My husband and I, both in our late 60s, own our home, savings and investments jointly. We each have children from our first marriages but none together.
We would like the children of whichever one of us dies first to inherent half of our joint holdings, excluding the home, at the time of their parent’s death, rather than waiting for the other one of us to die.
We are told we cannot make a will to this effect because joint holdings automatically go to the surviving spouse. So we are thinking of splitting all our joint holdings into equal holdings in our individual names but we do not know what the inheritance tax position would be on the death of the first one of us. Could you help?
Dennis Hall, of financial advice firm Yellowtail Financial Planning, said the simple answer is that if you divide your holdings so that you each own assets in your sole names, then on death those assets will pass on according to the instructions in your will. And if the will leaves all your assets to your spouse, then they will pass free of inheritance tax, as transfers between spouses are normally exempt – though different rules may apply where a spouse is non-domiciled.
If your will leaves assets to someone other than your spouse, then provided there have been no previous Potentially Exempt Transfers (PETs) or transfers into certain types of trust, the first £325,000 of any bequest is free of inheritance tax by virtue of the inheritance tax nil rate band. The excess over £325,000 will normally attract a 40pc inheritance tax charge – though certain assets are excluded.
“One of the biggest problems I encounter is that people underestimate life expectancy and the costs of maintaining their desired standard of living throughout their lifetime,” Mr Hall said. “There is a 25pc probability that for a couple in their late 60s today, at least one of them will live to their late 90s. That’s a potential 30 years reliance on the assets you have today.”
He said it’s easy to believe that inflation will remain low, but what would be the impact on your pensions, savings and investments if it averaged 6pc per year?
“The short spell of double digit inflation in the 70s materially damaged the real value of many people’s savings,” he said. “Remember too that there may be a significant cut in pension income for the surviving spouse, so savings and investments may need to work harder to maintain an acceptable standard of living.
“But let’s assume you have sufficient assets to meet your needs over the next 30 years, and you’ve stress tested it against a variety of possible future events (falling stock markets, periods of high inflation, or covering the cost of long term care). What if you still have more than you need?
“If you thought that your heirs could use the money better today, why wait until one of you dies? You could each give away an amount up to the current nil rate band, and provided you lived seven years it would be outside your estate forever. And if you still had surplus capital, you could get a second bite of the cherry with a new nil rate band allowance.”