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How will the Pre-Budget Report affect the Inheritance Tax Nil Rate Band?

15 October 2007

You will no doubt have heard about the Government's proposed changes to Inheritance Tax (IHT), specifically in relation to the availability of the Nil Rate Band (NRB) for married couples or civil partners. In essence, the NRB of the first to die is now transferable on death between spouses and civil partners and the NRB of the first to die will no longer be wasted.

For example, if no NRB has been used on the first death, on the survivors death two full NRB's (currently £600,000) will be available to offset against the joint estate (assuming neither spouse had made any lifetime gifts during the seven years prior to death). If part of the NRB was used on first death (for example, by the deceased having left cash legacies to grandchildren) then the percentage of the unused amount can be carried forward as a percentage of the NRB on the survivors death.

In calculating the NRB that can be transferred from the first to die, it will be the NRB in force at the time of the survivors death, and not that at the time of the first death.Thus, if none of the NRB was used on first death, and the survivor dies a few years later, when perhaps the NRB has risen to £350,000, then the survivors estate will have two NRB's (equalling £700,000) to offset before IHT is levied.

For those married couples/civil partners who have already signed Wills that incorporate the NRB Discretionary Trust arrangement (or for those currently being advised to sign such Wills) there is no need to revert to more straightforward Wills which leave everything to the survivor outright, as there are still potential benefits in a NRB Discretionary Trust arrangement. A decision can be taken following the first death as to whether the NRB Discretionary Trust should, or should not, be implemented.

If the decision is not to implement, then provided that decision is made within two years of the first death, it would appear that the NRB of the first to die can still be carried forward to the survivor.

However, many of the original benefits of implementing a NRB Discretionary Trust on first death remain, including the ability to;

1) Use one NRB before there are any further changes to the IHT legislation;

2) Ring-fence assets of the first to die within a trust, which enables the capital to be preserved for the eventual benefit of chosen beneficiaries, whilst enabling the survivor to benefit from the trust fund. This might be of relevance to those couples who have children from previous marriages and who are concerned about leaving each other's capital to the survivor or it may offer protection to the beneficiaries in the event of the survivor requiring long term care or becoming insolvent;

3) Ring-fence any growth in the value of the NRB fund within the Discretionary Trust, thereby insuring that such growth is not subject to IHT at 40% on the survivors death. This is particularly relevant where the assets concerned are likely to increase in value;

4) Enable assets which currently qualify for relief from IHT (for example, business or agricultural property relief) to benefit from that relief on the first death, thereby securing that relief before any future change in IHT legislation which might include the reduction or removal of such favourable reliefs.

This legislation is, of course, still in draft form, but this initial advice will clarify some of the recent proposals. If you require further information please speak to one of our experienced private client team who will guide you through the complex issues which need addressing and will help you resolve any difficulties, providing you with peace of mind throughout.