Quick Guide to Inheritance Tax
On 9 October 2007, the Chancellor announced changes to the
Inheritance Tax ("IHT") regime
affecting the way in which the Nil Rate Band ("NRB"), one of the
principal reliefs from IHT,
may be claimed. The changes will affect married couples or civil
partners only and will only
come in to effect in respect of deaths on or after that date.
Both before and after 9th October 2007, the estate of each
spouse or civil partner has a NRB
(a part of the estate which can be taxed at 0%) which in the tax
year 2007/08 was £300,000.
However, gifts between spouses are exempt from IHT and do not
operate to utilise the NRB.
"You have been efficient, sensitive and extremely thorough"
Before 9th October 2007 the NRB of the first to die had to be
utilised at that time if the couple were to take full advantage of
both NRBs. Typically, this was achieved by making gifts to a
Discretionary Trust created by the Will or by outright gifts to
children or descendants.
After 9th October 2007, any unutilised part of the NRB of the
first to die, which would
otherwise have been lost, can be carried forward to the survivor's
NRB. More specifically, the
unutilised percentage of the NRB of the first to die is applied to
increase the value of the
survivor's NRB.
For example A died on 1st December 2007 leaving everything to
his spouse. Transfers
between spouses are exempt from IHT so there is no chargeable
transfer which means that
100% of A's NRB of £300,000 is unutilised. A's spouse B died on
1st December 2010 when
the NRB was £325,000. The extra NRB available to B's estate is
£325,000 multiplied by the
percentage of the unutilised NRB in A's estate which is 100%.
Accordingly, B's NRB is
increased to £650,000.
The principle extends to cases where the surviving spouse or
civil partner dies after
9th October 2007 but the first to die died before that date. As in
the previous example,
assume that the surviving spouse B died on 1st December 2010 when
the NRB was £325,000; but spouse A died on 1st December 2002
leaving an estate valued at £250,000. At that time, the NRB was
£250,000. In A's Will, he left 50% of the estate to his spouse, B,
with the remaining 50% divided between their children. This was a
chargeable gift but was
covered by A's NRB. In calculating the NRB on B's estate in 2010
the executors can look
back to A's estate, take the proportion of the unutilised NRB,
50%, and apply it to the NRB in
2010 thus increasing it to £487,500 (50% x £325,000 plus
£325,000).
Is there now any point in retaining or including IHT planning in Wills?
In considering this, one point is that most Discretionary Trusts
contained in Wills can be
administered as if the first to die had left everything to the
other - though action must be
taken within two years. Another is that for a variety of reasons,
married couples may decide
that there remain advantages in not leaving their estates to each
other outright.
Further, where on the survivor's death the combined estates exceed
the increased NRB
figure, IHT will still be payable. There may still be merit in
transferring property into Trust
or outright to other beneficiaries on the first death which could
result in a lower overall IHT
burden.
For surviving spouses and civil partners where the first to die
died before 9th October 2007,
the priority now should be to try to quantify what percentage of
the unutilised NRB is
available.
As the law stood before 9th October 2007 there was no particular
reason to calculate this
figure accurately or to retain records about it. However, in order
to claim the increased NRB
on the second death it will be necessary to justify the percentage
increase claimed, so it will
be worth investing in personal and professional time to seek to
track down that information
now.