Saving Inheritance Tax

In the Pre-Budget Report on 9 October 2007 it was announced that from this date spouses and civil partners will be able to transfer their IHT nil rate band allowance presently £325,000 (2009/2010), so that any part of the nil rate band that was not used when the first spouse or civil partner died can be transferred to his or her surviving spouse or civil partner on their death.

Example:

Steve died in November 2001 leaving legacies totaling £96,800 to his children, and left the rest of his estate to his wife Sandra.  The nil rate band allowance in November 2001 was £242,000, so 60% of his nil rate band was unused.
Sandra dies in May 2010 when the proposed nil-rate band is £350,000. Sandra’s own nil rate band allowance of £350,000 is augmented by an additional 60% to £560,000.
The transferable nil rate band allowance will be available to all survivors of a marriage or civil partnership who die on or after 9 October 2007, no matter when the first spouse or partner died.
Unused nil rate band can be transferred from more than one deceased spouse or civil partner, but only up to a maximum limit of one additional nil rate band.

Simplification

In numerous cases the availability of a transferable nil rate band means it will be no longer necessary to incorporate nil rate band discretionary trusts into the Wills of spouses or civil partners.  It will remove the need for complex arrangements to satisfy a nil rate band gift by means of an IOU or equitable charge arrangement.
If, however, there are sufficient liquid assets, it may still be advantageous to set up a nil rate band trust from which the survivor can benefit. Capital growth in the trust may outstrip any increase in the nil rate band over the survivor’s lifetime.

Existing Wills

For clients who already have nil rate band trusts in their Wills, there is no urgency to change the Wills. If however the Wills have not been reviewed recently now might be a good time to do so.
In the event that someone dies with a nil rate band trust in their Will, and it is concluded that there is no benefit to keeping the trust in place, it can simply be wound up in favour of the surviving spouse.  This will ensure that the first spouse/civil partner’s nil rate band will be transferred to the survivor.

Further Advice

This is a specialist area and you should discuss your position in depth with us in order to establish the most appropriate actions for your particular circumstances.