Inheritance Tax on Pensions so Use Trusts in Your Will
Published / Last Updated on 17/12/2024
We have covered the use of Nil Rate Band Will trusts and Property Life Interest trusts many times on this website to protect from inheritance taxes and care fees means testing if the surviving spouse/civil partner needs to go into means tested social care later.
What is a Will Trust?
- On first death, you have a wording in your Will that sets up a Trust (sometimes called a Will Trust or a Nil Rate Band Trust).
- On first death money is left inside the trust for the benefit of loved ones e.g. children (not your spouse/civil partner).
- Your surviving spouse/civil partner is not the beneficiary of the trust but is a potential beneficiary meaning they can ‘borrow’ money interest free from the trust (if needed).
- The ‘loan’ being repayable on second death meaning the estate on second death is even smaller (lower IHT) and all the ‘trust’ money (including the repaid loan) is released to your beneficiaries e.g. children.
What is a Property Life Interest Trust?
- Most couples own their homes under ‘joint tenancy’ i.e., each of you owns the whole of the property jointly.
- On first death, the surviving spouse already owns the whole property anyway, but this has risks for care fees means testing for the surviving spouse and inheritance tax on second death.
- Now, imagine drawing a red line down the middle of your home.
- You own half and your spouse owns half. This is known as a severance of joint tenancy to ‘tenants in common’.
- On first death, you have a wording in your Will that sets up a trust called a Property Life Interest Trust.
- On first death your half of the property (under tenants in common) is left inside the trust for the benefit of loved ones e.g. children (not your spouse/civil partner).
- Your surviving spouse/civil partner is not the beneficiary of the trust but is a potential beneficiary meaning they can live in their own half of the property as well as your half of the property (now in trust) rent free.
- Half of the property is now in trust and protected from future IHT (if property value increases) and any care fees means test for the surviving spouse.
- On second death the surviving spouse’s share of the property and the first death share of the property (inside the Property Life Interest Trust) is released to your beneficiaries e.g. children again meaning they have inherited your share, and the surviving spouses share (on death) if the is any remaining.
The numbers: As you have/will see in the video; by using these two trusts in your Will, you may save your children inheritance taxes in most cases on second death and have protected assets from means testing.
Pensions and IHT
From April 2027, unused pension funds will be included in a deceased’s estate for inheritance tax purposes. This is yet another ‘tax grab’ meaning more inheritance tax will be paid by more people.
The use of trusts inside Wills is a valuable planning tool that is important today, but it will become even more important from April 2027.
