When a person dies, the net value of their estate (everything they own, less everything they owe) is calculated and, if it is valued at more than £325,000 (the nil rate band threshold which is likely to apply until 2015), the surplus is taxed at 40%.

Where a surviving spouse or civil partner dies after 9th October 2007 and the first spouse or civil partner did not make use of their nil rate band threshold, it is possible for the survivor’s available threshold to be increased to a maximum of £650,000.

The value of any large gifts that the person made over the previous 7 years is included in the net estate figure but certain gifts are exempt.

These include £3,000 as a personal allowance, plus any number of gifts of £250 to different people, wedding gifts of £1,000, £2,500 or £5,000 depending on how you are related to the person getting married, gifts out of surplus income and gifts, of any value, to spouses, civil partners or charities.
Gifts can be made to individuals or to trusts but they must be truly given away. If you try to reserve any present or future benefit in what you are giving away, the Revenue will treat you as not having given it away at all.

When calculating the taxable amount, the value of certain assets (business and farming assets for example) can be discounted because they attract tax relief.

It does not make sense for assets that attract tax relief to be given to beneficiaries who are tax-exempt. For example, if business assets are given to a surviving spouse, a relief and an exemption apply and so one is wasted.

It would be better for assets that attract tax relief to be given to beneficiaries who are not exempt. The correct wording in a Will can arrange this. However, you may want your spouse to inherit your business, for example, and so advice needs to be taken as to how you can arrange this whilst still making best use of all the tax reliefs available.

Prior to October 2007, it was common for spouses to leave an amount up to their nil rate band threshold to a trust rather than to the surviving spouse, so as to make use of both exemptions.

The reason a trust was used was that if this amount was left to an individual it might well leave the surviving spouse short of money. A trust could be used to keep the money out of the surviving spouse’s estate whilst providing for him or her if needed.

It could be said that, since the surviving spouse or civil partner can now use their deceased partner’s nil rate band, leaving it to them on the first death would not be a waste. If the sole purpose of leaving it elsewhere was just to save tax on that amount, then that would be correct and it would be better to now have simpler Wills where everything is left to each other on the first death.

However, there are a number of reasons, apart from tax saving, why trusts should be used. 

·   It can be useful to have the flexibility of a separate pot of money to provide for unforeseen circumstances
·   Money in a discretionary trust is protected if the surviving spouse or civil partner goes into care
·   You may not want your surviving spouse or civil partner to have all of your estate
·   You may want someone to control that money, where you have divorcing, wayward or mentally incapable  beneficiaries

In addition, trusts like these can still save inheritance tax. At the moment, it is highly likely that the growth over time in value of the amount in the trust will be greater than the increase in the value of the nil rate band threshold. That growth would be outside the survivor’s estate and so would not be taxable on his or her death.

It is vitally important to use all the ways available to you to save the payment of inheritance tax when you die. Although you will not have to pay the tax yourself, your beneficiaries will and it will make the administration of your estate more complicated for everyone involved.