IHT Planning In the Light of the October 9th Pre-budget Report

10th December 2008

Having fully come to terms with the changes to the Inheritance Tax (IHT) regime as a result of the Pre-Budget Report by the Chancellor on October 9th 2007 and the further proposals by the Tories to increase the IHT threshold of an individual to £1,000,000.00 if they enter power at the next election. 

A number of key advice points for clients have arisen as a result of the legislative changes:- 

1. Whereas, until the beginning of October, we would have advised married clients with joint estates in excess of the current nil-rate band of £300,000.00 (£312,000.00 - 2008/2009), to enter into Wills incorporating a nil-rate band discretionary trust, my advice now is to go back to very simple Wills, where practical, so that the whole of the estate is left to the surviving spouse and thereafter to any children or other chosen beneficiaries upon the death of the survivor. 

The advantage of using this simple type of Will is that under the new legislation, the surviving spouse (civil partner) will be automatically entitled to two nil-rate bands on their death which would currently equate to £600,000 but will definitely increase to £700,000.00 by 2010 when the current individual nil-rate band increases to £350,000.00 in accordance with the governments declared plans. 

If a client enters into the previously advised nil-rate band discretionary trust then the nil-rate band of the first spouse (civil partner) to die will be fixed at the current nil-rate band of £300,000. As such if one spouse died in November 2007 and created a nil-rate band discretionary trust under their Will and the surviving spouse died in May 2010, the survivor would only be entitled to their own £350,000 nil-rate band which added to the November 2007 nil-rate band of £300,000 means that the total tax-free sum available to the married couple totals £650,000 which is £50,000 less than with the simple Will solution and so could potentially add £20,000 to the inheritance tax due (IHT rate 40% of £50,000) 

Of course, this potential tax saving could be significantly increased if a future government increased the planned IHT threshold as indicated. 

The downside of entering into a simple Will as suggested is that the surviving spouse could change the beneficiaries of the Will but if this is a concern a life interest trust can be set up to overcome this issue. As always, the advice of a specialised solicitor is paramount. 

Insofar, as the main reason to enter into the discretionary nil-rate band trust Will until this October was to save IHT whilst trying to ensure that the surviving spouse was properly looked after, It is not foreseen that the downside raised is a major issue. 

2. The second big question to arise as a result of the pre-Budget Report is whether or not those clients who have already made Wills incorporating nil-rate band discretionary trusts need to change their Wills. Whilst, as a solicitor this could be said to be to a business advantage, we would actually advise any clients to leave their Wills as they stand. 

The reason for this is twofold:- 

a. It is conceivable that the nil-rate band may increase to £1,000,000 in the event of a Conservative Government being elected within the next 3 years and many clients will, as a result, not suffer an IHT liability whatever the type of Will that is in place. 

b. Even if a death occurs and a nil rate band discretionary loan Will trust is put into effect, it is currently possible to exit the trust and revert to the same end result as would otherwise occur by way of a simple Will as set out in 1, above. This is allowed by virtue of Section 144 of the Inheritance Tax Act 1984 and requires the Trustees of the nil rate band trust entering into what is known as a Deed of Appointment in favour of the surviving spouse after three months but prior to two years after the date of death of the deceased person. 

In conclusion and as a general rule, IHT planning has become considerably simpler as a result of the pre-Budget report for many clients. As a result, clients are more carefully considering how and to whom they wish to leave their estates rather than primarily concentrating on the saving of Inheritance Tax which must surely be a positive result. 

We are expert Inheritance Tax Solicitors in Bournemouth with solutions to all your Inheritance Tax problems. Simply contact  us today on 01202 802 807.