On death, Inheritance Tax is not payable on the initial £300,000 of your estate (often known as the Nil Rate Band). However, anything over this threshold is charged at a flat rate of 40%. For example, if your estate is worth £500,000 then the first £300,000 will not be liable to Inheritance Tax, but the remaining £200,000 will be charged at 40%, therefore £80,000 of your estate would need to be paid to the Government. Any transfers occurring between husband and wife are not included within the Inheritance Tax, and therefore no Inheritance Tax is payable on the death of the first spouse.
By carefully redirecting an amount equal to that of the Nil Rate Band into a trust for your children or another person/persons other than your spouse, you can make maximum use of TWO Nil Rate Bands. This way you make use of both husband and wife’s Nil Rate Bands – therefore in the above example of an estate worth £500,000 the £80,000, that would have been paid to the Government, would remain within the family.
A simple Will giving everything to your spouse will resist any Inheritance Tax. You could give away up to £300,000 without Inheritance Tax being payable, and then the rest to your spouse. However, this may cause financial difficulty to your spouse, which is why the Nil Rate Band Discretionary Trust is a better way to go as it enables your spouse full access to your funds if necessary.
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