Inheritance tax rules update

By John Whiting Tax partner, PricewaterhouseCoopers LLP

Inheritance tax (IHT) is a tax that in the great scheme of things doesn't raise huge amounts of money for the Chancellor.

But it is one that has been of increasing concern in recent years to more and more people as they see themselves drawn into its net, mainly through rising house prices.

It's a simple enough concept: whatever you leave behind when you die is valued and, to the extent that it's worth above (currently) �312,000, IHT is due at 40%.

One way of planning for IHT is to give assets away during life - though the gift has to be more than seven years before death to escape the net. Gifts or legacies to a spouse/civil partner are fully exempt (unless they are non-domiciled).

Nil rate bands

In many ways the most important bit of IHT is the 'nil rate band' (NRB) - currently �312,000 (increased from �300,000 on 6 April 2008). There have been demands for that amount to be increased substantially and it is indeed drifting up modestly in the next few years to �350,000 from April 2010.

But the big change came when the Chancellor announced that for deaths on or after 9 October 2007, the deceased will be allowed to use any part of an NRB that wasn't used up when their spouse or civil partner died.

Note that in Example 1 if the transferable NRB provision hadn't been there, tax of �288,000 at 40% = �115,200 would have been due on W's death.

If instead H had left something to his children on his death, so using up some of his NRB, then only a proportion would be available on W's death.

This new relief doesn't have to be claimed until the second spouse dies. Their executors will need some evidence about the first spouse's position - so although no claim is necessary then, it is clearly sensible for some record to be made, with appropriate evidence, and kept with the surviving spouse's will.

When the executors are dealing with IHT due on the second spouse's death, they will complete an HMRC claim form IHT216 in respect of the first death.

Points to note

Although the new relief is quite a simple one, it does throw up a few points to note:

Nil rate band trusts

One comment often made is that this new rule doesn't actually give well-advised people something they couldn't utilise in any event: H might always leave property to the couple's children on his death and so utilise his NRB.

If there was no spare property to pass, the device often used was a nil rate band discretionary trust, which put some property into a trust which could benefit both the surviving spouse and the children.

Such trusts are arguably no longer necessary nowadays, although some people will still want them because of the way a trust allows effective separate management of some assets.

Anyone with a NRB trust in their will may wish to consider adding a codicil to change their will. For some where a recently-deceased spouse directed that such a trust be set up, the simplest route may be not to proceed with the trust, though the wording of the will needs to be reviewed carefully.

For those many people who didn't like the trust route, finding it too complex perhaps, the new system is undoubtedly a welcome step forward.

A good step forward

Overall, the introduction of the NRB transfer is a good step forward and helpful to many people when they consider IHT planning.

There are still a few things to think about and, contrary to some suggestions, doesn't simply raise the NRB to �624,000 even if it will now be easier to get that amount of most couples' wealth outside the IHT net.

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