UK Will and Trust Ltd, Freepost GW7313, Galston, KA4 8JB | Telephone 0800 781 6743 |

Discretionary Will Trusts

As discussed in the pevious News Article, most people with existing Will Trusts will want to retain these in their wills as there are long term tax benefits over the transferable allowance route for the family.

However, there is one advantage that the new transferable nil rate allowance confers. The Chancellor has said he will link the 'nil rate allowance' or NRB or amount you can pass tax free, to the House Price Index (HPI). The current 'nil rate allowance' is £300,000. If a husband dies this year and his widow dies ten years later and the allowance is £600,000 the total amount the estate can pass on tax free will be £1,200,000. If the couple used the Discretionary Will Trust to 'Double Up' their allowance, unless the trustees of the trust have the power to index the amount originally passed into trust by the House Price Index, the total tax free element could be just £900,000 (£300,000 husband's allowance + £600,000 wife's allowance.

This is easily rectified by giving your trustees the power to index the value of the loan by way of a codicil. We can provide this free of charge to clients who completed their estate planning with us after 8th October 2006 FREE OF CHARGE as our clients may request any change to their will within 12 months free of charge.

For existing clients of UK Will and Trust or Medical Finance who completed before then we can provide the codicil with additional powers for £25.00 per will or £35.00 per couple.

For non-clients who had their wills drawn up by another company we can provide a review of your will for £25.00 per will or £35.00 per couple. Any additional codicil giving additional powers to trustees would cost £25.00 per will or £35.00 per couple. So if you have a will drawn up by someone else we, can review and make any change to the powers of trustees for £50.000 per will or £70.00 per couple.

If on the other hand you feel the Will Trust should be removed, we can do that as well.

If you wish to review your will in light of changes to the rules surrounding IHT

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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

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While most of our work is in the area of reducing Inheritance Tax (IHT) by creating Family Trusts, there are other ways to avoid IHT. Some of these can also reduce your family's liability to income tax and capital gains tax as well. Here follows a summary of 15 ways in which you may be able to reduce your family's IHT Bill.


What's taxed and what's not.

When you die, you can pass any amount of assets or savings to your spouse or civil partner without any inheritance tax to pay. But anything you pass to your children or any other party over the value of £300,000 will be taxed at 40%.

Transfers to parties made up to 7 years before your death may be counted back into your estate under 'Potentially Exempt Transfer Rules'

Bequests to charities can be free of IHT.

Some business assets can be passed on free of IHT.

Life insurance held subject to trust can be passed on free of IHT.

Lump sums from pensions can be passed on free of IHT.

Some Investments (AIM investments) can be free of IHT.

While many people are caught by inheritance tax, our experience shows that the majority of families can reduce the amount of IHT they pay by preparing a suitable will and family trust and arranging their affairs in a tax efficient manner before they die.


A low cost, low risk arrangement which leaves the survivor in control of assets and savings. Can save up to £120,000 tax.

If one partner in a marriage or civil partnership dies and passes everything to the survivor, there is no IHT at that point, but if on second death, the allowance of the first to die is lost and only the first £300,000 is tax free. In its simplest form a Discretionary will trust allows both partners in a marriage to use their personal allowance of £300,000 so that the children receive up to £600,000 tax free.

It’s highly flexible as the trust does not exist until the first death and as it’s been around for at least fifteen years and survived an extensive review of trust taxation by the treasury it’s not likely to be attacked in the near future, if properly drafted and administered. The main attraction for most married couples is that it leaves both or one of in control of and owning their own assets until they are both dead. For the above to work, you need to consider equalising your estates and ensuring property is owned ‘in common’ rather than ‘jointly’.

In addition, a Discretionary trust can prevent a Local Authority from taking all the value of your home from you if you have to go into long term care.

Finally, a discretionary trust can mean that your children and grandchildren may pay much less income tax on any interest generated by their inheritance, as all beneficiaries can use their personal tax allowance against income distributed by a discretionary trust.


This can save the children up to £120,000 but the survivor loses control of the funds to their children.

Both partners in a marriage or Civil Partnership can leave up to £300,000 free of IHT to anyone they wish. So if Dad dies and leaves the first £300,000 to the children, when mum dies, the children get another £300,000 tax free.

