Couples who have already put in place inheritance tax plans will not need to rewrite wills as a result of changes to inheritance tax allowances – but those who don’t review their planning could end up paying more tax, say accountants.
New tax rules announced by Alistair Darling, the chancellor, in this week’s Pre-Budget Report allow couples to share the joint nil-rate inheritance tax band, so that unused relief is available to a surviving partner.
Until the announcement, couples could only be sure of using both their nil-rate bands by passing assets directly to heirs or setting up a discretionary will trust.
If a trust was set up, it was held in abeyance and then passed to a beneficiary. As long as it was passed on within 10 years of the first death and provided no IHT was paid when it was set up, the amount held incurred no IHT charge.
Married couples and civil partners can now choose not to use up the individual nil-rate band of £300,000 on the death of the first spouse but instead transfer it to the survivor, to shelter £600,0000 on the second death, without the use of a trust. By April 2010 the joint allowance will rise to £700,000.
As a result, The Society of Will Writers has received many calls from people concerned that their wills are no longer valid in light of the new IHT changes.
But financial planners say there is no need for panic. “At this stage, it appears no major redraft is required,” said Fiona Graham, financial planning expert at law firm Boodle Hatfield. “Mr Darling has anticipated this outcry and has specifically confirmed that instead the will can be rearranged within two years of the first death to get back to ‘square one’” as long as all the parties agree to the change.
Advisers say the new rules should ease the pressure on couples by simplifying the process of passing on estates. The chancellor claimed it will result in a reduced tax bill for 3m people. Families who had intended to use a trust to pass on a portion of their family home or family business are likely to benefit most from the simplification.
As the first nil-rate band no longer has to be used on first death, family homes worth more than £300,000 need not be divided and partially placed in a trust.
“Those who have trusts will not necessarily be any worse off by leaving them in place. But for a living person they may find the new exemption rules make them feel more confident,” said Patrick Stevens, tax partner at Ernst & Young.
However, couples who plan to establish trusts through their wills could end up paying an extra £20,000 if their trusts are not carefully set up.
Accountancy firm PKF says that if the nil-rate band of £300,000 is used on the first death, the surviving spouse and beneficiaries will not gain from the increase in the nil-rate band from 2010.
For example, if a husband dies and his nil-rate band is used to put £300,000 into trust now, then his surviving spouse will only be able to use her nil rate band upon death, which in 2010 will be £350,000, totalling £650,000. If the first nil-rate band was not used when the first spouse died and was rolled up with the second spouse’s nil-rate, then £700,000 of the couple’s estate would be exempt from IHT after 2010. A 40 per cent tax on the difference of £50,000 would mean an additional tax of £20,000 if the trust was used.
Some trusts may take legislation changes into account. “In many instances, there is flexibility in the terms of a trust so that it can either be implemented or not, depending on what is most beneficial,” said Peter Harrup, tax partner at PKF. “But I would advise anyone with a trust or will to revisit it and check all of the terms.”
