You may have seen the media coverage of Alistair Darling's Pre Budget Report on 9 October 2007. The measure that grabbed the headlines was his introduction of a 'transferable nil rate band' for inheritance tax purposes.
Over the last few years, more people have found themselves dragged into the inheritance tax net because they own assets worth more than the 'nil rate band' (presently £300,000). When someone dies, if there is more than £300,000 in the estate, the surplus is generally taxed at 40%. Previously this caused a particular problem for married couples and civil partners, because when the first person died they could transfer assets to each other tax free due to the 'spouse exemption'. This meant that all of the couple's assets ended up 'bunched up' in the estate of the survivor. So, when the second person died and left the couple's combined estate to their children or other beneficiaries, only the second person's nil rate band was available to reduce the inheritance tax bill.
The changes announced in the Pre Budget Report mean that from now on, the surviving spouse or civil partner's executors will be able to make a claim to the Revenue for any unused nil rate band allowance on the first death to be transferred to the second estate, thereby increasing the tax free amount available on the second death. Better still, the unused proportion of the nil rate band that is carried forward is then applied to the nil rate band allowance in force as at the date of the second death. If the second spouse dies many years after the first, this could greatly increase the amount of the second estate which passes tax free - see the sample calculation below:
Example:
Pat dies on 26 September 2007, leaving an estate worth £400,000 in total. She leaves legacies of £15,000 to each of her children, Tom and Helen, and the residue of her estate to her husband, Tony. The nil rate band amount when Pat dies is £300,000 and gifts to spouses are exempt from inheritance tax, so there is no inheritance tax due on Pat's death.
Tony dies on 22 June 2009, leaving an estate worth 550,000. His will leaves everything to Tom and Helen in equal shares. By then the nil rate band is £325,000. Tony's executors make a claim to the Revenue to transfer the unused proportion of Pat's nil rate band to Tony's estate. Because Pat only used 30,000/300,000 or 10% of her nil rate band, the remaining 90% is available to Tony's estate. So the nil rate band applicable on Tony's death is increased by 90%, from £325,000 to £617,500.
As Tony's estate is worth less than the increased nil rate band amount, there will be no inheritance tax to pay on his death. Contrast this with the position under the old rules, whereby Pat's unused nil rate band would have been wasted and Tony's estate would have suffered inheritance tax at 40% to the extent that it exceeded the nil rate band - a tax charge of £90,000.
Previously, many clients achieved an inheritance tax saving by including tax-efficient 'nil rate band discretionary trusts' in their wills. These recent changes to the inheritance tax regime will not automatically revoke or invalidate wills which contain nil rate band discretionary trusts. However, it would be wise for clients who have made wills of this type to review them now.
This is abbreviated version of our full briefing note on the Pre Budget Report. If you would like to receive a copy of our detailed briefing, please contact the Private Client team.
Even if your will is not affected by the Pre Budget Report, it is still sensible to review it on a regular basis, to make sure that it is still in accordance with your wishes. To book an appointment for a will review, please contact the Private Client team on 0114 266 6660.
