Do I need to set up trusts for IHT issues

dulededulede

Hi,

All my life I have been a worrier and have ensured we have always had life assurance. We do not have much in regards to possessions and never will have. House is currently estimated to be worth approximately £150,000. I have a maximum inheritance to leave in addition to that of £200k and my wife has a maximum of £500k. All through various insurance policies. Time will erode those amounts. 

But as things stand today. If we both died in an accident my understanding is that I as the oldest or male, unsure which is relevant, would be deemed to have died first. My estate would pass directly to my wife so my life assurance amount of £200k would add to hers of £500k totalling £700k. On top of that there would be the house we have bought together over the past 25 years or so. Total value £850k. 

I was under the impression I would need some form of trust but have tonight seen that when a house is passed down to a child, that the £325k increases to £475k. Would that be an increase on both our IHT nil rate band's or just on my wife's as she would have been deemed to have died last and would have assumed my full IHT nil rate band along with her own. My understanding at least. There is a potential difference of £150k between the two scenarios. Two lots of £475k or one nil rate band of £475k but the other at the usual lower rate. We are only leaving to our child through a will currently. 

Are we safe as things are without any form of trust or will there be a potential IHT bill for him to lose a portion of what we hope to leave him. This will change as time goes on as my first insurance to finish comes up in 2024 and I cannot myself get more life assurance so will not increase our life assurance in the future. So the potential for IHT is at the maximum at this moment.

If anyone can advise. Thank you.

Jeremy535897

Each of you has a nil rate band of £325,000 and a residential nil rate band of up to £175,000, depending on the value of the property (but there are complicated rules). If the first spouse to die leaves everything to the survivor, both those nil rate bands can be used by the second to die, potentially exempting £1 million. If your house is only worth £150,000 though, only that amount can be exempted under the residential nil rate band.

It is possible to put life insurance policies in trust, but this should really be done at the outset, before they have much value. Are these term policies or whole of life, on single life or joint lives?

dulededulede

Thank you Jeremy for the answer. 

I had considered that taking a chance on part of the estate is a better option for now. Assuming only one of us; my wife or I were to die, then the situation could be that one of us receives the other's share in the house. The remaining issue is life assurance. £500k if my wife passed away and only £200k if I did. There is no IHT payable between spouses, I assume the same applies for an insurance policy payout. 

Of course, at this point now one of us could be worth £150k house plus either £200k or £500k. Now there could be a problem if the remaining one us dies and leaves this estate without being in trust in any form. There is a total of £850k in estate. Prime example would be a crash with the second death due to some life ending incident a month or so later. 

Either of us would have both the £150k nil rate band applied to our home as it will be going to our son. The remaining £650k would take up the majority of the remainder of the inheritance which is a total of £700k in life assurance. Worst case scenario is a IHT bill for the last £50k which would be £20k. Still a lot but not in comparison to what I had initially believed. One of my own policies ends in two years so will just wing it until then as everything is based on both my wife and I dying together. My first life assurance policy to end will bring any estate value within IHT nil rate bands. Cost of a solicitor to place a policy in trust now is more damaging to us financially than our son facing a maximum £20k bill if he is going to inherit £800k at the time. The residence nil rate band is new to me and has made a huge difference to the potential for IHT. Was looking at 40% on £200k but now only on maximum of £50k. So am rolling the dice.

Insurances are all level term, all single life and critical illness is separate from death policies for maximal payouts. No monetary value apart from on critical illness, terminal diagnosis or death. I am unable to add to life assurance for myself but my wife could potentially take out more in the future. If she doesn't the IHT nil rate band will face no further risk to us than stated - approximately £50k to apply IHT.

Thank you very much for your reply. 

Jeremy535897

There are a couple of things I don't understand. Up to £350,000 can be exempt due to the residential nil rate band (£175,000 each, but if the estate passes to the surviving spouse on the first death, the survivor inherits the unused band of the first to die). How much is the house actually worth?

The second point is whether the life policies have any value at this stage if they are term policies. That depends on the policyholder's health. If a term policy has no value, the term assurance part might be able to be transferred to a trust, from which the survivor and children can benefit, which does not form part of the estate (although such trusts can bear some tax themselves). It can be done for nothing by the insurance company, but discuss it all with them, as I am not confident that I understand just what you have. Your posts indicate that getting a sum from the policies on death is a given, but with term assurance that only happens if you die before a certain age.

Keep_pedalling

It is unlikely that your joint estates will have an6 IHT to pay regardless of which order you die. The most important thing is to have wills in place drawn up by a solicitor. These will make sure various what if situations are covered. 

Albermarle

As it seems the worst scenario, is that your estate may ( but probably not ) pay a small amount of inheritance tax , is it really worth getting so worried about and getting involved with complicated trust arrangements , which themselves cost money .
As long as your wills are sorted out then you should just relax,

getmore4less

When you die together(commorientes) there is an interaction with IHT rules and wills.

If really interested in that rare occurrence do some research.(it's also different depending which part of the UK)

It looks like you may be over insured especially the wife not sure why you would consider more.

Any Mortgage

What does it look like on the income/pensions side.

Age of child.