Do you need to change your Will?

New rules announced in the Pre-Budget Report now allow any inheritance tax (IHT) nil-rate band unused, on the first death of a spouse or civil partner, to be used when the surviving spouse or civil partner dies. For many couples this has effectively doubled the nil-rate band from £300,000 to £600,000 in the current tax year.

The move will potentially simplify IHT planning for many couples.

How did the old rules work?

Each person has an IHT nil-rate band. For married couples or civil partnerships to have used this effectively, the spouse or civil partner who died first would need to have bequeathed assets to beneficiaries other than the surviving spouse or civil partner, as transfers of property between spouses or civil partners are generally exempt from IHT. If the first spouse or civil partner wanted the surviving spouse or civil partner to potentially benefit from all the assets, a nil-rate band discretionary trust could have been set up on the first death which would ensure that the nil-rate band was used.

How do the new rules work?

The transfer of the unused nil-rate band from a deceased spouse or civil partner, irrelevant of the date of death, may be made to the estate of their surviving spouse or civil partner who dies on or after 9 October 2007.

The amount of the nil-rate band available for transfer will be based on the proportion of the nil-rate band which was unused when the first spouse or civil partner died.

For example, on the first death none of the original nil-rate band was used because the whole of the estate was left to the surviving spouse or civil partner. If the nil-rate band is £350,000 when the surviving spouse or civil partner dies, it would be increased by 100% to £700,000.

But if the deceased spouse or civil partner had made significant gifts to their children, or created a nil-rate band discretionary trust, there may not be any nil-rate band remaining.

What if your Will provides for a nil-rate band discretionary trust?

If both spouses or civil partners are still alive, the trust will not have been created. It will therefore be appropriate to consider amending the Will. If the only reason for the trust was to use each spouse’s or civil partner’s nil-rate band, there may be little point in creating such a trust. However, there can still be advantages in creating a trust:

• a person may want to direct who the ultimate beneficiaries of the assets will be rather than leaving that decision to the surviving spouse or civil partner
• assets put into the trust on the first death may grow at a faster rate than the increase in the nil-rate band. That growth is not included in the surviving spouse’s or civil partner’s estate.

Please contact us if you would like more advice specific to your circumstances.