Claire MacPherson: Don't let misleading, inaccurate inheritance tax stories be your guide

The issue of inheritance tax hit the headlines as it emerged that Bruce Forsyth left his £17 million fortune to his wife '˜to avoid inheritance tax'. Various reports then go on to describe how his wife can distribute various funds '˜tax free', with some of these reports being inaccurate and misleading with regards to the sums involved.

Bruce Forsyth left his £17m fortune to his wife. Picture: Getty

So, what are the inheritance tax (IHT) rules? Simply put, a person can leave up to £325,000 free of IHT and thereafter IHT is payable at 40 per cent.

Transfers between spouses and civil partners are also free of IHT. However, as with most tax, it’s not as straightforward as that. As well as a person’s own nil rate band, executors can claim a deceased spouse or civil partner’s transferable nil rate band, providing (and to the extent) it was not used on his or her own death.

In addition to this, and introduced from 6 April 2017, is the residential nil rate band. This is available in certain circumstances and generally applies where a house is being left to a person’s direct descendants, although there are also provisions for it to be claimed where a house has been sold prior to death. Once again, a deceased’s spouse or civil partner’s unused transferable residential nil rate band may also be claimed, giving an overall exemption, by tax year 2020/21 of up to £1 million.

Claire E MacPherson is a Director in Burness Paull LLPs private capital team

So, how has Bruce Forsyth allegedly structured his Will to avoid IHT? Simply put, if reports are accurate, it would appear that he has left his estate to his wife, with spouse exemption being available. Of course, IHT will be payable on her estate, but the intention here seems to be that she will give away her inheritance during her lifetime.

Reports state that she can give away up to £650,000, but in fact, she can give away any sum she wishes to. If however she dies within seven years of doing this, the sum given away will be aggregated with her remaining estate on her death and subjected to IHT accordingly.

However, given her current age, it is likely, but not of course definite, that she will survive for seven years, meaning that the assets will indeed pass to the children free of IHT.

Writing a Will in this way does of course rely on a spouse or civil partner following through a person’s informal wishes that assets are passed to children after death and there is no guarantee that this will be the case.

Claire E MacPherson is a Director in Burness Paull LLPs private capital team

However, instead of leaving assets absolutely to a spouse or civil partner there are also options available using a trust (known as an ‘immediate post death interest trust’) which also qualifies for spouse exemption but more importantly leaves the discretion to pass assets to the children, to the trustees appointed.

The trustees can then advance the whole of the trust funds to the children or other beneficiaries and providing the spouse survives for seven years, these assets will pass free of IHT.

The key here is in the selection of the trustees. The person writing the Will should appoint someone he or she trusts (the key is in the name, ‘trustee’) to follow out his or her wishes and ideally he or she should leave an informal letter of wishes to the trustees, setting these out.

Claire E MacPherson is a director in Burness Paull LLP’s private 
capital team