Inheritance Tax Proposals

Beware popular press coverage on the Chancellor’s pre-budget speech, 9^th October 2007, where it was announced the proportion of nil rate band not used by a spouse or civil partner on ‘first’ death, could be utilised by the remaining partner. On the face of it, this proposal appears particularly advantageous as the surviving spouse will utilise the proportion of nil rate band not previously used, as a percentage of the current nil rate band. Read on for further information.

First, we must highlight, this may not be a benefit to everyone and planning is still essential.

Second, anyone with ‘will’ planning more than likely already had the ability to do exactly this.

Any mention of partner in this document relates to a spouse or official civil partner and does not infer simply two unmarried people who may or may not live together.

However, we consider this approach beneficial for individuals who have not made preparations, or who died without full planning. It is also useful for those whose wealth is primarily in non-liquid assets such as property. For surviving partners, it is important they create a file with details of their spouse’s or civil partner’s death. For people who have remarried, the position becomes more complex and it is even more important that details are retained for their future Executors.

To obtain this benefit, the HMRC have introduced form IHT216 to be submitted at the date of the death of second death by their Executers.

It is important to note that:

At the time of writing, this legislation has not been passed yet (Finance Bill due in 2008).
Rules of intestacy still apply, and so if no ‘will’ is provided, there could be serious financial consequences that could result in the surviving spouse losing assets and control of assets.
Contrary to popular press coverage, this does not double the nil rate band available to married couples, it only allows the transfer of the unused element to the surviving spouse.
For those people who have already established wills with discretionary will trust and liquid assets, this route is still more effective and it effectively nullifies this proposal.
Caution must be exercised on relying on this ‘back-up’ facility as any investment may outperform the rate of increase of the future nil rate band. For example, since 1997 to date, the nil rate band has increased by 3.38% per annum on average while residential property has increased by 9.16%; the main reason why inheritance tax is affecting so many more people

Will Trusts

The discretionary will trust is not dead! What could be the benefit of setting up a trust?

For those with liquid assets such as cash or investments, this route may still provide greater benefits than transferring the nil rate band to the surviving spouse. As long as the nil rate band increases at a lower rate than the value of the assets, a will trust will be of greater benefit than reliance on the transfer of the nil rate band to the surviving spouse or civil partner. Moreover, it is possible for the will trust to make loans to the surviving partner, which will be a debt on the surviving partner’s estate and therefore further reduce the inheritance tax due.

Beyond these important financial considerations, a will trust also offers a degree of protection and safety from future legislation and creditors. What we hear from our clients is that they want control over what happens to their assets. An important aspect is using a will trust also gives the deceased spouse control over what happens to their assets, while continuing to provide for their loved one.

It is important that people do not rely on these latest proposals. By using the will trust planning available to you, you can still provide for your loved ones, have a degree of control, protect your assets and reduce the inheritance tax due more than by transferring the nil rate band to the surviving spouse. This should not be deemed as individual advice and you should seek further information particular to your individual circumstances. For further information, contact AisaProfessional on (01672) 569111.