Spousal Bypass Trust: Mitigating Inheritance Tax Liability
At Giles Wilson, the Wills, Trust and Probate department can offer clients a fully comprehensive service to ensure that every need is met. Discussing your Will can be a particularly sensitive task, and we are here to ensure that the stress of the whole process is minimised. One particular concern for wealthy clients is to mitigate Inheritance Tax liability by thinking about lifetime tax planning or making special provisions in their Wills.
A good aid for tax planning is to simply get married! Clearly we don’t advise this as a primary reason for tying the knot, but marriage does result in tax advantages. Spouses benefit from an Inheritance Tax exemption which means that there should rarely be Inheritance Tax to pay on the first death. Moreover, on the second death, the surviving spouse can at the moment benefit from an “uplift” in their tax free IHT allowance.
Many people benefit from a death in service benefit from their employers and these are usually held under the terms of a discretionary trust by the scheme providers and are payable at the discretion of the scheme trustees on death. As they are held on trust, the payment will usually be paid out free of IHT. Commonly, the benefit will be nominated to the spouse.
A concern though is that the benefit, which will usually be fairly substantial, will form part of the spouse’s estate when he or she later passes away and as such there may be a significant IHT bill at that time. With IHT taxed at 40%, clearly careful consideration should be given to good estate planning.
A solution is to create a trust during your lifetime known as a Spousal Bypass Trust (SBT). Instead of the death in service payment being nominated to the spouse, it can usually be nominated to the Trust. Still, no IHT will be payable on the first death as it will still be a payment out of the scheme’s discretionary trust.
Provided the scheme providers accept the nomination to the SBT, the payment into the SBT will not form part of the surviving spouse’s estate either and therefore on the second death the value of the SBT will not be taking into account when calculating IHT.
The SBT can be set up so that the spouse can still benefit from the trust fund, as well as their children and any other chosen beneficiaries, and the Trustees will have the flexibility to pay income and/or capital from the SBT to any or all of them. The spouse can even be named as a Trustee to retain some control over any payments made.
There is the additional benefit that the SBT could be set up such that the Trustees could make loans to the spouse, and such loans would become repayable on his/her death thus diminishing the value of his/her estate even further!
The SBT would of course be subject to its own tax regime, but the benefits far outweigh the costs. There are even income tax advantages as income generated by the SBT could be used for the benefit of the children (e.g. for their education) and the children may then reclaim the income tax paid by the Trustees, assuming that they are non-taxpayers.
If you would like to discuss setting up a Spousal Bypass Trust, or if you have Inheritance Tax queries in general or if you are considering altering your Wills, please contact Oliver Budino or Melinda Giles at Giles Wilson. We will be happy to help.