Changes to the Inheritance Tax rules

Prior to October 2007, if the first spouse left their entire estate to the surviving spouse, this would pass free of Inheritance Tax thanks to the spousal exemption rules. However, this means that the first spouse’s Nil Rate Band (NRB) allowance was unused and therefore lost.

The Transferable NRB - In 2007, the chancellor announced a new regime. This allowed the use of two NRBs without requiring any formal tax planning in the Wills.

The new regime does not simply double the Nil Rate Band; it allows unused NRB to be transferred between spouses. To do this, the executors of the survivor’s estate must make a claim for the percentage of the unused allowance to be brought forward and applied to the estate of the surviving spouse.

Reducing the tax burden

Trusts may have long term tax advantages in cases where capital depreciation is anticipated to outstrip future increases of the nil rate band.

Wills can offer flexible solutions to complex problems

Family Arrangements - A Will can be a really helpful tool in solving some complex family issues e.g. to include children from previous marriages.

A Will can ensure that a second (current) spouse has the right to occupy the family home, while still protecting the capital for children of an earlier marriage. This will ensure that the assets don’t pass outside the immediate family and also may help prevent any potential challenges in the distribution of the estate.

Asset Protection - One of the implications of an ageing population is that thousands of homes are sold each year to fund the cost of residential care.

A carefully drafted Will can ensure that a share of the family home passes into a trust on first death, which may give the survivor a right to occupy.

The Trust will make sure that the capital will be preserved from nursing home fees and will pass to the intended beneficiaries instead. This kind of Trust can be drafted flexibly to allow the survivor to downsize or move property.

Trusts can protect assets for future generations- if your child or grandchild suffers financial or matrimonial problems, or if beneficiaries are not mature or responsible enough to own large amounts of money, a Trust can come in handy. The Trustees will take each beneficiary’s personal circumstances into account.

Businesses

Your Will can ensure that business interests you have e.g. shares in a family business, or a farm are directed to those intended such as sons or daughters who have come into the business.

An important Inheritance Tax relief may apply to these business interests and providing discounts of either 50% or 100% (complete exemption).

When it comes to your house or other non-business assets, you can give them away without having to pay an IHT charge if they are ‘potentially exempt transfers’ (PETs). The vital point regarding PETs is that they have to be given away seven years before your death.

In terms of business assets, it is usually only necessary for the person to have owned these assets for two years, rather than the required seven years for the non-business assets.

So don’t risk paying a substantial tax bill when this can be reduced by carefully drafting you Will.

Other considerations

Many people own their house as “joint tenants”. This is one of two ways in which you can own your house. You could also own it as “tenants in common”. To own your home or other assets as “joint tenants” can be an inflexible method because the surviving co-owner automatically takes everything.

Therefore, a co-owner cannot, during lifetime or by Will, give these assets to any other beneficiaries, for example to his children to utilise the nil rate band.

The solution is to hold as “tenants in common” and if the holding is already as joint tenants, it can be changed by a rather simple process.

Remember that in a two year period following the death, the terms of a Will can be varied or disclaimed by an appropriate document entered into by the persons involved. However, this may be prevented by changes in the law.

Making a Will doesn’t need to be expensive. Most solicitors charge a reasonable fee for a straightforward Will. Where the Will achieves valuable tax savings, this will normally be reflected in the fee but the savings may be vast.