In his October Pre-Budget Release the Chancellor, Alistair Darling, proposed a significant change in Inheritance Tax (“IHT”) relief, applicable only to married couples and civil partners (“spouses”).
As matters stand, each individual spouse has the benefit of a “Nil Rate Band”. In other words, a part of their net estate, currently £300,000, is not chargeable to IHT. Any property above that threshold is subject to IHT unless exemptions or reliefs apply. Transfers of property between spouses are generally exempt from the payment of IHT however. This effectively means that if one spouse leaves their entire estate to their surviving spouse, they have “wasted” their Nil Rate Band and lost the opportunity to save £120,000 of IHT as at today’s rates.
As a result of this, spouses have resorted to taking various IHT planning measures when making their Wills. These measures invariably involve leaving property up to the value of the Nil Rate Band at the date of death to someone other than the surviving spouse. For instance, it might be an outright gift to the ultimate beneficiaries, who are usually the couple’s children. There are risks attached to many of these tax-planning strategies. In particular, the surviving spouse loses control of that proportion of the estate and it leaves them financially vulnerable in their old age. Although the finer details of the Chancellor’s proposals are not yet clear, it appears that in principle what he is proposing is that any proportion of the Nil Rate Band that was not used by the first spouse to die can now be used when the surviving spouse dies. In other words there is the potential to “double-up” the Nil Rate Band when the surviving spouse dies.
Furthermore, it appears that in terms of value the “double-up” will be of the later (and therefore higher) Nil Rate Band applicable at the second death. With soaring house prices over recent years, this is excellent news for the numerous couples who are only affected by IHT because they have most of their wealth tied up in their home. But before we uncork the champagne it is important to stress that these are simply outline proposals.
Cynics might say that this is just a headline-grabbing attempt to deflect attention away from the Conservative’s proposal to raise the Nil Rate Band to £1,000,000. It will be interesting to see if the Chancellor is still our darling when these proposals are firmed up next Spring in his Budget and, more importantly, when the Finance Act 2008 adds the real flesh to the bones.
The law governing IHT has obviously moved on since this article was first published by us. If you require guidance on the current regulations governing inheritance tax then give us a call or drop us an email.