News & Bulletins
The Chancellor's Pre-Budget Statement
9th October 2007
Some Questions and Answers
Has the Chancellor increased the Nil-Rate-Band for Inheritance
Tax?
No. Under current law the estate left by someone who dies
is entitled to an amount known as the Nil-Rate-Band which is
chargeable to Inheritance Tax at 0%. Any value above the nil
rate is charged at 40%. The Nil-Rate-Band in 2007/2008 is
£300,000.00. Transfers of property between spouses or civil
partners are generally exempt from Inheritance Tax. When
someone dies leaving some or all of their property to their spouse
or civil partner they may not have fully used up their
Nil-Rate-Band. The new rules will allow any Nil-Rate-Band
unused on the first death to be used when the surviving spouse or
civil partner dies. Therefore the effect of the change is to
make the Nil-Rate-Band of one spouse transferable to another on the
second death. There is no increase in the Nil-Rate-Band
itself.
Are the changes retrospective?
The changes will apply to any estate where one spouse has died
and there is a surviving spouse. They will not apply to
estates where both spouses died before the 9th October 2007.
What happens if part of the Nil-Rate-Band has been used on the
first death?
The amount of the Nil-Rate-Band potentially available for
transfer will be based on the proportion of the Nil-Rate-Band that
was unused when the first spouse or civil partner died. For
example, if on the first death the chargeable estate £150,000.00
and the Nil-Rate-Band is £300,000.00, then 50% of the original
Nil-Rate-Band would be unused. If the Nil-Rate-Band when the
surviving spouse dies is £350,000.00, then that would be increased
by 50% to £525,500.00.
What happens if the whole of the Nil-Rate-Band was used on the
first death?
In this case, there will be no available Nil-Rate-Band to
transfer and it will only the Nil-Rate-Band of the second to die
which is available.
Is it still advisable to make a gift of the Nil-Rate-Band on the
first death or should we transfer the whole of the estate to the
surviving spouse?
The position is still under review, but at present it seems to
us that it would be preferable to revert to the position where the
whole estate passed to the surviving spouse in order to ensure that
the maximum amount of the Nil-Rate-Band is available for the
estate.
For example, if none of the original Nil-Rate-Band has been used
because the entire estate was left to the surviving spouse then if
the Nil-Rate-Band when the surviving spouse dies is £350,000.00, it
would be increased by 100% to £700,000.00.
Do the changes apply to people other than spouses and civil
partners?
No. Currently the benefit is only conferred on spouses and
civil partners.
Will it be necessary to sever joint tenancies and set up
Nil-Rate-Band Discretionary Trusts by Will in future?
No. Our advice is currently that this form of tax planning
by Will is no longer necessary and for the reasons set out above,
it would be preferable to leave the gift of the estate to the
surviving spouse absolutely. However Lifetime Nil-Rate-Band
Discretionary Trusts are still a valid method of saving tax and
could effectively increase the Nil-Rate-Band by 100%. We can
advise further on this for clients who are interested.
I have a Nil-Rate-Band Discretionary Trust in my Will. Do I
need to rewrite it?
Our advice is that it is possible to vary a Will containing a
Nil-Rate-Band Discretionary Trust on the first death, provided that
the action is taken within two years of the date of death.
However, it would probably be preferable to remove the
Nil-Rate-Band Discretionary Trust before the first death.
Will this mean that Wills are no longer needed for married
couples?
NO. Tax planning is only one function of the Will.
Obviously the most important function is to dispose of the property
in accordance with the wishes of the Testator and Testators may
still wish to make provision for children from the
Nil-Rate-Band. There are other factors such as:
· Providing an age contingency for young children
· Appointing Executors
· Appointing Guardians for minor children
· Making personal gifts
· Expressing wishes in relation to funeral or cremation
requirements
· Disposing of business and agricultural property which is
still covered by Inheritance Tax Relief.
· Securing the succession of property where there are second
marriages
We have a Nil-Rate-Band set up on the death of the first
spouse. Can we dismantle it? If so, should we dismantle
it?
As set out above, it is possible, within two years of the date
of death, to remove the Nil-Rate-Band Trust. Again for the
reasons set out above, this would probably be a sensible course of
action. If the first death occurred more than two years ago,
then this step will no longer be possible and the Nil-Rate-Band
Trust should be allowed to run. If a share of property has
been transferred into the Trust, it may be beneficial to
allow it to run in any event as it will probably increase more than
the value of the Nil-Rate-Band.
Nil Rate Band Trusts have been an effective method of saving tax
for many years and the Chancellor has recognised this in the recent
changes. Our advice to include Nil-Rate-Band Discretionary
Trusts and Loan Clauses in Wills has been based on the law as
it stood and, in cases where both spouses died before the 9th
October 2007, a considerable amount of tax will have been saved by
these measures. However, we now recognise that the position
has changed and will tailor advice to clients accordingly. If
you are concerned, please contact your advisor at the firm.
Christine Green
Partner
Private Client Department
Date:
October 2007
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