Discretionary Trust & Inheritance Tax
Inheritance tax planning
Wealth Management
Inheritance Tax   Business Trust

Inheritance Tax & Discretionary Trust

In his Pre-Budget Report, the Chancellor of the Exchequer announced that from 9th October 2007, it will be possible for spouses and civil partners to transfer their nil-rate band allowances so that any part of the nil-rate band that was not used when the first spouse or civil partner died can be transferred to the individual’s surviving spouse or civil partner for use on their death.

This means where a surviving spouse or civil partner dies on or after 9 October 2007, a proportion of the unused nil rate band from the death of the first spouse or civil partner can be used on the second death. The amount that can be transferred will be based on the proportion of the nil rate band unused at the date of first death and applied in the same proportion to the current nil rate band.

The transferable allowance will be available to all survivors of a marriage or civil partnership who die on or after 9th October 2007, no matter when the first partner died / dies.

What has changed?

What has changed is the rules on how the tax free allowance can be used when a husband, wife or civil partner dies. Transfers of property between spouses and civil partners are generally exempt from inheritance tax. This means that if an individual dies and leaves some or all of their estate to the surviving spouse or civil partner, they may not have fully used their tax free allowance.

Prior to 9 October 2007, the effect of this was that the surviving spouse or civil partner would pay more inheritance tax on their death, as they would only have the use of one nil rate band allowance.

The amount of the transferable nil rate band will be a proportion of the allowance which is not used on the first death. So, for example, if Mr Brown died in March 2000 and left all of his estate to Mrs Brown, then 100% of his nil rate band is therefore available on Mrs Brown’s death.

So if Mrs Brown was to die in March 2008, her executors could use not only her £300,000 (the IHT threshold 2007/2008) of allowance but also 100% of Mr Brown’s allowance, which would be a further £300,000. For this all to work and be effective, Mrs Brown’s death has to fall after 9th October 2007 and that Mr Brown’s transferred allowance is calculated as that at the time of Mrs Brown’s death (March 2008), and not his own death (March 2000).

Uprating the nil rate band by the same proportion

The key concept here is uprating the nil rate band available by the same proportion. This involves the amount to be transferred is worked out by taking the proportion of the nil rate band that was unused on the first death and applying that to the nil rate band available when you die.

So if your spouse left assets worth £150,000 to your children with everything else to you and the nil rate band on their death was £300,000; one-half of their nil rate band is unused and is available for transfer. If, when you die, the nil rate band had increased to £325,000, the amount available for transfer would be 50% of £325,000 or £162,500 giving your estate a nil rate band of £325,000 + £162,500, or £487,500 in total.

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