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Newsletter - Inheritance Tax (IHT)

The New Rules

What has changed? Very little except the way in which the Nil Rate Band amount is calculated on the death of a surviving spouse or civil partner (see below).

moss haselhurst solicitors

The Nil Rate Band remains £325,000 and the rate of tax 40%.

The Nil Rate Band is the maximum amount which you can give on death and within the preceding seven years other than to exempt beneficiaries. Tax at 40% is assessed at anything over the Nil Rate Band.

Exempt beneficiaries include spouses, civil partners and charities. Most gifts between spouses and civil partners remain exempt from IHT.

Historically that meant that when one partner died leaving his or her property to their surviving spouse or civil partner, they did not make use of the Nil Rate Band available on the first death. That is why "Tax efficient Wills" were popular with married couples or civil partners whose joint estates exceeded the Nil Rate Band amount. Such Wills ensured that they both made use of their Nil Rate Band allowances, saving as much as £120,000 IHT in the process.

The Change

It is now possible to transfer unused Nil Rate Band allowances between spouses or civil partners. The new rules apply to allow a claim to be made to transfer any unused IHT Nil Rate Band on an individual's death to the estate of their surviving spouse/civil partner where the second death occurs on or after 9 October 2007. Accordingly "Tax efficient Wills" are no longer necessary.

moss haselhurst solicitors

The amount of the Nil Rate Band potentially available for transfer will be based on the proportion of the Nil Rate Band unused when the first spouse or civil partner dies. For example if on the first death the amount left, other than to the surviving spouse or civil partner, is £156,000 and the Nil Rate Band was £312,000 then 50% of the original Nil Rate Band is unused. If the Nil Rate Band when the surviving spouse/ civil partner dies is £350,000 then that is increased by 50% to £525,000.

Any claims for transfer of unused Nil Rate Band Amount can be made by the personal representatives of the estate of the second spouse or civil partner to die when they complete an IHT return.

The above change will apply to all surviving spouse estates from 9 October 2007 including those when the death of the first spouse occurred prior to that date.

The rules allow unused Nil Rate Band amounts to be transferred from more than one deceased spouse or civil partner but up to a maximum limit of one additional Nil Rate Band. So if someone has survived more than one spouse or civil partner then on their death their personal representatives may be able to claim additional Nil Rate Band from more than one of the relevant estates.

Existing Wills

The new rules will not change the effect of existing Wills. So people who have, for example, a Nil Rate Band Trust written into their Will do not have to take any action as a result of this measure, but they may nevertheless wish to do so.

Where someone dies after 9 October 2007 with a Nil Rate Band discretionary Trust in their Will an appointment of the Trust assets in favour of the surviving spouse or civil partner (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 simply been left to the surviving spouse or civil partner outright. Ending the Trust in this way would mean the Nil Rate Band was not used on the first death and so the amount available for eventual transfer to the surviving spouse or civil partner would be increased accordingly.

moss haselhurst solicitors

Notwithstanding the above many married couples or civil partners who have previously made Tax efficient Wills may nevertheless wish to make straightforward mirror Wills in favour of one another so as to give the surviving spouse complete control rather than relying on the Trustees of the Will of the first to die making an appointment of the Trust assets in favour of the survivor.

The position for married couples or civil partners who already have in place Tax Efficient Wills and where one of them died pre 9 October 2007 is not so straightforward.

Typically on first death the assets may have been transferred to the surviving spouse or civil partner subject to a debt or charge equal to the available Nil Rate Band amount of the first to die. Accordingly on second death there may be no uplift of the survivor's Nil Rate Band amount as there may be no unused portion of the Nil Rate Band amount of the first to die. Instead the survivor's personal representatives will have to rely on the Inland Revenue accepting a deduction of the debt or charge from the survivor's estate in arriving at the taxable figure. That remains the case.

If however it has not yet been two years since the death of the first to die then matters could be simplified by an appointment of the Trust assets (here possibly the debt or charge) in favour of the surviving spouse or civil partner. This would mean that the Nil Rate Band of the first to die had not been used and so would be available for eventual transfer to the surviving spouse or civil partner whose own Nil Rate Band amount would be increased accordingly.

Examples of our Work

A
A dies on 14 April 2007 with an estate of £400,000, which he leaves entirely to his spouse, B
B Dies on 17 June 2009 leaving an estate of £600,000 equally between her two children
When B dies the Nil Rate Band is £325,000.
As 100% of A's Nil Rate Band was unused, the Nil Rate Band on B's death is doubled to £650,000.
As B's estate is £600,000 there is no IHT to pay on B's death.

B
J dies on 27 May 2007, with an estate of £300,000. She leaves legacies of £40,000 to each of her three children with the remainder to her spouse K.
The Nil Rate Band when J dies is £300,000.
K dies on 15 September 2009 leaving his estate of £500,000 equally to his three children;
The Nil Rate Band when K dies is £325,000.
J used up 40% of her Nil Rate Band when she died; which means 60% is available to transfer to K on his death.
So K's Nil Rate Band of £325,000 is increased by 60% to £520,000.
As K's estate is only £500,000 there is no IHT to pay on K's death.

C
R dies on 14 April 2007 with an estate of £450,000, which he leaves entirely to his spouse, S.
S dies on 17 June 2009 leaving an estate of £675,000 which she leaves equally between her two children.
When S dies the Nil Rate Band is £325,000.
As 100% of R's Nil Rate Band was unused, the Nil Rate Band on S's death is doubled to £650,000.
This leaves £25,000 chargeable to IHT on S's death, producing a tax bill of £10,000.

D
X dies on 14 April 2007 with an estate of £250,000, leaving £120,000 to his son Y and the remainder to his spouse Z.
The Nil Rate Band when X dies is £300,000 so 60% of his Nil Rate Band is unused.
Z later marries W who dies on 14 May 2008 and also leaves 60% of his Nil Rate Band unused.
Z dies on 14 June 2009 with an estate of £700,000 when the individual Nil Rate Band amount is £325,000.
Z's Nil Rate Band is increased to reflect the transfer from X and W, but the amount of increase is limited to 100% of the Nil Rate Band in force at the time.
So Z's Nil Rate Band is £650,000, leaving £50,000 chargeable to IHT on Z's death, producing a tax bill of £20,000.