The obvious drawback is that most families have their savings tied up in the house and wouldn’t want half the house to go to the children. If it did, there are tremendous risks to mum’s financial security and she may even half to pay additional tax if she continues to live there.


There's almost no reason not to place any life policy you have on your own life in trust for your partner. It avoids IHT on the proceeds and ensures payment is made promptly.

As most life policies don’t pay out until you die, it’s sensible to place them in trust. That way if you die, the money is paid into a trust for your partner and the children. As Trustee and beneficiary, they can have full use of income and capital and control the investments until they die. But on their death, the funds are not included in their estate for the purpose of calculating inheritance tax. So your children can receive the fund free of IHT.

Again, funds held in a properly worded trust cannot be attacked by local authorities, creditors or divorcing spouses and your children may be able to receive the income free of income tax.

Even policies which have maturity values like endowments can be placed in trust for your partner while retaining the value for yourself should you survive.

Unfortunately, joint policies cannot be placed in trust for each of the insured partners. So for the purposes of avoiding inheritance tax, it's usually best for partners to have individual policies held in trust for each other.


Giving assets away can avoid IHT on them. But you have to plan far ahead to avoid being caught by Potentially Exempt Transfer Rules (PET). You also need to consider the Capital Gains Tax Implications.

Of course you can give your assets away, but unless you are very wealthy, most people don’t know if their savings will be enough for their old age and are very reluctant to make gifts without strings. However, if you do make a gift, you have to live for at least 7 years before it’s completely free of IHT. You can make some gifts without them being Potentially Exempt Transfers which count towards the IHT calculation. But at £3,000 per year or £10,000 in consideration of marriage, it would take a long time to make a dent in £100,000. Gifts over the current ‘nil rate allowance’ (£300,000) have to be declared at the time they are made and could be subject to a Lifetime Transfer Tax of 20% at that time.

However, there is a rule that says ‘Gifts out of normal income’ are exempt. In brief this means that if you earn £50,000 pa and save £12,000 pa you can gift this to your children and it is immediately out with the reach of IHT.

If your capital is increasing, this can be a useful tool, but you are giving your money away and your offspring can use it as they wish. One way to retain control is to gift it into a trust with yourself as trustee. You then control who gets what and when. Recently, the Chancellor introduced additional taxes on this kind of trust, so you should check the implications before considering this option.

Avoiding Capital Gains Tax on Property Transfers

If you transfer shares or a property which is not your main residence to your children you may avoid IHT But if it has risen in value, you could pay up to 40% of the gain in value when you pass it to your children if you are not careful.

Capital Gains Tax or CGT of up to 40% is due on any profit you made over £8,800 when you dispose of that asset. Even if you give it away, the tax is due. So if you bought a flat for £80,000 and it's now worth £100,000 your gain is £20,000 you could pay around £5,000 capital gains tax just to pass it on to your children. However, if you ensure it is held jointly with your spouse first and transfer a smaller share in two separate tax years, the CGT payable is nil.


If you are over 70 and require income but don't envisage using the capital, this may be of interest.

These are the trusts marketed by various Life Companies. In brief, if you place capital into a trust for your children but continue to take an income, the Revenue may grant a pre-agreed discount on the potential IHT if you were to die tomorrow. It all hangs on your age and health. Someone in good health around age 80 might get an immediate discount of up to 50% as a rough example. So if you need your income, but not your capital, this may help.

You have to be in good health, so it's not an option for anyone who is already ill.


If you think you might need your capital, but don't need the income it's generating, this may be of interest.

This is almost the mirror of a Discounted Gift Scheme. Again, these are marketed by the Life Companies and advice from a qualified adviser is necessary. Under these arrangements, you set up a trust and make a loan of capital to it. The income and gains generated by the loan goes into trust for your children and grandchildren. You can’t get the income back, but you can get the capital if you need it. The income is protected from inheritance tax, but the capital is returned to your estate on your death and is not.

Of course you can probably save the same amount of IHT by simply giving the income to your children and grandchildren as a ‘gift out of normal income’ as described above and achieve the same savings. The advantage placing it in trust gives you is that you can be the trustee and decide who gets what and when. And if one of your beneficiaries gets into trouble, divorces or become bankrupt, your hard earned savings won’t be affected and they can be held back until the problems are resolved or distributed among the rest of your heirs.


