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Changes To Inheritance Tax - the consequences

Published: 17th March 2008 08:11

Changes To Inheritance Tax - the consequences

 

Estate Planning Consultant Nick Hutt (Just Wills) writes.

  

 

In his Pre-Budget Report on 9^th October 2007, Alistair Darling, the Chancellor of the Exchequer, proposed some changes to Inheritance Tax rules. What are the changes and what do they mean? This article explains what people in differing circumstances need to think about. 

 

He announced that those that have been widowed can "uplift" their Nil Rate band (NRB) allowance by the % of the NRB allowance unused when their spouse died. References to "spouses" in this article can also be taken as applying equally to Civil Partners and surviving Civil Partners.  The date of death of the spouse is irrelevant so even if their spouse died 30 years ago they will still be able to make use of the new rules.

 

What's clear though is that this is not a doubling of the IHT allowance.  Couples have always been able to make use of their allowance through proper Will planning so the chancellor is giving nothing away. So what does this all mean and how should people be responding?

  

1) Unmarried people

 

Nothing has changed for them and they still need to complete IHT planning under the old rules .... or get married!

 

2) Married couples who have made 1^st death gifts to "non exempt" beneficiaries (e.g. their children) in their Wills

 

These people need to consider whether they want to amend their Wills.  Such gifts will use up some or all of the 1^st spouse to die's IHT allowance which means that the surviving spouse will receive less than the 100% uplift that would otherwise have been available.

 

3) Married couples who have made provision for a 1^st death gift into a NRB discretionary Will Trust.

 

Such people do not urgently need to amend their Wills (but see para 4 below - Elderly Couples).  Where someone dies after 9^th October 2007 with such a Trust in their Will, an appointment (i.e. distribution) of the Trust assets in favour of the surviving spouse (after 3 months and within 2 years of the 1^st death) would be treated for IHT purposes as if the assets had simply been left to the surviving spouse outright.  Ending the Trust in this way would mean that the NRB was not used on the first death and so the amount available for eventual transfer to the survivor would be increased accordingly.  The 1^st death NRB Trust provides valuable protection of assets against the possible consequence of future  remarriage/divorce, nursing fees, hostile creditors  and ensures that assets ultimately pass to the intended beneficiaries and this is a key reason people are still including this provision in new Wills.

 

4) Elderly couples who have made provision for a 1^st death gift into a NRB discretionary Will Trust.

 

Now that IHT is less of a concern they may be concerned about the possibility of their assets being assessed to pay for Nursing home fees should the need arise.  A 1^st death NRB Will trust provides some protection against this.  A Discretionary Trust does not provide guaranteed benefits for any beneficiary (inc. a surviving spouse) and some couples may be uneasy about this uncertainty. Some may prefer the security provided if the assets were put into a Will Trust that gives the surviving spouse a guaranteed interest for life. Others may have wealth such that the value of their house and their savings is greater than the IHT allowance limit of a DWT and would benefit from their assets going into a Life Interest Will Trust to maximise the wealth that is protected from, amongst other things, Local Authority assessment. These people need to re-evaluate their situation and concerns and consider replacing the 1^st Death NRB Trust with a 1^st Death Life Interest Will Trust.

 

5) People with Wealthy children

 

These people need to consider the effect that leaving their estate will have on their children's finances. Leaving wealthy children an inheritance may be of little benefit to them and could simply increase their taxation problems. In such cases consideration could be given to passing some of their estate to their grandchildren or maybe creating a Discretionary Will Trust for their children and grandchildren that will enable their Trustees (who could be their children) to decide, only after both parents have died, how best the estate should be divided between the generations.  Such trusts for grandchildren that have a value greater than the IHT threshold do incur tax charges but these charges are lower than the full rate of IHT.

 

6) People who are married but either or both have been widowed before.

 

These people, potentially, are in the fortunate position to be able to make use of 3 NRB allowances.  An example: Geoff and Jean both write Wills leaving 1^st death NRB discretionary Will Trusts.  So, Geoff dies and leaves his IHT allowance in a trust and Jean "borrows" the Trust assets. When Jean dies she has her own IHT allowance but does not have an "uplift" of Geoff's (her 2^nd husband) IHT allowance because it was used to create the trust as mentioned above.  However, she may well have a 100% uplift from the unused IHT allowance of her 1^st husband.  So, her estate is discounted by the loan from the Discretionary Will Trust, she has her own IHT allowance plus her 100% uplift from her 1^st husband. Such couples could leave £900k (in tax year 2007/08) free of IHT. These people need to consider drafting Wills with a 1^st death NRB DWT and if they already have such Wills, should not amend them.

 

7) The procedure for claiming the unused NRB.

 

The Inland Revenue have issued guidance regarding the documentation they will need to see relating to the affairs of a previous spouse when claiming "uplift" on the surviving spouse's NRB.  This includes death certificate, Grant of Representation (where there is one), estate valuations, details of gifts to non-exempt beneficiaries (either via a Will or intestacy rules) and details of gifts made in the 7 years before death.  People who want their estate to claim the uplift in their IHT allowance of the unused element of their spouse's IHT allowance should collate the necessary paperwork now to make matters easier for their executors when the time comes and increase the likelihood of a successful claim.

 

8) And those people who have not yet made a Will?

 

The intestacy laws dictate that when a married person dies some of their assets above £125k are passed to their children or, if no children, some of their assets over £200k are passed to other family members.  As well as depriving the surviving spouse of the assets they deserve this will use up the IHT allowance of the 1^st spouse to die thereby reducing any "uplift" available to the surviving spouse increasing the amount of IHT payable when they die.  Even simple Wills that leave everything to each other would ensure that the surviving spouse has financial security and a 100% uplift of their IHT allowance when they die.  It has been said that the IHT rule changes mean there is no longer an incentive for people to make Wills to reduce their IHT liability.  Not so!

 

Some experts suggest that people should still include IHT provisions in their Will.  While they may appear irrelevant right now there could be legislation changes in the future that make them relevant again.  If that doesn't happen then the provisions can easily be reversed if necessary.  This solution ensures that all options are covered.

 

Everyone should be urged to make a Will for all sorts of reasons but also to ensure that the maximum uplift in the surviving spouse's uplift IHT allowance is available when they die.

  

Conclusion

 

So - are Will Trusts Still Relevant?

They certainly are, particularly for unmarried couples and people who are in new relationships who want to protect assets for their children from previous relationships.  The days of rattling out "IHT saving Wills" on a production line are over and that is, in many ways, a good thing.

 

Tailored planning

The days of a tailored approach to tax and estate planning are now with us along with carefully selected Will Trusts tailored to meet individual clients' circumstances and wishes.

 

There is a danger that IHT rule changes will lead to complacency about planning for 1^st death by couples and that, as a consequence, assets may not be preserved for the benefit of future generations.

 

Estate Planning and Will Writing Service   Free no-obligation  consultation offered in the comfort of your own home (visits made within 70 miles of Minehead) Fixed fees thereafter-No hidden extras   For further information, please contact Nick Hutt (Just Wills)    Tel.  01643 841219 Mobile: 0773 9517102 e-mail: nick.hutt@justwills-southwest.co.uk web: http://www.justwills-southwest.co.uk/

The importance of a professionally drafted Will and the value of advice and explanation of options that is provided during the Estate Planning process remains unchanged.  This is true whatever a persons circumstances - you only need to be familiar with the Laws of intestacy to appreciate that.

 

If you have any questions, or would like to meet for an initial consultation, please do not hesitate to contact me.

 

 

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