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Inheritance Tax

In October 2007, changes were made to the way that Inheritance Tax (IHT) is charged.

The first point to make is that the IHT allowance was NOT increased. The changes simply allow couples to use both of their IHT allowances. They have always been able to do this through proper Will planning - so the Chancellor gave nothing away and the only people who have benefited are those who fail to plan.

How does this work?

Say H died in May 2006 when the IHT allowance was £285,000. He made a Will leaving all of his estate to his wife, W. W died on 10th October 2010 leaving an estate in her own right of £300,000, plus the estate that she inherited from her husband of £285,000, which has now grown to £325,000. So her estate is now valued at £625,000. Under the 'old' rules, W's estate would have qualified for her IHT allowance of £325,000, but the balance of £300,000 would have attracted IHT at 40% - £120,000. Under the 'new' rules, because H did not make use of his IHT allowance (as the gift in his Will to his wife was exempt from IHT anyway), W's estate will be treated differently. She will be able to claim an uplift on her IHT allowance of the percentage amount of H's unused IHT allowance which, in this case, will be 100%. So W's estate will enjoy an increase in the IHT threshold from £325,000 to £650,000 and therefore no IHT will be paid.

The following outline provides some guidance for people who have Wills, or are contemplating making Wills, but it is important to note that specialist professional advice should be sought to ensure that any plan suits your individual circumstances.

Unmarried clients

The above rules only apply to married couples so unmarried couples still need to complete IHT planning under the 'old' rules by making their Wills. They can do this by making Wills which include a ‘Nil Rate Band Discretionary Will Trust’. For more information, please contact a member of the Institute here.

Married couples - who have made 1st death gifts to 'non exempt' beneficiaries

Such couples need to re evaluate (and have re evaluated) the effect that 1st death specific legacies will have on their estate planning on a case by case basis.

Married couples - who have made 1st death gifts into a 'NRB Discretionary Will Trust'

Such clients do NOT need to amend their Wills. However it may make sense to remove the trust from their Wills. Although this can be done after death, it will be easier (and cheaper) to deal with by amending the Will now. However consideration should be made as to whether there is any likelihood that IHT rules will change again which could make the inclusion of a trust a valuable advantage again.

Elderly Clients - who have made 1st death gifts into a NRB Discretionary Will Trust

Such clients need to re evaluate their concerns if saving IHT is no longer a primary concern and consider amending their Wills to replace the NRB Discretionary Will Trust with a Life Interest Will Trust.

Clients with wealthy children

Such clients need to evaluate whether it would be beneficial for their children and subsequent generations, to pass their estate in their Will to a wider group of beneficiaries, or through a Discretionary Will Trust.

Clients who are married - but both have been married before

Such clients are in the fortunate position of being able to make use of three, possibly four, IHT allowances. They need to consider drafting Wills including a 1st death NRB Discretionary Will Trust - and if they already have such Wills, they should NOT amend them!

Clients who have a business (or farm) which qualifies for 100% relief and can be continued after their death

Such clients need to consider amending their Wills to include a first death gift of their business (or farm) to a Discretionary Will Trust.

Clients whose spouse has died and a NRB Discretionary Trust was created in their Will.

Such clients (and the Trustees of the Discretionary Will Trust) need to consider whether it is worth continuing the trust - this decision needs to be made within two years of the death.

The procedure for claiming the unused NRB

The procedure for claiming 'the unused IHT allowance' is not straightforward and claims will not be automatic. Clients should be aware of the importance of seeking professional help to administer their estates, not only on first death, but also on second death.

And finally - those who have not made a Will

"I don't need to make a Will because, when I die, everything will automatically go to my spouse" - NO!

The intestacy rules state that when a married person dies, some of their assets above £250,000 are passed to their children and if there are no children, then some of their assets above £450,000 are passed to other family members.

These gifts not only deprive the surviving spouse of assets - but also use up the IHT allowance of the first spouse to die. This reduces the uplift available on the surviving spouses IHT allowance when they die, which could result in more IHT being paid than would otherwise have been the case. Even simple Wills where husband and wife leave everything to each other would ensure that the survivor has financial security - and a 100% uplift of their IHT allowance when they die.

It has been suggested that the changes in legislation mean there is no longer an incentive for people to make Wills. Not so. Everyone should be urged to make a Will for all the reasons known to Willwriting professionals - but also to ensure that the maximum uplift in the surviving spouses IHT allowance is available when they die.

The days of a tailor-made approach to tax and estate planning are with us. It has always been essential to take professional advice from someone trained and qualified in the subject of Wills, tax and estate planning. IPW members are uniquely placed to provide such advice. To find your local member, please click here.