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On the 9th October the Chancellor
delivered his Pre-Budget Report which contained a number of proposed changes
in taxation, one of which were quite eye catching
and at first glance appear most welcome.
The proposals could affect everyone who is married,
widowed or in a civil partnership.
Legislation will be introduced into the Finance Bill 2008 to allow a
claim to be made to transfer any unused IHT nil-rate band on a persons death to the estate of the surviving spouse or
civil partner who dies after 9th October 2007.
The proposals are:-
- The claim
is to be made when the surviving spouse or civil partner dies not when
the first spouse or civil partner dies.
There is nothing you need do now to make a claim even though your
spouse or partner may have died.
You will however need to keep a record of the proportion of the
nil-rate band which remains unused.
- The date of
death of the first spouse or civil partner is irrelevant as far as a
claim is concerned. Even if you
have been a widow or widower for many years a claim is still valid if
there is unused nil-rate band.
- Where a valid
claim is made to transfer unused nil-rate band the nil-rate band which
is available when the surviving spouse or civil partner dies will be
increased by the proportion of the nil-rate band unused on the first
death. For example if on the
first death the chargeable estate is nil because it has all been left to
the surviving spouse then 100% of the nil-rate band is unused. If the survivor were to die now when
the nil-rate band is £300,000.00 the survivor’s nil-rate band is
thus increased by 100% to £600,000.00.
- It is the
current nil-rate band on the first death which is used to determine the
unused percentage but that percentage is applied to the nil-rate band
which is applicable at the time of the survivor’s death.
- The new
rules apply in the same way whether the first spouse to die leaves a
Will or dies intestate.
- The rules
permit the unused nil-rate band to be transferred from more than one
deceased spouse or civil partner but the maximum additional nil-rate
band which can be claimed is limited to the value of the nil-rate band
in force at the time of death e.g. the current nil-rate band is
£300,000.00 so if a second death occurs now then the maximum additional
nil-rate band which could be claimed is £300,000.00 making a maximum
total of £600,000.00.
What are the implications of these proposed changes?
- The new
rules will not affect existing Wills.
Those with nil-rate band trusts need not take any immediate
action because where someone dies after 9th October 2007 and
an appointment in favour of the surviving spouse is made within two
years of death but not within the first three months immediately
following the death is likely to be treated for IHT purposes as if the
assets had simply been left to the surviving spouse or civil partner
outright. Ending the Trust in
this way would mean all or part of the nil-rate band is not used on the
first death and so it could in due course be transferred to increase the
nil-rate band of the surviving spouse.
- A Life
Interest Trust in favour of a surviving spouse would also leave the
nil-rate band available for transfer.
- Purely on
tax grounds there may be an advantage in dispensing with nil-rate band
trusts in favour of transferring the nil-rate band. Where assets are placed in trust the
nil-rate band is frozen at the level applicable on the first death. If the unused nil-rate band is
transferred then the percentage uplift on the second death is applied to
the nil-rate band level at the time of the second death. We already know that in 2010/11 that
the nil-rate band will be increased to £350,000.00 so if the second
death occurred after 5th April 2010 the surviving spouse
could claim an exemption up to £700,000.00 if all the assets passed to
the survivor on the first death.
Tax aside however the trust does have the advantage of shielding
the assets in it if the survivor needed to go into care and it can give
the first to die more control over what eventually happens to the funds
held in the trust when the survivor dies.
On balance this is a welcome piece of legislation
and although it does not give much away in terms of tax as it was already
possible to achieve a similar position it does present an opportunity to
review the need for nil rate band trusts and complex schemes involving the
family home and it contains an element of retrospection in that it will
benefit many couples where one of them has already died with unused nil-rate
band.
This is based on our understanding of the proposed
legislation and is supplied for information only. It has been produced following the
Chancellors Pre-Budget statement on the 9th and from statements
and notes issued by H.M. Treasury and HMRC.
F.H. Manning cannot accept responsibility for any errors or omissions
and Clients should not take any action without seeking further specific
advice.
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