2007 PRE-BUDGET REPORT

The pre-budget report is heralded as 'Doubling' the married persons allowance while in fact all it does is allow both partners in a marriage or civil partnership to use both partner's allowances on the second death. In short it does part of the job a Discretionary Will Trust does without the additional security these trusts offer.

This does not avoid any more inheritance tax than a Will Trust but it is certainly to be welcomed for people who put off tax planning and to their widows and widowers who will now benefit.

A Discretionary Will Trust can do a lot more than the new Allowance Rules and so we are advising our clients to stick with the discretionary trust route with IOU clause.

1. As well as avoiding the same amount of inheritance tax as the new transferrable allowance, The Discretionary Will Trust prevents your house being sold by a Local Authority and all the proceeds used to pay for your care. It allows half the value of the house to be placed in trust for your use while you are in care and Local Authorities and Creditors have no access to it. It therefore safegauards your bequest to your children and allows you access to capital and income left to you by your partner.

2. While a transferred Allowance will save inheritance tax on the death of the second partner, it will not protect the capital from IHT payble by your Children and Grandchildren. A Discretionary Will Trust places these funds off limits to Inheritance Tax for up to 80 years. It's available to the family but not the Revenue.

3. A Discretionary Trust left to your children can distribute income to the family free of income tax. If you leave your £300,000 allowance directly to your children and it produces £15,000 a year bank interest, the tax on that income could be £30,000 over 10 years.


With a will Trust, if your Children are trustees and have three children, they can pay the interestinto their children's accounts and they can claim all the income tax back on their behalf.

4. If you own a business, business premises or shares in a business which are exempt IHT A Discretionary will trust allows your family to exchange the assets for cash on your death and thereby shelter a sum equal to their value in trust. It allows a doubling of tax relief equal to the exempt asset.

As always with pre-budget speeches, the devil is in the detail, but for the foreseeable future a Discretionary Will Trust appears to remain the most flexible and tax efficient way to avoid IHT

Posted on 09 October 2007 at 18:59 by John