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Inheritance Tax

PRE-BUDGET REPORT (09 October 2007)


We have produced this Guide, in keeping with our commitment to keep our Clients as quickly and as fully informed as possible, following the Chancellor’s recent announcement. Please note that, as usual, we still await much of the detail from HMRC.

•  In Summary
The Chancellor announced new rules, with immediate and retrospective effect, allowing married couples and those in Civil Partnerships to combine their Inheritance Tax allowances.
•  The Effect
The announcement will make it simpler for couples to shelter up to £600,000 (increased to £700,000 by April 2010) worth of assets from Tax from now on.

The Nil-Rate Band for Inheritance Tax is already £300,000 per person. What the new measures announced (applicable from the 9 October 2007) will do is to bring together the existing allowances of married couples, civil partners and widows and their late spouses. These allowances will be increased to £350,000 per person/£700,000 per couple by 04.2010.
•  What is the future for Nil-Rate Band Discretionary Will Trusts?
Up until now, complicated Nil-Rate Band Discretionary Trusts have been used to utilise both spouses’ Nil-Rate Bands. In the light of the announcement, the need for these will significantly reduce from an Inheritance Tax planning point of view but may still be relevant in particular family circumstances (such as second marriages, imposing trust conditions for children etc).

The new rules will not change the effect of existing Wills so that where people have a Nil-Rate Band Trust written in their Will, they do not have to take any action. However, Clients may wish to change their Will in order to remove the trust element (and associated obligations and potential restrictions after the first death) and we can assist with this by way of a codicil or new will.

Our attention is now focused on any amount over the combined nil-rate bands (currently £600,000) that our Clients may have so that we can advise on what can be done during the lifetime to minimise inheritance tax on the second spouse passing away.
•  How can both Nil-Rate Bands now be utilised on the second death?
On the death of the first spouse or civil partner the spouse/executor/administrator will need to record the proportion of the Nil-Rate Band that goes unused. We still await detailed guidance from the HMRC as to precisely what records they will require to be kept for submission on the second death.

On the death of the second spouse or civil partner the Person Accountable (the executor or administrator) will now be able to make a claim to transfer unused Nil-Rate Band from the first spouse or civil partner when the second spouse or civil partner dies.

The claim form (again, we still await these from the HMRC) will need to be submitted, together with requested documents, at the same time as the form IHT 200 is submitted.
•  What about Excepted Estates?
Please note the increased Nil-Rate Band does not replace the single Nil-Rate Band available to the survivor that determines whether or not their estate is an Excepted Estate. An Excepted Estate is one where no IHT is due and a full IHT account is not required. Currently there are three types:- low value estates, exempt estates and foreign domicilaries.
•  An example to illustrate the changes:-
If, on the first death, the chargeable estate was £150,000 and the Nil-Rate Band was £200,000, 25% of the Nil-Rate Band would be unused. If, when the survivor dies, the Nil-Rate band is £350,000, then that would be increased by 25% to £437,500.

Note that it is the proportion unused on the first death that is transferred, not the value and that proportion is applied to the Nil-Rate Band at the death of the survivor.
•   What if someone dies after 9th October 2007 with a Nil Rate Band Will?
Where someone dies after the 9 October 2007 with a Nil-Rate Band Trust in the Will, an appointment of the Trust assets in favour of the surviving spouse before the second anniversary of the death (but not within three months immediately following the death) would normally be treated for IHT purposes as if the assets had been left to the surviving spouse. This would mean that the Nil-Rate Band Trust would not be used on the first death so the amount available for eventual transfer to the surviving spouse would be increased accordingly.
•   Additional Issues
There are potentially more complex issues where there was an Immediate Post death interest (e.g., assets left on Trust with a life interest for the surviving partner with a remainder passing on their death to, for example, children) or the first death was before 18 March 1986 where the old Capital Transfer Fax Rules or Estate Duty rules will apply.
Our specialist team can provide expert advice in these complex areas to ensure that the appropriate amount of Inheritance tax is paid and the estate is efficiently administered.

If you have any particular questions after reading this Guide then please do not hesitate to contact your lawyer or one of our Private Client team (01903 229999).