Prior to Alistair Darling’s announcement on the 9th October every individual had an Inheritance Tax 0% allowance, commonly referred to as the ‘Nil Rate Band’. For the year 2007/08 this is £300,000. It was the responsibility of each individual to ensure that they utilised this allowance and generally, spouses and Civil Partners failed to do this and transferred all assets to the survivor on first death. There were no Inheritance Tax implications of such transfers as they were usually covered by the ‘spousal’ exemption. However, the nil rate band allowance on first death was lost which could increase the overall exposure to Inheritance Tax by up to £120,000 (for 2007/08) on second death. By ensuring that effective planning was in place, it was possible to ensure that two nil rate band allowances were used without the surviving spouse or Civil Partner losing access or control of the assets.
Under the new proposals it is now less critical to have nil rate band Wills in place as Mr Darling’s plans have introduced a ‘doubling up’ of the nil rate band for spouses and Civil Partners. In effect, this means that any unutilised allowance on first death is carried over and can be used on second death. By way of a brief example, if husband leaves everything to spouse on first death, thus not utilising his allowance, then on wife’s death the family can claim twice the prevailing 0% allowance. Alternatively, if husband utilises 50% of his allowance, then on wife’s death the family can claim 150% of the prevailing 0% allowance.
However, to discount the use of nil rate band Wills planning without careful consideration would be foolish. The guiding factors as to the need for such planning are three-fold:
Firstly, it is necessary to identify the nature of the assets which comprise the nil rate band. Historically, the nil rate band has grown at a rate of 3.4% per annum over the last decade. With efficient management, investment growth (whether in property or liquid assets) will have far outstripped the growth in the nil rate band over the same period. This is a trend that is likely to continue. Therefore, the transfer of such assets to trust on first death may be far more tax advantageous than a simple outright transfer to survivor.
Secondly, it is necessary to consider whether there is a need for protection of assets due to family circumstances. The use of a Trust can allow the family access to assets, at the discretion of the Trustees, without the family having direct control of them. A Trust can also protect against the loss of assets through divorce, remarriage or bankruptcy and adds an element of protection against future care home fees.
Thirdly, nil rate band Wills can provide a flexibility over the distribution of an estate which is not afforded by Wills that simply leave all assets to the survivor. This may assist with Inheritance Tax planning in the future.
Finally, as everyone is aware, our Government likes to make amendments to tax planning on a fairly regular basis and therefore there may be mileage in crystallising your nil rate band before the rules are changed yet again!
Obviously, this is a complex area and, at the moment is an uncertain one. Should you require any advice relating to your own circumstances, please contact
Jonathan Lee at Pearson Jones plc
0113 228 0900