Do the Inheritance Tax Changes affect me?

Article

14 October, 2008

In October 2007, the government announced changes to the inheritance tax rules. The new rules relate to the amount of your estate on which you do not have to pay inheritance tax (the nil rate band). The changes now allow spouses to carry forward any unused nil rate band on the first death to be used against the survivors estate on second death. Based on 2008/2009 rates, a married couple (or civil partners) will therefore have a combined tax free allowance of £624,000, subject to certain conditions. The allowance carried forward will be expressed as a percentage and the surviving spouses nil rate band will increase by that amount.

Each individual has their own personal inheritance tax nil rate band (currently £312,000). Before October 2007, spouses who left everything to the survivor "wasted" the nil rate band of the first to die as only one nil rate band could be used on the survivor's death. If the value of the combined estate was more than the nil rate band then inheritance tax was paid on the balance at a rate of 40%.

It was possible to use the nil rate band of the first spouse by most commonly, making direct gifts to people other than the surviving spouse, such as children or by including a discretionary trust in their Will. However, many people could not afford to make large gifts on the first death as it would leave the survivor short of funds or they were not comfortable with involving a trust.

The new rules will allow married couples (and civil partners) to keep their affairs simple and leave everything to the survivor whilst still having the benefit of both spouses nil rate bands. However, you will still need to make a Will as without one everything will not automatically pass to the survivor. Here are a few points to bear in mind:

  • The executors of any surviving spouse who dies after October 2007 can make the claim to carry forward any unused nil rate band, even if the first spouse died before October 2007.
  • The nil rate band is not automatically transferred to the surviving spouse. On the surviving spouses' death, their executors will need to make a claim and provide proof that the nil rate band was not used (or not wholly used) on the first death. This means that it will be important to keep records when the first spouse dies.
  • If part of the nil rate band is used on first death e.g. by legacies, then only the unused percentage can be carried forward.
  • The unused percentage is calculated by reference to the nil rate band at the date the second spouse dies and so it will increase over time.
  • If the surviving spouse re-marries the nil rate band of the first spouse could be lost. This is because you cannot accumulate unused nil rate bands. You can only ever claim the benefit of one full nil rate band extra.

Leaving everything to the survivor may not be the best option for everyone. Wills which use a discretionary trust are still effective for saving inheritance tax and are often a much more flexible option. They have other benefits such as protecting assets from care fees, providing funds which can be used for children and grandchildren and protecting assets in the event that the survivor remarries. They can give greater inheritance tax savings if it is likely that the assets being held in the trust would grow at a greater rate than the nil rate band.

For further information please visit the Wills, Probate, Tax and Trusts or contact our Wills Solicitors on freephone 0800 975 2463 or by email

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