Contrary to the headlines, the threshold for Inheritance Tax (IHT) for married couples, the ‘nil rate band’, has not been doubled but has stayed precisely the same, currently £300,000 per person. The change lies in the ability to transfer unused nil rate band between spouses or civil partners. This will make estate planning easier for many couples and protect some who have not or cannot take other measures.
If you have already made the standard IHT planning wills incorporating a discretionary trust of the nil rate band, then there is no need for them to be changed. The trust can be disbanded or can still operate so as to enable two nil rate bands to be used on the second death. And when the time comes, there may be other family reasons why the flexibility of such a trust is advantageous.
If you still have a will leaving everything to your spouse/civil partner then there is now no need to change it purely to avoid paying up to £120,000 in additional IHT.
This is the good news but there are inevitably losers. Those whose spouses/civil partners made gifts in lifetime and failed to survive for 7 years may now find their total nil rate band is not £600,000 as headlined. There are also those who are already bereaved and who sensibly tried to protect their family’s wealth in the only practicable way open to them at the time. These widow(er)s may find they have restricted their claim for the second nil band to the amount of the band at the date of first death.
However if your spouse/civil partner died less than 2 years ago, some planning can be done now to preserve the right to claim the full uprated nil rate band in the future.
So how can you best plan to take advantage of the new regime? We are promised a review of inheritance tax prior to the next finance act so there are likely to be further changes to come, but just to wait and do nothing is still not good practice.
Regardless of the transferability of nil rate bands and that your joint estates may not be as much as £600,000, it is vital to have a will, appointing executors and expressing your wishes. If you do not, then under the intestacy rules, your surviving spouse/civil partner will get £125,000 plus a life interest in half the rest of your estate and your children will get the other half. This may mean the house has to be sold.
Today’s families are more fluid, with more marriages, half brothers and sisters and step children. You may leave everything to your wife, assuming that on her death the estate will be divided between all your respective children but if she does not make a will, the estate will go only to her children, not to yours by previous marriage. By making the right will, you can ensure this does not happen.
If you are not married/civil partners, then the position may be worse. Your other half will get nothing as of right and may have to take your children to court to get a share or a right to continue living in the house.
You also need to check how you own your house. If you own it as joint tenants, it will pass automatically to the other owner on first death, whatever your will says. If you are not married - cohabiting or share with a sibling or friend - and your half is worth more than £300,000, the house may need to be sold to pay the IHT.
There are also other reliefs such as business property relief which may be lost if the business assets are left to a spouse/civil partner rather than children or a trust.
It is not only proper will planning which will save tax. Planning in lifetime by using the exemptions or making larger gifts and surviving 7 years is still one of the best means of reducing your IHT bill. Even after the changes to IHT and trusts made last year, grandchildren’s trusts can still be made which save income as well as inheritance tax.
But beware of giving away too much too late as the additional nil band cannot be used against lifetime gifts, only against your estate at death.
Finally, think of the practicalities. The claim to use the balance of your deceased spouse/civil partner’s nil band is not made until the second death so it will be up to your personal representatives to provide the necessary information to the tax office and they won’t be able to ask you where to find it! So prepare now. Make sure you keep with your own will a copy of your marriage certificate, your spouse’s will, death certificate and all the details about what he/she owned at death and who it went to. The claim can be made regardless of how long ago he/she died. If you have been married more than once then you should keep these details about all spouses, as the claim can be made for all the unused bands up to a maximum of the nil rate band in force at the date of your death.
For more information, please contact Mary Hase or complete the online form below.