The next step

http www hmrc gov uk pbr2007 notes pdf htm

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Facelift or disguise?

What’s changed? Under current law, when you die the estate (assets less liabilities) you leave is entitled to an amount known as the IHT-nil rate band (NRB), which is taxable at 0%. The NRB for deaths in 2007/8 is £300,000. Above this, the rate is 40%. However, transfers of property between spouses or civil partners are generally exempt from IHT. This means that if you die leaving some, or all of the property, to your spouse or civil partner you may not have used up your NRB. New rules are to be introduced which will allow any NRB unused on the first death to be used when the surviving spouse or civil partner dies. This will effectively allow two NRBs to be used on the second death. At current rates that’s a maximum of £600,000 IHT-free.

For example. If, on the first death, the chargeable estate is £100,000 and the NRB is £300,000 then £200,000 of the original NRB would be unused. If the NRB when the surviving spouse dies is, say, £300,000 then the total IHT-free is £500,000 (£300,000 + £200,000).

Tip 1. The change is undoubtedly going to benefit married couples. It will be possible for married couples and civil partners to transfer their NRB allowance to the surviving spouse or civil partner on death. If you have quite sensibly made wills to assist with IHT planning you now need to review them as certain provisions may no longer be necessary, e.g. the first spouse leaving £300,000 - the tax-free threshold - to a trust or their children, and then leaving anything on top of that to the surviving spouse.

Tip 2. There are still some issues to be clarified, e.g. the proposal doesn’t provide any real benefit for unmarried couples. They will continue to use their wills in a tax-effective way and make arrangements to preserve the NRB of the first to die. So unmarried couples (and siblings who live together) need to keep planning to avoid IHT.

The next step

For a link to the Taxman’s Pre-Budget Report notes, visit the Download Zone at http://tax.indicator.co.uk (TX 08.02.01).