Inheritance Tax: Where are we now?
Over the last few years our dear Prime Minister (when Chancellor) has given us a real run around with changes to Inheritance Tax (IHT). We have had to cope with the taxation of Pre Owned Assets the “Rationalisation of the Taxation of Trusts” (an excuse for putting nearly all Trusts under the disadvantageous discretionary trust taxation regime) and this year with a sleight of hand imaginative to say the least, we were briefly left with the impression that IHT tax free allowance (called the Nil Rate Band (NRB)) was to be doubled.
So, where are we now?
Well, first let us look at the chancellor’s most recent proposals which were announced in his Pre Budget Review last October. This initially sounded as though the NRB was to be doubled to £600,000, but not for long! The new position is that for any person dying on or after 9th October 2007 where that person has/had a spouse or civil partner who predeceased and who used none or only part of his NRB then the unused portion of the NRB of the first to die can be added to the tax free NRB of the second spouse/ civil partner on their death. This means that in the current tax year where a second spouse dies he/she will be able to leave £624,000 tax free if the first spouse left everything to the survivor. Those with more than one previous spouse/civil partner may use parts of both predeceasing spouses NRB, but only to a maximum of two full NRBs at the death of the second spouse; and it doesn’t matter whether or not the first spouse had any money to leave!
This puts most people now in the same position as those who had chosen previously to go to their solicitor and draft Wills ensuring that, as a family, they used up both parents Nil Rate Band tax free allowance. The saving in tax this year for planning of this sort is £124,800. Whilst solicitors now will not as often need to recommend NRB tax planning does it mean that there is now no point in bothering to make a Will?
Far from it! I know you would expect me to say that, but the following remain cogent reasons for making a Will.
- The intestacy rules are presently more than 20 years out of date (as to values) with the result that if you die intestate (without a Will) what happens often would not correspond with your wishes
- You can chose and appoint your own Executors
- You can express wishes as to funeral arrangements
- You can stipulate ages at which young beneficiaries receive their gift (ie later than 18years)
- You can gift “Business Property” to chargeable beneficiaries and save IHT
- You can deal appropriately with property where there are beneficiaries from different relationships
- You can leave your half of your joint estate to your spouse for his/her life to protect that capital from nursing fees and it will pass according to your wishes on the second death benefiting from a double NRB
You may well ask whether there is any future for the “old” tax planning which has been so common over recent years where it was important to ensure that each parent used his/her NRB. The answer to that is Yes, there will be times when it is appropriate to used a NRB Discretionary Trust or outright Gifts on the first death; but not nearly as often as before. Examples could be where there is a big age difference between spouse and a judgement is made that investments in a NRB Discretionary Trust would outperform the Chancellor’s likely indexation of allowances. This is even more relevant now under the new Capital Gains Tax regime Also where a Testator is seeking to protect part of the Capital of joint estates from payment of care fees.
One of the most frequently asked questions right now is from those who have the earlier NRB Discretionary Trust Wills. The question is always a variant of “are these (old) Wills still any good?” And the answer is, nearly always, that such Wills remain absolutely fine. They are flexible, still retain the possibility of doing a little sophisticated tax planning (if that is relevant at the time) and if not within two years of death the tax planning in those wills can be reversed to take advantage of the new rules.
But that is not all. There are still other things that can be considered to reduce IHT and although not suitable to everyone remain a part of the armoury for transferring wealth down a generation minimising the impact of IHT. Some examples are:
- Use of the Annual exemptions (£250 and £3000 plus additional gifts on marriage
- Gifts out of income (tax free without limit but donor must retain standard of living)
- Outright Gifts and survive for 7 years (where there is spare cash)
- Gifts into a NRB Discretionary Trust for children/grandchildren (where control is needed) and then survive for 7 years
- Deeds of Variation
- Leave qualifying “Business” or “Agricultural” Property to children and substantial cash to spouse who can then buy back the “Business”/”Agricultural” Property leaving children with the cash and the spouse to get the relief again in his/her estate (if he/she survives 2 years
- Unusual but where a client widow/er has inherited all from his predeceasing spouse and remarries he/she could in his will set up a double NRB discretionary trust for new spouse and children and still leave his new wife a further NRB in her estate
Emigrate and live for 3 years or more in a jurisdiction which does not levy IHT
Whilst they remain the two certainties in life, how could death and tax be so interesting!
