Grab a slice of inheritance pie

Feb 19 2008 by Karen McLauchlan, Evening Gazette

AS SOME of the highest tax payers in Europe, British homeowners are so used to crumbs from the Chancellor’s table that many are still unaware of a big slice of largesse which could make inheritors at least £100,000 richer, says Stockton accountant Trevor Cook.

Last October, the Chancellor bowed to intense pressure to raise the level at which beneficiaries had to pay tax on estates.

Although not as much as some campaigners would have liked, it nevertheless had a big impact in the Tees Valley where property prices on the whole have not risen as sharply as in the South.

“The change had a lot to do with property values,” says Mr Cook, a partner at Baines Jewitt accountants. “The tax hadn’t kept pace with prices and it was felt that people were paying tax unfairly.

“In this neck of the woods you could argue it amounted to an extra half share, in the South it was nowhere near of course.”

The new rules which, unusually, apply retrospectively, mean that a widow or widower in a marriage or civil partnership to whom property was transferred upon the death of their partner, can go on to leave as much as £600,000 tax free - double what was allowed previously.

“The current limit on the nil rate band is £300,000. As transfers of property are exempt from IHT, someone who left their property to a spouse or partner may not have used all of their nil rate band.

“If they didn’t use any of the band, the £300,000 limit would be transferred to the surviving partner’s limit, and would increase it by 100%. It would therefore stand currently at £600,000 before any assets were liable to the 40% rate,” Mr Cook explained.

The nil rate band is proposed to increase in 2010/2011 to £350,000, making the cumulative tax free total even higher.

The changes do away with the need for complicated and potentially expensive trust fund arrangements.

“We used to have a situation where you created on the first death a nil rate trust so you didn’t lose the tax exemption. This effectively does away with it and makes it simpler.

“Trusts still have their place, of course. Many people don’t like the idea of someone below the age of, say, 25 getting their hands on all that cash and squandering it.

“A trust protects it, while still allowing them to benefit from the capital and income distribution, dependent on the trustees’ agreement.”

But the revision does, at least, allow families and others to hang on to the family home, if they wish.

“Where, for example, they might have only £30-£50,000 of cash assets, on the second death you had no choice but to sell the house to pay the tax on it, because, unless they had tax planning in place, the inheritors had to pay up to £120,000 (40% of £300,000),” added Mr Cook.

While the changes won’t be introduced until April, the inheritors of anyone who survived until October 9, 2007, are eligible to benefit from a backdated transfer.