inheritance tax changes

Last year the then Chancellor made an announcement regarding inheritance tax that has changed the way it is calculated and widened the relief available.

Prior to this date each individual on death had one allowance (currently £312,000) that could be left free of Inheritance Tax and any excess over that amount was taxed at 40%. All assets were brought into account for the purpose of calculating inheritance tax to include joint assets, Trust assets and gifts made in the seven years prior to death.

In order to maximise the Inheritance Tax relief available, married couples or those in a civil partnership were strongly encouraged to make Wills incorporating Nil Rate Band Discretionary Trusts to ensure that both couples' inheritance tax allowances were fully utilised, as it was often the case that the allowance of the first person to pass away was wasted. The purpose of this article is not to explain these Trusts but if you would like more information regarding them then we can advise further and it should be noted that these Trusts can also be used for other purposes.

In his pre-Budget report the Chancellor announced that as from 9 October, spouses and civil partners will be able to transfer their unused allowance to each other so that any part of the nil rate band that was unused when the first person passed away can be carried forward to be used on the second death.

For example, if a husband died in 2005 and left everything to his wife, on her death her executors can claim not only her own tax allowance but also her husband's. If the full allowance was unused on the first death then on the second death the relief  is doubled, it does not matter how long ago the first person died or what the tax allowance in force was at that date.

The unused allowance to be carried forward is calculated as a percentage to be set against the tax allowance in force at the date of the second death. So, if a wife died in August 2007 and left £100,000 to her children and the remainder to her husband, as the tax allowance in force then was £300,000 she has already used up one third of her tax allowance thereby leaving two thirds available to be claimed on her husband's death. If her husband died in July of this year, then the allowances available would be his full allowance of £312,000 plus two thirds of his wife's allowance which would be £208,000 (£312,000 x 2/3) making a total allowance of £520,000.

In order to qualify for this 'double allowance relief' couples must be married or in a civil partnership at the date of the first death and the second death. If a second marriage or civil partnership is subsequently entered into, this is the one that will be taken into account. On the second death when claiming the relief, the first person's death certificate and the marriage certificate or civil partnership certificate must be produced. It is possible to apply for replacement certificates but it is better to keep the originals safe.

It is also now important to keep a record of the financial history of each party. Often many years separate the deaths of the couple concerned and it is not always easy to remember or trace what happened when the first passed away. You should keep a copy of the first person's Will and if the estate was administered by a firm of solicitors, there should have been a set of estate accounts produced that should also be kept. These show what assets the deceased had and to whom they were passed. This is very useful information. In addition, details of whether the deceased had any trust assets, foreign assets, nominated assets or joint assets when he or she passed away should be kept.

You also need to disclose any gifts made by the deceased in the seven years prior to the first person's death. We therefore suggest couples keep a financial record of any such gifts and keep this with their papers at home so that the information can be easily found when both have died and the relief needs to be claimed. This makes it much easier for the executors to assess the relief available after the couple have died and therefore proceed with administering the estate quicker.

If you would like further information, please contact Sarah Hewitt in our Succession and Tax team at sarah.hewitt@bllaw.co.uk