Developments in Inheritance Tax Planning
The Spouse Exemption has been a feature of UK Capital Taxation since Estate Duty was introduced in 1894. At a recent Countryside Taxation Conference, the Assistant Director of the Capital Taxes Office drew attention to this exemption in the context of human rights cases coming up in the European Court next year, having regard to the position of long standing unmarried partners. The effect of decisions made by the Court may have far reaching consequences for farmers and business proprietors. It was also reported that a former tax advisor to the last Conservative Government had recently indicated being in favour of abolition of Agricultural and Business Property Reliefs for Inheritance Tax. What next?
Since Inheritance Tax was introduced in 1986, lawyers, when drafting Wills, have tended to advise farmers and business proprietors to give assets eligible for Agricultural Property Relief (APR) and Business Property Relief (BPR) to children or beneficiaries other than spouses and the remainder of the Estate to the surviving spouse, taking full advantage of the reliefs and the exemption.
While this means that no tax should be payable on the death of the first spouse to die, the effect can be that the surviving spouse receives rather less than had been originally intended. How do you ensure that your spouse receives sufficient assets from your estate, whilst securing maximum IHT saving under your will? One solution involves the creation of certain Trusts and the co-operation of your children!
You may decide to leave your estate to your spouse for their lifetime so that they receive the income, or use and enjoyment, of the assets for the rest of their life. That works, provided the assets still attract APR or BPR on the death of the survivor. If not, because during the remainder of the life of your spouse, farming or business has been given up, the capital value of the assets will be aggregated with the value of your spouse’s estate when they die and IHT charged accordingly.
However, there are means, using certain Trusts, whereby assets can be passed to your children with your spouse still deriving a benefit. Such Trusts must have attractions where it is not intended that farming or business should be continued, particularly against a background of no Inheritance Tax or Capital Gains Tax being payable when your spouse’s interest comes to an end on their death. The Trusts can also be drafted so that the assets pass to your children for their life, with the value of the trust assets being uplifted to the date of death value for CGT purposes. In Tax planning terms these Trusts are highly effective. They do, however, depend on the co-operation of your children and are not limited to holders of agricultural and business assets. As with the operation of all Trusts, specialist legal advice is of the essence.
For more information please contact Whitehead Monckton on 01622 698000 or email us on enquiries@whitehead-monckton.co.uk
Richard Stogdon, Partner
Kerin Speedie, Senior Solicitor
Published: 01 November 2003