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Inheritance Tax - Where Do We Stand Now?

07 November 2007

Given all the media coverage on Alistair Darling’s pre-budget report, you can’t have missed the changes to IHT (inheritance tax).

While the current nil-rate band allowance remains unaltered at £300,000 for each individual, any unused allowance is now transferable between spouses and civil partners. But it doesn’t necessarily mean the survivor gets a double allowance. That depends on what happens when the first partner dies.

Let’s take the case of Jack who died in 2002, leaving his estate of £250,000 (equal to his nil-rate band allowance) to his wife Jill. Jill dies in 2010 when the allowance is £350,000. The allowance available at her death will be £700,000.
However, if Jack had divided his state equally between his daughter and Jill, Jill’s allowance at her death in 2010 would only benefit from an additional 50% allowance, bringing the total to £525,000.

Where do the new rules leave us with nil-rate discretionary trust wills?

They seem to put married couples with simple Wills on a similar IHT footing to those with IHT-efficient wills. Because the trust is very flexible it can provide other benefits such as protecting assets from being eaten up by nursing fees; preserving wealth for children, and providing a sound tax-planning vehicle for future generations. It can also save IHT for the families of unmarried couples.
We’re not advocating that people with IHT-efficient wills need to change them -although a review would be wise. But those who have contemplated IHT-efficient wills prior to Mr Darling’s pre-budget report shouldn’t ignore the other opportunities that trusts can provide.
If your spouse or civil partner has died, you should retain all the relevant information about the estate. Keep a note of the estate value, any gifts made in the seven years prior to their death and a copy of the death certificate. Your executors are very likely to need these details in order to make sure you get the right nil rate band allowance on your death.

A word of warning

If your spouse or civil partner has died within the past two years having left an IHT-efficient will, it is very important to review the relative benefits of keeping or dispensing with any discretionary trust that may have arisen under that will.
Failure to act could result in an unnecessary amount of inheritance tax being payable on your death.

For more information contact Harvey Barrett
 

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