How making a will can save you money

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How making a will can save you money

In 2007 the Government made some radical changes to Inheritance Tax. The Inheritance Tax regime has now become much more favourable for those who are either married or in registered civil partnerships. However, the changes do not apply to unmarried couples or those not in civil partnerships. So that means that there are thousands of couples out there who will be unnecessarily hit by Inheritance Tax charges. Indeed, without proper planning it could mean that the survivor is forced to sell the home to pay the Inheritance Tax.

The following 3 simplified examples show how it works.

A & B are married. They have a joint estate worth £750,000. A dies. As a married couple there is no Inheritance Tax to be paid on first death. They both have an Inheritance Tax allowance of £325,000 (years 2009-10). When B dies their joint allowance is £650,000. The balance of the estate, ie £100,000 is then taxed at 40% meaning that the tax to be paid on second death is £40,000 or just over 5% of the whole estate.

C & D are neither married nor Civil Partners. They also have a joint estate of £750,000 owned equally. C dies. Not being married any Inheritance Tax due must be paid after first death. C is worth  £375,000 (half the total estate) but has a personal Inheritance Tax allowance of £325,000, meaning the balance – ie £50,000 – is taxed at 40% which is £20,000. Thus the survivor needs to find and pay that money. D dies. They are worth their own £375,000 of the estate plus the balance they’ve inherited from C which is £375,000 less the tax paid, equalling £355,000. Thus D is worth £730,000.  When D dies they also have a personal allowance of £325,000 which taken of their estate means that £405,000 is taxable at 40% meaning another £180,000.  On top of the £20,000 already paid on C’s death a total of £200,000 has been paid in Inheritance Tax. This now represents nearly 20% of the original estate.

E & F are similar to C & D, except E owns virtually all the estate and F only owns about £50,000 in their own name. E dies. They are worth £700,000 but have their allowance, as before, of £325,000. Thus the taxable amount at 40% is £700,000 less £325,000 which is £375,000. 40% of that is £150,000. Not being married or Civil Partners it becomes payable straight away. So now we have a situation whereby F needs to find and pay £150,000 to the Revenue. Only being worth £50,000 the only way they might be able to pay is by selling the home. F then inherits the balance, which is £700,000 les the tax, equalling £550,000. Added to their own £50,000 they are now worth £600,000. When F dies tax is then payable on £600,000 less their personal allowance of £325,000 at 40%. So, £600,000 – £325,000 = £275,000 x by 40% = yet another  £110,000. So not only did F need to find an initial £150,000 on the death of E, but the total estate has paid £260,000 in Inheritance Tax which represents a staggering net 35% of the total.

Not everyone in today’s society wishes to commit to either a marriage nor a Civil partnership. Clearly it is illustrated here that, if you do not make the right kind of Will, the survivor could be left very much worse off.

Prior Knowledge have great experience in giving the correct advice and in writing the necessary Trusts to avoid the unfortunate experiences of couples C & D, and E & F.

 

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