THE MARSHALL & GALPIN GUIDE TO INHERITANCE TAX -
THE NIL RATE BAND AND THE CHANCELLOR'S RECENT CHANGES

This is a Guide to explain how the announcement by the Chancellor on 9^th October 2007 affects Inheritance Tax and Wills.

What was the position before the change?

When someone dies, the value of their total estate is calculated, and the “Nil Rate Band”, currently £312,000, can pass free of Inheritance Tax.  Anything above the Nil Rate Band threshold is taxed at 40%.  Please note that this does not include any assets passing to a spouse, civil partner or charity because gifts to these recipients are exempt from Inheritance Tax.

On this basis, we previously advised couples who were married or in a civil partnership that to save Inheritance Tax, they should use their Nil Rate Band available on the first death.  In order to do so, and at the same time to preserve the possibility of the surviving spouse or partner being able to access this money if necessary, we advised that wills were drafted to include a Nil Rate Band Discretionary Trust ie. a trust of the same amount as the Nil Rate Band in force at the time of the first death. This enabled the surviving spouse or partner to benefit from the assets in the trust, but on his or her death, those assets were not treated as belonging to the surviving spouse or partner for Inheritance Tax purposes.  This enabled a couple to use each person’s Nil Rate Band allowance, thus enabling £600,000 to pass free of Inheritance Tax, at current rates.

What has changed?

The Chancellor’s announcement has changed the law so that if on the death of the first spouse or partner, that person did not use up all their Nil Rate Band allowance eg. if they left all their assets to their spouse or civil partner (which is exempt from Inheritance Tax, as mentioned above) then on the death of the surviving spouse or civil partner, the survivor’s estate may use whatever element of their spouse’s or civil partner’s Nil Rate Band was not used on the first death.

Each person still has a Nil Rate Band; this has not changed.  However what has changed is that it is no longer necessary that on the first death, assets are passed to the children or into trust rather than to the surviving spouse or partner because the Nil Rate Band is no longer lost if it is not used.   Any unused Nil Rate Band allowance is simply transferred to the surviving spouse or civil partner for future use on the second death.

Please note that this legislation only applies to married couples and civil partnerships.  Unmarried couples may be able to achieve an Inheritance Tax saving through the use of a Discretionary Trust and we will be happy to advise further on this.

Is it necessary for me to change my Will if I have already set-up a Nil Rate Band Discretionary Trust in my Will?

Including the discretionary trust does no harm, and, the Tax Planning Wills we have drawn up have been drafted flexibly enough that the trust doesn't have to be used if it is not needed when the time comes. The only disadvantages is that having the Discretionary Trust structure inevitably increases administration slightly on the first death even if the trust is not used as the Executors will have to sign a document confirming this.

There remain advantages to having Tax-Planning Wills.

(i)        If the surviving spouse or civil partner has to go into residential care, under current rules, the funds in the Trust should not be taken into account in assessing the surviving spouse or partner for care fees (although, if the surviving spouse or partner chose to use the trust fund for that purpose, that could be done of course, with the agreement of the Trustees). 

(ii)        On the surviving spouse’s or partner’s death, your children may not want or need further wealth at that time, and if Deeds of Variation are no longer available (they must be completed within 2 years of death), the Trust Fund could be useful to pass funds direct to grandchildren, bypassing the children.

(iii)       Using the trust can protect funds for children or grandchildren if the surviving spouse remarries.