Changes to inheritance tax: it’s official
Last year the Chancellor of the Exchequer announced sweeping changes to the inheritance tax system.
The announcement came as a big surprise and had wide-reaching implications. It is now one year on and the changes have been enshrined by Royal Assent, so it’s now official! This article gives a brief explanation of inheritance tax and the current position.
A bit of background
After death, inheritance tax often has to be paid. Understandably, it is not paid by the deceased; rather, it is taken from the money which is due to the “beneficiaries” (the recipients of the deceased’s money and property, who are often close relatives).
It is worth noting that beneficiaries will not have to “pay out” from their own pockets and they will not be disadvantaged, except in the most unusual cases. Rather, if inheritance tax is due, the beneficiaries will simply receive less.
Who pays inheritance tax?
The “nil-rate band” is the amount of money an individual can leave behind on their death without their relatives having to pay inheritance tax. This year (6 April 2008 – 5 April 2009) the nil-rate band is £312,000.
Changes to the nil-rate band in October 2007
The Chancellor, not untypically, didn’t make things simple. He did not, for example, double the nil-rate band (a common mis-conception).
The changes only apply to married couples and couples in a civil partnership. For everyone else, the position remains relatively straightforward: if you die leaving more money and assets than the current nil-rate band, there will be inheritance tax to pay.
Some tricky calculations
For spouses and civil partners, the position is more complicated. On the death of the first spouse, the unused proportion of his or her nil-rate band will be transferred to the surviving spouse. This may in effect double the nil-rate band of the survivor, or it may not (it depends how the deceased gave away his or her property).
Often, in their wills, spouses leave everything to each other in the first instance. Where this is done, the couple will benefit from a helpful thing called the “spouse exemption”, by which any gifts from a deceased spouse to the survivor are entirely inheritance tax-free, regardless of the nil-rate band. In these cases, a surviving spouse will receive a 100% increase in their nil-rate band (i.e. doubling their nil-rate band).
If a survivor’s nil-rate band has been doubled, he or she can leave twice the amount of money and assets on their death before any inheritance tax becomes due.
Any increased nil-rate band is not awarded automatically; it is claimed on the death of the survivor. Therefore, it is vital to keep all relevant records from the first death (for example, inheritance tax forms, grant of probate and so on).
The rules are quite complex. If you would like to know more about your inheritance tax position, please seek legal advice.
Nil-rate band discretionary trusts
Many people have these complicated-sounding trusts in their wills (you will know if you do; they are often dozens of pages long!). If you are one such person, and you are married or in a civil partnership, you may have received a letter from your solicitor suggesting that the trust is no longer necessary. This is very probably correct (though bear in mind it won’t do any “harm” to leave it in). If you are unsure, we suggest you seek legal advice.
Legal advice
We would always suggest speaking to a solicitor when making a will, and we would always suggest making a will! Where applicable, your solicitor will discuss the implications of the recent changes, which can be complicated (to say the least). Receiving advice as to inheritance tax could save your relatives many thousands of pounds, depending on the amount of money and assets you leave behind.
A few interesting points
- The changes to the inheritance tax system were in limbo for much of a year. They finally received Royal Assent on 21 July 2008. It is impossible to say if and/or when they will change again (the rules may change without any notice).
- Inheritance tax will only be due after around 6% of deaths. This low figure may come as a surprise to many people.
- If all your money and property combined equals less than the current nil-rate band, and it will not creep up to that level prior to your death, you will probably not need inheritance tax advice. In all other cases, advice could save your family thousands of pounds.
Your comments, questions and experiences are welcome below.
