Saving Inheritance Tax

In his Pre Budget Report on Tuesday 9th October 2007, the Chancellor, Alistair Darling, announced changes to the way that Inheritance Tax (IHT) is charged.

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

How will this work?

Say H died in May 2006 when the NRB threshold was £285,000. He made a Will leaving all of his estate to his wife, W. W died on 10th October 2007 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 £300,000. So her estate is now valued at £600,000. Under the ‘old’ rules, W’s estate would have qualified for her NRB allowance of £300,000, 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 NRB 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 allowance of the percentage amount of H’s unused NRB which, in this case, will be 100%. So W’s estate will enjoy an increase in the IHT threshold from £300,000 to £600,000 and therefore no tax will be paid.

What does this mean for people who have made tax effective Wills and for those considering making tax effective Wills?

The first piece of advice is – don’t panic. The following outline should provide some guidance for people who have Wills, or are contemplating making Wills.

Unmarried clients

Nothing has changed for them and they still need to complete IHT planning under the ‘old’ rules since the changes only apply to married couples and civil partners.

Married couples – who have made 1st death gifts to ‘non exempt’ beneficiaries

Such clients 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. It makes no sense for them to spend money to remove a trust from their Wills when, if appropriate, it can easily be undone on 1st death – especially as it is possible that the rules could change again under a new government, making the inclusion of a trust a valuable advantage.

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

Such clients need to re evaluate their concerns now that saving IHT may not be their primary concern and consider amending their Wills to replace the 1st death NRB Discretionary Will Trust with a 1st death 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 appear to be in the fortunate position of being able to make use of three NRB 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 who have had a spouse die 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.

The procedure for claiming the unused NRB

HMRC have released details of the procedure for claiming ‘the unused NRB allowance’. The process is not easy 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

The intestacy rules state that when a married person dies, some of their assets above £125,000 are passed to their children and if there are no children, then some of their assets above £200,000 are passed to other family members.

These gifts not only deprive the surviving spouse of assets – but also use up the Nil Rate Band of the first spouse to die. This reduces the uplift available on the surviving spouses Nil Rate Band when they die, which could result in more IHT being paid. Even simple Wills leaving everything to each other would ensure that the survivor has financial security – and a 100% uplift of their Nil Rate Band 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 NRB 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

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