13 February, 2008
In his Pre-Budget Report the Chancellor proposed a "transferable nil rate band" for married couples and civil partners. The "nil rate band" is the part of your chargeable estate taxed at 0% on death. In the current tax year this is the first £300,000.00. The amount of the nil rate band tends to increase each year in line with inflation. If your estate is valued at more than £300,000.00 (or the current nil rate band) then Inheritance Tax will become payable on the value over £300,000.00 at a rate of 40%.
Assets passing between spouses and civil partners on death are exempt from inheritance tax. However, prior to the Chancellor's announcement, couples leaving everything to each other would "waste" the nil rate band of the first to die and would only have one nil rate band available on the second death. To get around this, people were either making outright gifts on the first death to use the nil rate allowance or were using trust arrangements.
The Chancellor's proposals are to allow any unused nil rate band from the first spouse to be transferred to the surviving spouse to increase their nil rate band on death. This will be done as a percentage increase. This will mean that in cases where couples have left everything to each other on first death, on the second spouses death, the executors of the estate can claim two times the nil rate band available at the time of the second spouse death (£300,000.00 + £300,000.00 = £600,000.00 in this current year). Please note that if the first estate has already used part of their nil rate band then this will reduce the amount that can be transferred to the survivor. For example, if the first spouse has made gifts to children amounting to £150,000.00 on their death, then this would have used up 50% of their nil rate band and only 50% could be transferred to be used by the second spouses estate.
The proposals by the Chancellor are to take effect from 9 October 2007 and will be back-dated so that in cases where a spouse has already died and the second spouse dies after 9 October 2007 then the second spouse's estate can still utilise any unused portion of the first spouse's nil rate band allowance. There is a note of caution in that the proposals are not yet formalised and could still be altered. Therefore, until it becomes law there is some uncertainty.
It is also still important that people seek advice and make wills as relying on this tax proposal will not be the best course of action for everyone. In situations where people have complicated affairs, second families or are concerned about nursing home fees or managing money in old age, it may still be advisable to use trust arrangements.
People should also be aware that it is still important to make a will as if you die without having made a will then the law does not automatically provide for your spouse to receive everything. If your estate is worth more than £125,000 then the law provides for some of your estate to pass to your children and imposes a trust arrangement on your spouse. This can be not only complicated for your spouse and children but also inefficient for tax.
Please contact the Wills, Probate, Tax and Trusts department to discuss more fully your estate planning and your Wills to ensure that you are keeping pace with the changes. Our specialist Wills solicitors can help you with any Will related legal issues.