Gardner Leader

Inheritance Tax Update

We asked Robert Jobson, Associate in the Inheritance Protection Team at Gardner Leader Solicitors, to answer some questions about the recent changes to inheritance tax.

Q. I understand that in the Pre-Budget Report on 9 October 2007, the Chancellor Alastair Darling increased the nil rate band for Inheritance Tax to £600,000 – is that correct?
A. No – the nil rate band was not actually increased to £600,000 but it is now possible to make use of both spouses’ nil rate bands on the death of the second spouse. Therefore, if the first spouse dies leaving their entire estate to the surviving spouse, on the surviving spouse’s death, there will be a tax-free estate of £600,000 (twice the current nil rate band of £300,000). Individuals who have never married still have a nil rate band of £300,000.

Q. Does this still apply even if the first spouse died 20 years ago?
A. Yes, but only if the surviving spouse dies after 9 October 2007.

Q. What if the first-to-die gave half of their estate to their children and the other half to the surviving spouse?
A. In that circumstance, an additional 50% of the nil rate band would be available for use following the death of the surviving spouse. Therefore the tax-free estate would now be £450,000.

Q. My spouse and I have previously made Wills incorporating discretionary trusts to save Inheritance Tax – are they still relevant?
A. Whilst you would not necessarily prepare such Wills today, they are still valid and may still be beneficial.
Such Wills were prepared so as not to “waste” the nil rate band of the first spouse to die. They did this by passing assets up to the value of the nil rate band to a discretionary trust rather than to the surviving spouse. As a result, the value of the assets in the trust (commonly half of the value of the house) did not form part of the surviving spouse’s assets on their subsequent death. This, therefore, ensured that both nil rate bands of a married couple were made available. As both nil rate bands are now available on the second death, it is no longer necessary to prepare such Wills for tax planning purposes.
I recommend that you contact your solicitor to discuss your requirements now that the law has changed.

Q. I note that the nil rate band is increasing to £350,000 – when is that likely to happen?
A. The Chancellor indicated that the nil rate band will be £312,000 for the year to 5 April 2009, £325,000 for the year to 5 April 2010 then £350,000 for the year to 5 April 2011.

Q. I am in a civil partnership – does the new Inheritance Tax regime apply to me?
A. Yes – everything stated above also applies to civil partners.

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