Inheritance tax changes for married and civil couples
11th Jan 2008
Positive changes for inheritance tax following the Chancellor’s 2007 Pre Budget Report have led some families to believe that they no longer need to put in place tax efficient arrangements in their Wills. I urge caution in this approach.
Prior to last October, the situation for married couples and civil partners was as follows:
If the first to die left everything to the survivor then no inheritance tax was payable due to the spouse exemption. The downside was that this potentially led to a large tax bill on the second death when everything over and above the nil rate band (currently £300,000) was taxed at 40 per cent.
Since the Pre-Budget Report a claim can now be made to transfer any unused nil rate band of the first spouse to die across to the estate of the survivor, giving a potential nil rate band of £600,000 and thus doubling the amount that passes to their children tax free.
While the new system may seem to have drastically improved the position of married couples, in reality the changes are not that significant; for people who already had in place correctly drafted Wills there is probably no advantage at all.
By having correctly drawn up Wills not only can you put in place tax planning measures but the first to die can also safeguard against the following possible scenarios:
1. If the survivor re-marries and leaves all their estate to their new spouse. In this case the beneficiaries whom the first person wanted to benefit, which could include children of the marriage, may get nothing.
2. The survivor may need to enter means tested long term care. Most of the assets could then be taken to pay for such care. Trust arrangements under a Will can at least safeguard part of the estate.
3. The survivor may spend or give away the money leaving less for the beneficiaries the first person wished to benefit.
In addition, there is no guarantee that the rules will not change again. By taking advantage of the nil rate band on first death rather than leaving everything to chance on second death then again at least part of the estate is safe guarded for the children.
We feel there is as much need as ever for couples to seek professional advice in relation to Wills and tax planning.
In particular, many existing widows, widowers and surviving civil partners may not have considered their Inheritance Tax position. As the changes are retrospective they can benefit from the increased allowance even if their partner died many years ago.
To ensure that the appropriate transfer of allowance can be made we recommend anyone affected to consider their circumstances now to benefit their family in the future.
* Val Hutchinson is an Inheritance Tax consultant with Blackett Hart & Pratt Solicitors. For more information, she can be contacted on 0191-221 0898.
Author: Val Hutchinson, Inheritance Tax Consultant (ValH@bhplaw.co.uk)
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