If you own a family business or have shares in a small company, this may be of interest.

Most businesses (Excluding those that are purely investment or Property Companies) receive 100% IHT relief when they pass to another member of the family. So a self-employed joiner who leaves his workshop and business to his son, shouldn’t be worried about IHT on the business. However if his house and savings mean that he will be paying inheritance tax in any case, he can use a business trust to increase the value of the assets that pass down the line.

In brief, if you leave your business asset, say shares in a small, family company, to your spouse along with substantial savings, only the shares are tax free when your wife dies and passes your estate on to your children. However, if you leave your shares in trust for your wife, she can then purchase the shares from the trust and, then pass the shares free of IHT to your children. As the trust is free of IHT anyway, the savings are now protected.

For this to work, all parties have to run the business or own the shares for at least two years, but it’s a useful strategy to know about. Like all strategies, it may be attacked by the revenue who will challenge anything they view as an abuse of the rules in court. Even if they lose, they may have the law changed so you can’t use this in the future.


This strategy is of interest to Landlords with a property portfolio, but in our opinion, is likely to be challenged by the IR in future.

As we get down this list we move from sensible and prudent tax planning into the area of ‘Tax Loopholes’. This is definitely a strategy I’d describe as a ‘loophole’ and is therefore more likely to be unavailable three years from now.

With more and more people investing in buy-to-let property we are becoming a nation of land lords. As property business are not exempt IHT it means that anyone who has built even a modest portfolio will be facing a substantial IHT bill on these investments alone.

However the IR has just lost a case where a family set up a loan company first. This company was not an investment company but a commercial lending business which lent the family the money to buy the properties. Essentially the properties were mortgaged up to the hilt, but the family owned the shares in the mortgage company. As a result, when Mum and Dad died, their property portfolio was sold and the loans re-paid to the loan company. Although some IHT was paid on the increased equity value of the portfolio, the majority of value went back into the loan company whose shares, increased in value by the repaid debt, passed to the rest of the family free of IHT as a legitimate loan business.

Although this family won the case, the argument is not yet over and I suspect this is not a strategy that will be around in three years time. However, if it’s within your means and there is change of government before the rules are changed, it might be worth looking at.


Some lenders are now pre-authorising selected descendants to take over your mortgage instead of your equity.

If you want your children to inherit your home and would prefer to invest your spare funds in investments that are inheritance tax free to your children there are lenders who will agree to allow your children to take over the loan on your death. If you pay off of a £100,000 loan on your £400,000 home, when it passes to your children they could pay £40,000 IHT.

However, if you invest the money you would have used to pay off the loan in a business, holiday home, AIM investment or simply pass the funds to your children as PETs, which can all be free of IHT, they can receive a house worth £400,000 with a £100,000 loan and another £100,000 of tax free bequests. As a result, the IHT is nil and they can decide whether or not to repay the loan with these funds or continue paying the mortgage.


If you own a holiday home, you can avoid IHT and capital gains tax by giving a share to your children.

If you give a share in your main home to your children and they don't live with you, you will suffer up to 40% 'Pre Owned Asset Tax' on the estimated rental value unless they live with you and share the bills as in the case of a child caring for elderly payments.

However, the pre-owned assets rule doesn't apply if you own a holiday home that you use for a few months a year. Let's say you have a flat in Spain worth £150,000 and have 2 children. If you give each of them a share of one third and you live for 7 years, you won't be caught by Pre-Owned Asset Tax or the Rules surrounding transfers or PETS (Potentially Exempt Transfers)

If the property has risen in value, make consider transferring the property in smaller 'slices' so you and your partner can use your capital gains tax allowances and thereby avoid tax on the gains made.


Bequests to charities are not subject to IHT

Leaving something to a registered charity will avoid IHT on that gift. It won’t benefit your family, but it will avoid inheritance tax and might also do quite a lot of good.


Investment in companies listed on the Alternative Investment Market can pass free of IHT. However, these are high risk investments and not for the faint hearted.

Investments in the ‘AIMS Markets are by definition risky, but can pass to your children free of IHT if you have held them for two years or more. You need to know what you are doing before making any decision to invest. So take advice from an advisor first.


