“Inheritance Tax is a voluntary tax”
Past announcements (in Oct 07) by the Chancellor have given some married couples a false sense of security that they do not need to worry about planning for Inheritance Tax – and yet decisions made when writing a Will today, by individuals or couples, could impact the money being lost to the family for generations to come.
The change is often talked about as doubling the Nil Rate Band (NRB) for married couples – but, as you might expect with tax matters, it is not that simple. In any event, simply relying on the new rules misses the opportunities for protecting family inheritance against not just tax but also Care Fees and many other problems.
If you made Wills which exploited the old IHT rules they remain valid. However, as with all Wills, it will be sensible to review them in due course to see if they remain appropriate for your situation.
This is a complex area, and the best advice is to speak to a Will writer to analyse your situation and find the most appropriate courses of action, but if you really want to know more then read on.
The Background
After certain special assets (such as an appropriate business) have been ignored for IHT purposes each person can pass on an initial amount free of tax - we often call it the Nil Rate Band (NRB). Currently this is £312,000 (2008/2009), and tends to be increased roughly in line with inflation. However, anything passing to your legal spouse (or civil partner) is tax free and does not use the NRB. The same applies to gifts to charity.
Anything above the NRB is taxed at 40% - so leaving £313,000 to family this year you would be taxed on £1,000 giving a bill of £400.
The New Rules
Under the new rules, if the 1st member of a married couple did not use all of their NRB allowance then the unused proportion can be claimed by the executors of the estate of their widow(er) as and when the 2nd one passes away. This will require good record keeping by the executors on the 1st death, and extra forms to complete on the 2nd death.
- An example:- The 1st member of a couple leaves all their estate to their widow(er) so the full amount exploits the spouse exemption, leaving the NRB completely unused. Then the widow(er) passes away a few years later, and their executors can claim a full additional NRB (so suppose the NRB has risen to £350,000 by that time, so that will be £700,000 passing tax free).
- A different example:- On the 1st death gifts totalling £150,000 were made directly to family, and that this used up half of the NRB allowance as it applied in that year. Then suppose the widow(er) dies a couple of years later, the executors can claim an extra 50% of the NRB that applies at the time of the 2nd death (that is £150,000 passing tax free on 1st death, and then in 2 years’ time the executors could claim an extra 50% NRB on top - if the future NRB had become £350,000 then £525,000 would pass from this estate and a grand total of of £675,000 from between the two estates free of IHT)
These new rules only apply to those legally married (or in a civil partnership) at the time of the 1st death. It does not matter how long ago the 1st death occurred, but the 2nd death has to be on or after 9th October 2007 for the executors to be able to go back and make the claim for the unused portion. Should the widow(er) marry again at some point, the unused portion can still be claimed – but in order to achieve the most effective use of the NRB allowances both members of the new couple really should not leave everything to each other but should consult their Will writer about making more sophisticated Wills. If someone is unfortunate enough to be widowed multiple times their executors can claim multiple partial NRBs as available – but to a maximum of one full extra NRB.
If you simply live together the rules do not apply. If you were divorced before your ex-spouse died then there is also no benefit.
Confused? Probably. As ever, the details of what is involved can catch out the unwary.
Think that Inheritance Tax does not apply to you? Well, with the high price of houses plus pay out from life insurance policies or death-in-service benefit from work then increasing numbers of families fall into this tax bracket. Remember, even if your estate is not hit by the tax, the way in which you set up your Will can reduce the tax that would be paid when money passes from your children on to your grandchildren.
Giving Money Away
Some people try to give money away during their lifetime, to reduce the eventual tax bill. This means that you can enjoy seeing your family have the benefit of it - but again, you should be very careful about leaving yourself worse off now just to save tax in the future. There are rules that can catch you out, such as a £3,000 annual limit and a 7-year claw-back - read the details here. Gifts
Large or Complex Estates
Where an estate is especially large, or includes items such as a business, specialist solutions may be required to maximise the tax benefits. Your Will writer works with appropriate financial advisors to create a solution specific to your situation - please ask for details.
Inheritance Tax Limits
The planned Nil Rate Band limits for coming years have been published in the Budget, and are shown here along with more recent years.
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