Spousal Bypass Trust

A spousal bypass trust is a trust in which a person decides that they want to leave their money in trust form for their surviving spouse on their death. Although it is often grouped together with pension plans, it is separate and works a different way.

This is a form of discretionary trust, established during the course of a lifetime, with a named trustee. Although named a spousal by-pass trust, the trust can be made so that it benefits any immediate family member. It differs from a pension fund because the trust itself receives the money as opposed to the named beneficiary, in effect, bypassing their estate.

In usual pension schemes once the payment is made it then forms a part of the beneficiary’s taxable estate on their death, provided that this trust payment has taken them above the Inheritance Tax nil rate band (NRB) threshold of £325,000.

Therefore, the main appeal of a spousal bypass trust is that as it is classed as being outside the taxable estate and therefore promises greater Inheritance Tax advantages, especially when the creator of the trust is sure to whom they want the money to go.

The trust can be set up with a minimum of £10 and while the person setting up the trust is still alive they can change the terms and amount in their trust.

Once paid to a beneficiary, the trust can be subject to two charges. Firstly, any amount above the threshold of its nil rate band would incur a charge of 6% on every tenth anniversary of the trust’s existence. The amount of tax charged on every anniversary can fluctuate depending on the amount held on trust. The second form of charge is an exit charge for when property is taken out of the trust.

What has changed?

Changes introduced on 6 April 2015 have changed the premise behind spousal by pass trusts.

With the changes, if the deceased died over the age of 75, the spousal bypass trust is subject to 45% tax and a periodic tax every 10 years. However, if the deceased died before the age of 75, there is no such tax, provided the discretionary trust payments were paid out within two years of the death.

This method of taxation does not completely eliminate the possibility of being taxed but when comparing the tax advantages of spousal bypass trust to assets and money being passed down through the deceased’s Will and being subject to a 40% inheritance tax bill over anything over the nil rate brand (£325,000) it still remains advantageous, albeit less so than what it was considered pre 6 April 2015.

Other Considerations

Although, spousal bypass trusts are a practical option, above the age of 75 they lose their appeal. This is also the case if they are not paid to the trust within two years of death. With these things considered, if the person is aged under 75, a spousal bypass trust is advantageous because it allows certainty in death benefit payments. 

Written by:
Nikita Assani

Nikita is a paralegal at Posada & Co. She mainly deals with private client matters. Nikita is currently undertaking her Legal Practice Course at BPP and hopes to specialise in Intellectual Property when she qualifies.