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Inherit careful approach

It is well known that a married couple can save up to 105,200 of inheritance tax by leaving assets to persons other than the surviving spouse on the first death and a typical IHT planning strategy for married couples is for each will to include a clause stating that an amount up to the nil rate band at the date of death will be left subject to a discretionary trust.

If the private residence is to be used, then the severance of any
joint tenancy to create a tenancy-in-common will be a necessary step
before planning of this nature can be undertaken.

Each spouse then leaves their share to the discretionary will trust
(care being taken to ensure that the value does not actually exceed
any available NRB). On the first death, the deceased’s share in the
property becomes comprised in the discretionary trust, with the other
share still being owned by the surviving spouse.

The surviving spouse has a right to occupy the whole of the property
in any event under his/her tenancy-in-common and continues to do so
until his/her death.

This planning should work but there is always a danger that the
Inland Revenue may be able to challenge on the basis that the
surviving spouse has either explicitly or implicitly assumed the
status of sole occupier of the property as a result of the trustees’
actions (or lack of action) and thus would effectively have an
interest in possession in the trust property so that, on his/her
subsequent death, the value of the trust fund forms part of his/her
estate for IHT purposes and nothing will have been achieved.

In order to try and avoid this problem, it is now common for the
discretionary will trust to contain an additional provision; namely,
that the NRB legacy may be satisfied by an IOU from the surviving
spouse.

Thus, the deceased’s share in the private residence passes to the
surviving spouse exempt from IHT and the trustees receive an IOU to
satisfy the legacy to the discretionary trust. On the surviving
spouse’s death, the IOU creates a deduction on that spouse’s estate
for IHT purposes.

Following the introduction of stamp duty land tax from December 1,
2003, there has been some discussion about whether a SDLT charge will
arise on certain transactions depending on the way that they are
structured.

On November 15, 2004, the Revenue issued a note clarifying its views
of the SDLT implications of the common-est examples of this type of
planning and these are reproduced belowThe NRB trustees accept the
surviving spouse’s promise to pay in satisfaction of the pecuniary
legacy and in consideration of that promise, land is transferred to
the surviving spouse. The promise to pay is chargeable consideration
for SDLT purposes.

The NRB trustees accept the personal representatives’ promise to pay
in satisfaction of the pecuniary legacy and land is transferred to
the surviving spouse in consideration of the spouse accepting
liability for the promise. The acceptance of liability for the
promise is chargeable consideration for SDLT purposes. The amount of
chargeable consideration is the amount promised (not exceeding the
market value of the land transferred).

Land is transferred to the surviving spouse and the spouse charges
the property with payment of the amount of the pecuniary legacy. The
NRB trustees accept this charge in satisfaction of the pecuniary
legacy. The charge is money’s worth and so is chargeable
consideration for SDLT purposes.

The personal representatives charge land with the payment of the
pecuniary legacy. The personal representatives and NRB trustees also
agree that the trustees have no right to enforce payment of the
amount of the legacy personally against the owner of the land for the
time being. The NRB trustees accept this charge in satisfaction of
the legacy. The property is transferred to the surviving spouse
subject to the charge. There is no chargeable consideration for SDLT
purposes, provided that there is no change in the rights or
liabilities of any person in relation to the debt secured by the
charge.

The good news is that the final example is the most common way of
structuring arr-angements of this sort and so if this approach is
adopted, there should not be a SDLT issue.

It is, however, stressed that care is needed in any event regarding
the IHT efficiency of planning of this nature and specialist advice
should always be obtained.

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