Inheritance Tax - Pre Budget Report

The Government announced in the pre-budget report that with effect from 9 October 2007, any unused Inheritance Tax (IHT) nil rate band (currently £300,000) on an individual’s death will be transferable to the surviving spouse or civil partner. This will allow married couples and civil partners to leave all of their estate to their spouse, but retain the use of the IHT nil rate band which would previously have been lost.

 

The announcement was hailed as an “increase” in the Inheritance Tax allowance but many individuals have already arranged their Wills to take advantage of the use of a nil rate band discretionary trust to ensure that both spouses allowances are utilised. The irony is that those who had done nothing previously are now potentially in a better position. There is no longer any need to include complicated discretionary trusts in a Will in order to minimise IHT, and they are likely to benefit from an eventual higher allowance. There may well however be other reasons for such Trusts.

 

Our recommendation is that those who have already written a nil rate band discretionary trust into their Will should review the situation and consider whether this is still the best form of action. Obviously these discretionary trusts are not just a tax mitigation tool but a way of protecting assets from remarriage or, for example, subsequent nursing home fees.

 

Chancery is happy to assist clients with this review.

 

One other salient point to make is that the new rule came into effect from 9 October 2007. This will affect those whose spouse or civil partner died before 9 October 2007 but the nil rate band was not used up at the time.  The proportion of the unused allowance to be used on the second death will be calculated using percentages. 

 

For example a spouse who died in 2000 would have benefited from a nil rate band of £234,000. If at that time distributions of £120,000 were made to people other than their spouse then the proportion of the unused allowance which can be used on the second death is as follows:

Total IHT nil rate band in 2000	£234,000
Value of gifts using nil rate band	£120,000
Percentage of allowance unused £120,000/£234,000 x 100	51.28%

In this example the position on second spouses death in 2007/2008 would be as follows:

Nil rate band in 2007/2008	£300,000
Add Unused allowance form death of spouse in 2000   51.28% x £300,000	£153,840
Value of estate taxable at 0%	£453,840

It is therefore imperative that where one spouse has already died, records are kept so that this calculation can be performed on the second death.

 

If you require any further advice on this or IHT in general, please contact Delyth Barnett at Chancery on 01908 699600 or by emailing delythb@chancerypartnership.com