I wonder how many people like me saw the fact that the pre budget report had announced the Inheritance tax threshold had doubled and then fainted. What better news I thought…Until I read it. Basically the nil rate band is the amount you can transfer to anyone other than your spouse free of inheritance tax. Whatever you transfer in excess of this is charged at 40%.
Currently the nil rate band is £300,000. To hear it had doubled to £600,000 was fantastic! That would mean joint couples would now have an estate of £1.2m. Unfortunately not. The doubling they are referring to leaves the tax payer in pretty much the same position as before. Up to now, the tax payer had one nil rate band per person which is a total of £600,000 per couple – what they say they are raising it to. So in real terms there is no increase at all, and the net change to the tax payer is zero.
Having poured the cold water all over their headlines, there is good news. Up to now there was considerable paperwork to complete on first death to use the first nil rate band. Let me give you an example: A person dies and he owns a house with his wife. It’s valued at £600,000. Clearly if he gives his £300,000 to his wife there won’t be any inheritance tax (it’s called an inter spouse exemption). The problem is he has lost that £300,000 exemption. On second death the spouse uses her nil rate band but there is a tax bill of 40% of £300,000 to pay now! Disaster.
To mitigate this, on first death we needed to use the first nil rate band by giving away up to the £300,000. This causes difficulties because we must give away half a house or half an estate where the surviving spouse still needs it!
This is where you bring in the solicitor and Independent Financial Adviser and we charge you fees to set up trusts to get round the issue. The trusts can be inflexible and are not really ideal for all, and they can cause complications later.
With the change in the rules there is no real need to make any changes or alterations on first death as the two nil rate bands can be used on second death. This is the most welcome aspect of planning I have seen in most of my financial planning years.
For me I don’t have to think of a million complications about what happens to my estate on first death. How much do I leave to my children? At what age can I allow them to have it? What if I leave it to my children and they split up, forcing my wife to sell her portion of the property to pay off the outgoing son in law. The worry and concern can spin the tax payer into indecision and they don’t put any plans in place.
It’s now much simpler to leave the plans on first death negating the need for any complicated trusts etc. My wife can keep the estate and on second death can use both the nil rate bands!
In a rush of blood and with a potential election in his mind (or not) he went further, and this is really good news.
Any survivor of a marriage who dies after the 9th of October 2007 will also be able to go back and use the unused nil rate band of the deceased spouse, no matter when they have died. This is fantastic news and all those who are sitting with an estate where the nil rate band wasn’t used on first death are in a wonderful position to go back and use it on second death. This is a potential gift of £120,000 from the tax man and is welcomed.
Naturally if the Gord giveth he taketh away – so…he advised that the nil rate band would increase closer to house prices. That’s a bit late, we are at the peak of a market, does that mean the nil rate band will now start to fall? Also (for another column), the rules on capital gains tax are being changed, and whilst more simple, may mean you need to take some action now. More on that later.
If you have a query about Inheritance Tax or any other financial query, call Worldwide free on 0800 0112825 or e-mail info@wwfp.net
The value of shares and investments can go down as well as up
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