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Siblings and inheritance tax planning

The vexed question of the position of siblings under UK Inheritance tax (IHT) law has again come to the fore with the introduction by Lord Lexden, a Conservative peer in the House of Lords of a private members’ bill. If it becomes law the bill would mean that siblings who have been living together for at least seven years could leave their estates IHT free to the surviving sibling if they are aged over thirty.

Lord Lexden has been concerned about this issue for some years. Currently, when siblings die their whole estate in excess of the IHT nil rate band (currently £325,000) is potentially liable to IHT at 40%. Civil partners and married couples can claim exemption from IHT on any gifts between them, either in lifetime or on death, but no equivalent exemption exists for gifts between siblings, and siblings cannot marry or become civil partners in order to gain the advantage of this exemption.

The question of whether siblings should be permitted to enter into civil partnerships was the subject of litigation over ten years ago when two Wiltshire sisters took the issue to the European Court of Human Rights, without success. The sisters had lived together all their lives; a common domestic arrangement that is becoming more popular as an option for home ownership.

If Lord Lexden’s bill is unsuccessful in reaching the statute book, what could siblings do to reduce their potential IHT liability? In many of these cases, as with married couples, both siblings may wish their joint estates to pass to the same beneficiary ultimately, so a review of their Wills could help.

An example: Margaret and Kathryn

Take the example of Margaret and Kathryn who are siblings in their 70s who have lived together for 20 years. Their joint estate, including the property which they bought together, is worth in the region of £800,000, divided equally between them. They would both like their assets to ultimately pass to their elder brother’s two children, Charlotte and Beth. The sisters’ current Wills leave everything to each other in the event of one of them dying. On the death of the first of the sisters, there will be IHT payable, on current rates, of £30,000 and the IHT bill on the second death will be £178,000, a total tax bill of £208,000.

How could Margaret and Kathryn change their Wills?

They could consider incorporating a discretionary trust of the IHT nil rate band into their Wills on the death of the first of them, under which the survivor of the two sisters and their nieces could potentially benefit. The IHT bill on the first death would be unchanged at £30,000, but on the second death the assets in the survivor’s estate would amount to £445,000, as £30,000 will have been paid in IHT and £325,000 of the remainder will be in the discretionary trust and outside of the survivor’s estate. The IHT bill on the second death, at current rates, would be £48,000 leading to a total tax bill of £78,000, a £130,000 reduction on the bill that would otherwise have been payable.

IHT planning for siblings, both to reduce the overall IHT liability, and to plan for payment of tax on the first death, is as essential as it is for unmarried couples. As in Margaret and Kathryn’s case options do exist but forethought is essential.

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