Spousal Bypass Trusts

Many people have death-in-service benefits through their employer, or death benefits via their pension scheme. Most nominate these benefits to be paid to their surviving spouse or partner. These death benefits are, however, generally not considered an asset of the deceased person and are therefore usually free from inheritance tax (IHT).

Passing such benefits to your surviving spouse or partner can create an IHT liability which will bite when the survivor spouse dies.  For example if on the first death you nominate your lump sum death benefit to your spouse this becomes an asset of their estate. A charge of 40% will arise in respect of all assets which are in the survivor spouse's estate at the time of his or her death, which exceed the current nil rate band of £325,000.

It is therefore generally prudent to nominate any death benefits into a "spousal by-pass trust" as this will avoid increasing the value of your surviving spouse, or partners, estate. The use of such trusts is therefore an effective IHT planning strategy.

Spousal by-pass Trusts are created in your lifetime. They are a form of discretionary trust and provide great flexibility as the beneficiaries of income and capital can include your spouse/civil partner and children.  Such trusts can be drafted with power to loan monies to your spouse and as a result he or she can have full use of the funds whilst creating a liability in their estate due to the loan, thereby reducing their estates value for IHT purposes.

Spousal by-pass Trusts are taxed under the "relevant property trust" regime, so are subject to an IHT charge (currently) every 10 years at no more than 6% of the value of the assets less any available nil rate band. There is also a charge when capital is paid out of such a trust. However both charges are likely to be considerably less than the regular 40% charge if you simply leave the money to your spouse outright. They therefore offer an attractive tax saving.

Spousal by-pass trusts are not limited to death in service benefits and pension benefits.  They can be used in conjunction with any form of life insurance.  Anyone with any type of term life insurance or mortgage protection insurance should consider placing the benefit of the policies into such a trust, though care must be taken to ensure that critical illness, cash value or other lifetime benefits are not included.

We can draft bespoke spousal by-pass trusts incorporating all appropriate trustee powers tailored to your personal circumstances. They can be set up quickly with a nominal sum of £10 and can be made individually or at the same time as you make a Will.