After the first death, you can still save on the IHT. But don't depend on this option being around for ever.

Finally, it always pays to act in advance. Very often, tax breaks that exist today are withdrawn tomorrow and many people are left kicking themselves that they didn’t act sooner. Often the death of a partner means that your good intentions will no longer be effective.

The advice you will get from everyone is to act now, while you are able.

However, if you are a widow or widower or your civil partner has passed away within the last two years, you can re-arrange their will in retrospect to take advantage of the Discretionary Trust or nil rate band allowance. You need to have the agreement of all beneficiaries and the assistance of a good lawyer, so it’s not cheap. Any beneficiary may object and scupper your intentions.

It’s also a matter of record that the Labour Party had it in their 1996 manifesto to do away with this and so it may not be around when you finally come to need it.

Don't let your inheritance be taxed twice.

If you inherit £100,000 from your parents which is taxed at 40% and you then allow it to be taxed again when you leave it your children, the Inland Revenue will take £64,000 (40% of the original £100,000 and 40% of the remaining £60,000) and your children will receive £36,000.

It may be difficult to discuss these matters, but if your parents can be persuaded to include a trust in their will, you could avoid inheritance tax on your inheritance completely.

You could also avoid income tax on the interest generated. Any tax paid on interest distributed by a trust can be claimed back by the beneficiary. So if your parents leave you £100,000 in trust of which you, your spouse and your children are beneficiaries and you pay the £5,000 interest to the children, it's not seen as coming from their parents.* Instead it's seen as coming from their grandparent's trust and as such they can use their personal allowances to reclaim all tax on that interest. If you have three children, your family trust could provide over £15,000 pa tax free.

*Only the first £100 of interest from funds passed from parents to children may be held as tax free.


If you don't have it, they can't tax it.

If you’ve worked hard, why not splash out a bit! If you haven’t got it, they can’t tax it and the memory of a once in a lifetime holiday like a world cruise is definitely not taxable!

You can see that there are lots of options which is why IHT is called a 'Voluntary Tax'.

But to save inheritance tax, you have to act before you die, before the tax rules change and while you are able.

Procrastination is the Inland Revenue's greatest ally. So do


Contact us on 01563 821117 for further help and advice.

All figures are based on tax allowances for the 2007 – 2008 tax year and our understanding of tax law at 1st February 2007.

The above strategies are examples only. No advice to act is offered. Please contact UK Will and Trust 01563 821117 for a free personalised report if you have concerns that your family may have to pay inheritance tax on your estate.

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‘The Phizackerley Case’ is important to anyone who has a Discretionary Will Trust or was considering setting up a Will Trust to avoid inheritance tax, because it underlines the importance of making sure your will is up to date and that it has up-to-date and relevant clauses in the light of any change in the rules. For couples, who both worked and who bought their home between them it has no immediate implications

In brief, Dr and Mrs Phizackerley became ‘tenants in common’ and set up their wills so that on first death, up to half the value of the family home passed to the survivor in trust on the basis that on their death the value was returned to the trust and on to the children free of inheritance tax. It’s the basis of most couple’s planning to mitigate inheritance tax and in 90% of cases works well without IR contention and should continue to do so.

Mrs Phizackerley died first and unfortunately, the IR took the stance that as Dr Phizackerley was the sole bread winner and had essentially provided the funds to pay for the house, Mrs Phizackerley had not contributed to the value of the home and so the Will Trust Scheme could not apply. In brief, their argument was that due to longstanding anti-avoidance legislation (S103 of the 1986 Finance Act) property paid for by one partner, then transferred to the second and left to the first partner in a will is a device to avoid IHT and can be disregarded.

If Dr Phizackerley had died first, the trust would have worked perfectly well. However, there are ways to get around this, but they must be included in your will. However here’s a brief checklist as to whether or not you should be taking further advice:

Assuming you have married, have Discretionary Trusts for your ‘Nil Rate Band Allowance’ in your will and have become tenants in common:


No action required.


Take advice.


Take advice.

