Inheritance Tax is the tax applied to the estate of someone who has died.
In October 2007, changes were made to the way that Inheritance Tax (IHT) is charged, meaning that now, the tax-free allowance can be transferred between spouses.
How does this work?
For example, let's say that Mr H died in May 2006 when the IHT allowance was £285,000. He made a Will leaving all of his estate to his wife, Mrs H.
Mrs H 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, Mrs H'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 Mr H did not make use of his IHT allowance (as the gift in his Will to his wife was exempt from IHT anyway), Mrs H's estate will be treated differently. She will be able to claim an uplift on her IHT allowance of the percentage amount of Mr H's unused IHT allowance which, in this case, will be 100%.
So Mrs H's estate will enjoy an increase in the IHT threshold from £325,000 to £650,000 and therefore no IHT will be paid.
The rules set out above apply to married couples only. Therefore, it's vital that unmarried couples still 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 by clicking here.
Married couples - who have made 1st death gifts to 'non exempt' beneficiaries
Such couples may need to re evaluate 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'
Couples in this category do not need to amend their Wills. However, it may make sense for them to remove the trust from their Wills. Although this can be done after death, it may be easier - and cheaper - to deal with their estate if their Will is amended now.
Before this is done, it may best for clients to consider the likelihood of IHT rules changing again. This 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. Instead, they should consider amending their Wills to replace the NRB Discretionary Will Trust with a Life Interest Will Trust.
Clients with wealthy children
Clients in this category 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.
Clients in this categry (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
Whilst there is a procedure for claiming 'the unused IHT allowance' 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"
Despite this being the view of so many couples, it simply isn't true. 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 asset, 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.
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.
Free guide to making a will