil partner outright is extremely efficient, but in many instances, it could still be worthwhile to employ the use of a trust in your Will.

Establishing a trust

Thinking about your husband, wife or civil partner being with someone else after you die could be upsetting, but it is important to bear in mind that sometimes people remarry. This relationship could have an impact on the wealth you leave behind.

The survivor could choose to leave all of their money to their new husband, wife or civil partner, and exclude children from the previous marriage or civil partnership. It is possible that this could happen unintentionally. Marriages and civil partnerships revoke any previous Wills. A surviving husband, wife or civil partner is prioritised over a child under the rules of intestacy (in England – the rules differ in Scotland).

Passing on wealth through a trust can prevent this issue.

Discretionary trusts

With a discretionary trust, the trustees control who benefits from the assets it holds and when the proceeds are paid.

A discretionary trust can be established up to the value of the nil rate band (£325,000) on the first death. Inheritance tax is not payable as the band is not exceeded. The assets from the trust will not form a part of any beneficiary’s estate and these beneficiaries can be anyone of the deceased’s choosing, including the surviving member of the couple or their children.

Any growth on the trust’s assets will fall outside of the survivor’s estate. This means that if in the time between the first and second deaths the growth on the trust’s assets is larger than the growth in the nil rate band, on the second death, the inheritance tax liability could be smaller.
Discretionary trusts offer a great deal of protection. If a remarriage takes place, under the terms of the trust, the assets should be protected from a future husband, wife or civil partner and the assets are more likely to be passed to the right people at the right time.

Interest in possession trusts

By establishing an interest in possession trust within a Will, the surviving husband, wife or civil partner can have the right to live in the family home until their death and are entitled to any income generated by the trust. Under the terms of the trust, this person could also have the rights to capital payments. On the second death, the trust assets are passed to any children, or other beneficiaries named by the person who died first.

On the first death, no inheritance tax is payable as the value of the assets will be deemed to pass to the person who is entitled to the income from the trust (the husband, wife or civil partner). On their death, the value of these assets become a part of their estate. The transferrable nil rate band can still be used for this type of trust agreement.

Would you benefit from a professional perspective?

Trusts can be liable to tax and ongoing charges, so care needs to be taken before setting one up.

Tilney’s experts can help you decide on the best way to pass on your wealth. If you would like to find out more, book a free no-obligation consultation online. Otherwise you can watch Tilney’s on demand webinar "A smarter way to pass on your wealth "

Nothing in this article is intended to constitute advice or a recommendation, and you should not take any financial decision based on its content.

Issued by Tilney Financial Planning Limited. Authorised and regulated by the Financial Conduct Authority.

Advice in relation to trusts and inheritance tax planning is not regulated by the Financial Conduct Authority, however, the products used in relation to trusts and to mitigate tax may be regulated.