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Inheritance Tax Can Still Damage Your Wealth
Introduction
Inheritance Tax (IHT) is a tax on gifts you make during your lifetime or on death. However, whether IHT is or may become payable depends upon the tax regime in place at the time.
On a person's death, if the taxable estate exceeds the NRB then IHT at 40% is payable on the excess value subject to the availability of certain exemptions and reliefs.
IHT has been in the political spotlight recently.
In his pre-budget report on 9 October 2007 the Chancellor announced a significant alteration to the way married couples and civil partners are to be assessed for IHT.
What has changed?
Before the announcement if a wife, husband or civil partner left their entire estate to their surviving spouse or civil partner there was no IHT payable because the spouse exemption applied. Unless the Will was varied no use was made of his/her NRB and the opportunity to save potentially £120,000 (ie the present NRB of £300,000 x 40%) was lost.
Under the new rules the NRB of the first spouse or civil partner to die may be transferable to the survivor.
Where the survivor's death occurs on or after the 9 October 2007 the value of the transferable NRB will be calculated with reference to the tax regime applicable on the first death and is based on the NRB then unused.
The following examples illustrate the position if a couple both die leaving all their taxable estate by Will and the NRB threshold remains at £300,000:
| On the first death, all to the survivor except | The NRB % transferable to the survivor's estate | Value that can pass tax free on the death of the survivor |
A. £300,000 gift eg to children or to a discretionary trust | Nil | £300,000 + Nil = £300,000 |
B. £150,000 gift eg to children or to a discretionary trust (leaving 50% of the NRB unused) | 50% | £300,000 + 50% = £450,000 |
C. No other gifts made leaving 100% NRB unused | 100% | £300,000 + 100% = £600,000 |
What should you do?
Keep evidence of gifts and trusts you make and records relating to a deceased spouse or civil partner and the distribution of their estate, as this will make it easier to claim the transferable NRB. We would advise that you consult a solicitor to ensure that this is in order.
If you have carried out tax planning already eg by completing discretionary trust wills you may not need to unravel things but you may want to review your options.
Should you make or change your Will?
As the new rules apply whether or not you have a Will we recommend you review your wishes taking them into account.
For further advice and assistance on Wills, Trusts, Estates and taxation please contact a member of our Trusts and Estates Team on 01884 203008 or email taxteam@ashfords.co.uk
The information in this memorandum is correct but it is inevitably very general and is no substitute for individual professional advice. Ashfords can therefore accept no liability in the event of anyone relying solely on this article*.
Ashfords is regulated by the Solicitors Regulation Authority. The information in this article is intended to be general information about English law only and not comprehensive. It is not to be relied on as legal advice nor as an alternative to taking professional advice relating to specific circumstances.
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