Inheritance tax
Married couples and civil partners should review their wills to take advantage of the new rules about transferring unused nil-rate band for inheritance tax (IHT). Before 9 October 2007, the standard tax planning advice was to use the nil-rate band, currently £300,000, on the first death by leaving assets up to that amount to beneficiaries other than your spouse or civil partner. Now, leaving everything to your partner will often save more tax and give the survivor more flexibility.
The change stems from the announcement in the 2007 Pre-Budget Report. When a person has died, any unused nil-rate band can be transferred to the estate of a surviving spouse or civil partner who dies after 8 October 2007. It doesn’t matter when the first death occurred. On the second death, the nil-rate band in force at that time is increased by an amount calculated by the proportion of the nil-rate band that was left unused when the first partner died. The effect is to uplift the first partner’s unused nil-rate band to its value at the second partner’s death.
For example, suppose Mr Jones died in autumn 2002 when the nil-rate band was £250,000 and his will left £100,000 to his children and the remainder of his estate to his wife. Transfers to a spouse are free of IHT so £150,000 – 60% – of his nil-rate band was unused. If Mrs Jones dies at a time when the nil-rate band is £400,000 say, her nil-rate band will be uplifted by 60% of £400,000 – an increase of £240,000, compared to the £150,000 unused at Mr Jones’s death.
Of course other factors will come into play. In the period between the deaths, the value of the couple’s assets could grow at a faster rate than the nil-rate band. If the estate is worth more than the combined nil-rate bands, this growth could result in a higher IHT liability than if the nil-rate band had been used on the first death. However, the survivor could avoid this problem by making lifetime gifts, a much more flexible option than the discretionary trust structures currently in many couples’ wills.
The rules are more complicated where the survivor remarries and there are many other things to think about. If you would like us to look at IHT planning for your own circumstances, please get in touch.