In his Pre-Budget Report announced on the 9th October 2007 the Chancellor introduced the following changes to Inheritance Tax (IHT):-
- Married couples and civil partners can now transfer their Nil Rate Band (NRB) allowance so that when the survivor dies such part of the NRB that was not used on the first death can be used on the survivors death.
- The transferability of the NRB is backdated indefinitely and applies in respect of all deaths of surviving spouses/civil partners on or after 9th October 2007 regardless of the date of the first death.
- The transfer of the unused NRB must be claimed on the survivors death it is not automatic.
- The changes only apply on death, not to lifetime chargeable transfers
- The effective NRB for married couples/civil partners will be 700,000 by 2010 the single persons/divorcees NRB (currently 300,000) will then be 350,000 as previously announced by Gordon Brown. Bear in mind that lifetime gifts within seven years of death could well have eroded the full NRB.
- The rules allow unused NRB to be transferred from more than one deceased spouse/civil partner up to a limit of one additional NRB. This will benefit eg. the estate of a widow(er) who has had two spouses die before her/him.
SO DOES THIS MEAN THAT MARRIED COUPLES/CIVIL PARTNERS CAN NOW RELY ON SIMPLE WILLS LEAVING EVERYTHING TO EACH OTHER ON THE FIRST DEATH (dispensing with the need for the NRB Discretionary Trust Wills (NRBDTWs) we have seen used extensively in recent years)? We think not necessarily so because:- (a) NRBDTWs can ensure capital growth in assets is split as between the deceased spouses trust and the survivors estate very important if we continue to see Stock Market and residential property values increasing at a greater rate than the NRB. (b)NRBDTWs can guarantee asset protection for the next generation/ultimate beneficiaries particularly in circumstances where eg. there is a second marriage, age disparity of the couple, or the possibility of the survivor requiring long-term care. (c) NRBDTWs provide colossal scope for flexibility in the context of allowing the survivor to benefit the next generation/ultimate beneficiaries yet retain control/accessibility to assets if the survivor is ever in need. (d)NRBDTWs can perhaps to a degree provide certainty/protection against future legislative changes eg. in relation to how estates are taxed, and the rate(s) of IHT (currently there is a flat rate of 40% but historically we have seen escalating rates). We may also see withdrawal/modification of what are currently very valuable Business and Agricultural Property Reliefs. Locking into these reliefs on the first death may be desirable though nothing is certain! (e)On the basis of current Capital Gains Tax legislation (which is under review) NRBDTWs provide terrific scope for Capital Gains Tax mitigation/planning where assets held within the trust have increased in value. (f) NRBDTWs are proving extremely useful for children/the ultimate beneficiaries in the context of their own IHT planning. SO OUR ADVICE HAS TO BE :-
- every case will be different
- every case will depend on the value of not only the deceaseds estate, the value of the survivors estate, the scope for capital growth in the survivors estate, the family profile, but most important of all the wishes of the two individuals concerned.
- we will still, in appropriate circumstances, recommend NRBDTWs for reasons outlined above
- perhaps a bird in the hand is worth two in the bush? (or three in the case of a second marriage/civil partnership)
If you require any further information contact Anne Elliott - firstname.lastname@example.org or Andrew Way - email@example.com Please note: This Client Alert is only intended for guidance and is not represented as definitive work. No responsibility for loss occasioned/costs arising as a result of any act/failure to act, on the basis of this Client Alert can be accepted by Latimer Hinks.