Saturday, November 22nd, 2008
Following changes introduced in the pre-budget statement last October, the rules relating to inheritance tax (IHT) allowance have now been changed. They now allow a person, on death, to pass on their nil-rate allowance to their spouse or civil partner. This can mean that up to £624,000 of assets pass free of Inheritance Tax on the second death, at current rates.
Everybody has always had an allowance on death upon which there will be no IHT to pay. Everything above that amount is liable to be taxed at 40%.
Before last year’s changes, the allowance was lost if the deceased person left their entire estate to their spouse or civil partner, as the estate would pass under the spousal exemption, so there would be no liability to IHT. Then on the second death, the size of the estate would include the assets of both partners, and there would be a liability to IHT on everything above the nil-rate band.
In order to retain the nil-rate allowance of the first person to die, married couples and civil partners had to set up discretionary trusts to transfer assets to the value of the allowance away from the estate of the survivor. This ensured that, on the second death, the first person’s allowance could still be utilised, and was not lost.
The changes apply to married couples and civil partners who are now able to transfer the unused part of their nil-rate band to their surviving spouse. The transfer is passed as a percentage uplift to the allowance available on the second death.
For example; if a perosn has died this year, when the nil-rate allowance is £312,000 but their spouse had died in December 2005 when the nil-rate allowance was £275,000 and the entire estate to the spouse then the estate will now be able to take advantage of 2 x nil-rate allowance at todays rates. The spouse’s estate can therefore benefit from £624,000 of nil-rate allowance, and IHT will only be payable on anything above that amount.
This will clearly assist many families, who will no longer have any liability to IHT. However, there may be other issues that make a trust beneficial.
If you would like more information on Wills or Inheritance tax then contact Marie Turner now.
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