Posted on 12th August 2008

New Inheritance Tax Rules Present Many Questions

Anne Elliott, a partner and specialist tax adviser at Darlington law firm Latimer Hinks, is advising people on the implications of new Inheritance Tax legislation commonly referred to as the transferable Nil Rate Band

Every individual is entitled to gift assets up to the value of 312,000 tax free either within seven years of death or on death. Known as the Nil Rate Band (NRB), assets to this value can be gifted tax free. Above the NRB, IHT is payable at 40%.

Affecting married couples and civil partners, the new legislation means that up to 100% of the first to dies unused NRB will automatically transfer to the survivor for use on the second death - resulting in an increased combined NRB allowance for the survivors estate.

Prior to these changes, couples could only combine their NRB allowances in their wills by immediate gifts e.g. to children or by setting up a Nil Rate Band Discretionary Trust in the Will of the first to die his/her NRB is gifted to a discretionary trust for the family, including the surviving spouse/civil partner. The survivor can benefit from assets within the trust but those assets do not form part of the survivors estate.

Anne Elliott said: For many years, we have used NRB discretionary trusts for effective IHT planning. Even though we now have the transferable NRB there are many other advantages and features of the NRB discretionary trust which ensure they remain a useful and prudent family and tax planning arrangement for couples.

For example, if a widowed partner was to go into a new relationship/remarry, the trust would potentially safeguard the NRB assets for the benefit of any children from the first marriage/partnership. Furthermore, a trust can also protect property should the survivor require residential care in their old age.

Anne added: There are some important issues and protections offered by NRB discretionary trusts and, in light of the legislative changes, I would advise people to review their wills. It is good practice to periodically review your will (we recommend every 3-5 years) especially if there has been a change in family circumstances e.g. a birth, death, marriage, divorce.