Inheritance Tax Transferable Nil Rate Bands
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It applies to all cases where the second spouse to die dies after 9th October 2007 regardless of when the first spouse died; and
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It allows the unused Nil Rate Band of the first spouse to die to be altered in value to the value of the Nil Rate Band applicable on the second death.
The relief is proportionate so that no more than two Nil Rate Bands can ever be claimed. There are mechanisms for families where the last to die was widowed more than once.
It is not, as was widely reported in the media last Autumn, a doubling of the Nil Rate Band. The new relief only applies to married couples and civil partners.
Gifts to anyone other than a spouse or charity and chargeable lifetime transfers will still use up the available Nil Rate Band of the first spouse to die in the usual manner.
The mechanism already exists for the use of two Nil Rate Bands against the combined estates of spouses and civil partners by the use of effective Will planning. However, this new relief will save families having to enter into complex arrangements to ensure that the Nil Rate Band is used on the first death.
The Chancellor has announced that, in future years, both house prices and inflation will be taken into account when setting the Nil Rate Band, though he did not specify how this would be done. In the current financial climate, this may mean a freeze on future increases to the threshold. However, we do know that the Nil Rate Bands have been set for the next two years - £312,000 for 2008/09, £325,000 for 2009/10 and £350,000 for 2010/11.
Many clients will be concerned as to whether or not they will have to alter an existing will containing a Nil Rate Band Discretionary Trust. The answer is NO if your arrangements are properly drawn up. This is because properly drawn trusts allow a wide range of activity, including the absolute payment of the assets to the surviving spouse that is compatible with the new relief.
Nil Rate Band Discretionary Trust Wills will continue to be of vital importance where :
Protection of assets is needed from long term nursing home or care costs or from divorce on a second marriage of the surviving spouse or from the simple financial naivety of the surviving spouse;
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The £55k restriction where the surviving spouse is domiciled outside the UK, for example Republic of Ireland spouses;
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People financially dependent on one another are unmarried – not just cohabitees but also siblings living together;
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The assets being placed in the trust are likely to increase significantly in value beyond the projected rise in the Nil Rate Band;
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The trust is likely to be used for wider family purposes rather than just straightforward Inheritance Tax planning – where there are vulnerable or disabled family members.
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Lastly, whilst the new relief is to be widely welcomed, the transferable Nil Rate Band could be taken away in the future. This Labour government has a history of bringing in tax changes and then some years later reversing them - see the recent abolition of
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Capital Gains Tax taper relief for example. It may be that a new government may also wish to change the relief. Therefore it may be sensible in any event to look to secure the
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Nil Rate Band allowance on the first death.
For further information on the issues covered in this article, please contact Brid McColgan, Associate Director, Private Client Department, on 028 9055 3300, or email, brid.mccolgan@tughans.com.
The content of this article is provided for information purposes only and does not constitute legal or other advice.