Married couples and civil partners should
review their wills to take advantage of the new
rules about transferring unused nil-rate
band for inheritance tax (IHT). Before 9
October 2007, the standard tax planning
advice was to use the nil-rate band, currently £300,000,
on the first death by leaving assets up
to that amount to beneficiaries other than
your spouse or civil partner. Now, leaving
everything to your partner will often save
more tax and give the survivor more flexibility.
The change stems from the announcement in the 2007 Pre-Budget
Report. When a person has died, any unused nil-rate
band can be transferred to the estate of a surviving
spouse or civil partner who dies after
8 October 2007. It doesn’t matter
when the first death occurred. On the second
death, the nil-rate band in force at that
time is increased by an amount calculated
by the proportion of the nil-rate band
that was left unused when the first partner
died. The effect is to uplift the first
partner’s
unused nil-rate band to its value at the
second partner’s death.
For example, suppose Mr Jones died in autumn
2002 when the nil-rate band was £250,000 and his will
left £100,000 to his children and
the remainder of his estate to his wife.
Transfers to a spouse are free of IHT
so £150,000 – 60% – of his
nil-rate band was unused. If Mrs Jones dies
at a time when the nil-rate band is £400,000
say, her nil-rate band will be uplifted
by 60% of £400,000 – an increase of £240,000, compared to the £150,000
unused at Mr Jones’s death.
Of course other factors will come into play.
In the period between the deaths, the value of
the couple’s assets could grow at a faster
rate than the nil-rate band. If the estate is
worth more than the combined nil-rate
bands, this growth could result in a higher IHT
liability than if the nil-rate band had
been used on the first death. However, the
survivor could avoid this problem by making
lifetime gifts, a much more flexible
option than the discretionary trust structures
currently in many couples’ wills.
The rules are more complicated where the
survivor remarries and there are many other
things to think about. If you would like
us to look at IHT planning for your own circumstances, please get in touch.
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