You can find more information on the case here:

Even if you fall into a similar category as the Phizackerleys, there are answers to the problem and we can provide a review of your will if you e mail us or phone on 01563 821117. Clients who completed in the last 12 months are welcome to a free review and to any changes they request as a result at no charge.

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The 2007 budget has had no adverse effect on Discretionary Will Trusts. In his speech, Mr Brown announced increases to the 'Nil Rate Band' for IHT which are ahead of the underlying rate of inflation but less than average house price inflation in the UK over the last ten years.

The new allowances follow along with potential savings to be gained by creating a Discretionary Trust in your will:


Nil Rate Band Allowance : £312,000
Joint allowance with Will Trust in place : £624,000
Potential savings from Will Trust : £124,800

For the above to be effective you should consider:

1.Have up-to-date wills which effect a Discretionary Trust to receive the allowance of the first partner to die.

2. Be Tenants in Common (E&W) or Evacuate any Special Destination in your Deeds (Scotland)

3. Make your wishes clear to your trustees by creating a Letter of Wishes which describe how you wish the trust to be run.

If you need any further information, please call 01563 821117 any day or any time. We have a 24 hr answering service and will call you back.

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We hope our site is clear and helpful. If you want to read a recent 'Telegraph' article on why Discretionary Will Trusts or IOU, Charge or Loan Schemes are becoming necessary additions to many couples' wills you can read the article here:

If the link doesn't work when you click on it, simply cut and paste it into the address bar at the top of your screen and press'Go'

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In Scotland, the rules affecting the way you can save inheritance tax on property are different.

You can read an article in 'The Scotsman' by cutting and pasting this link into your address bar and pressing go.

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If, after careful planning, you still have an IHT liability, an insurance policy, payable into a trust for the benefit of your children is one way of ensuring the assets pass to them intact. It gives your children the wherewithall to pay the tax. As it is them who benefit, they might not mind paying the premiums.

In recent months, the cost of doing this has dropped as the 2006 budget now allows you to have life insurance with tax relief and claim up to 40% of the premiums back.

Take advice on the subject from a quitably qualified adviser.

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Many people have turned to property investment as a way of saving for their old age. There are several advantages:

Commercial property can be passed from generation to generation free of inheritance tax.

Combined with a family trusts, parents can pass savings equal to the value of a family business or commercial property as well as that property to their children tax free.

However, if you have a flat you are letting out and wish to pass it on to your children, you may face either an inheritance tax bill of up to 40% of its value or a Capital Gains Tax bill of 40% of the gain if you transfer it to your children. Even then, they may still be due to pay IHT if you die within 7 years of the transfer.

Most owners simply transfer the property all in one go and suffer the CGT in preference to the usually higher IHT. But if you are well and likely to live a nother 7 years you can transfer the property in 'bits', giving your childrent a percentage share each year that uses you (and your spouses)CGT allowance for each year. Thereby you can avoid the CGT completely.

So if you and your spouse have a flat which is now worth £50,000, more than you paid for it after all expenses and taper relief, you could be looking at over £13,000 CGT on transfer, even if it is for no monetary consideration.

However, if you transfer a 25% share over to your children over 4 tax years, your joint allowances should wipe the tax out.

Legal costs are higher, but the saving could be around £10,000.

Take advice before you embark on this as there are other considerations to take into account.

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One of the least used ways of passing on wealth to the next generation is 'Gifts from normal income'.

Most people don't realise that if they can establish what they normally spend on home, bills and day to day living, they can transfer the balance to their children on a regular basis. So if you spend £25,000 a year from family income of £50,000 pa and save £25,000 pa, you can transfer the £25,000 balance to your children and your executors can argue that this is a 'Gift from normal income'. As such it cannot be taxed under the current tax rules. To be completely safe, you should transfer on an annual basis at least and keep records of your income and spending.

However, if you have savings of £100,000 which you accumulated over 5 years (assuming savings of £20,000 pa and therefore under the £25,000 pa excess of income over expense)you could transfer this to your children and have your executors claim exemption on the baisis that this was accumulated income, waiting to be transferred. In a recent test case, the executors won and the capital did not suffer the tax.

Gifts from normal income are not subject to the 7 year rule and could, theoretically, be done as a 'Deathbed' measure.

However, I would think, the IR are currently very busy thinking on how they can close this opportunity off.

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