Well-drafted Wills still have a big part to play

Mar 19 2008 By The Journal

Fiona Grogan, an Associate Solicitor in the private capital team at Hay & Kilner Solicitors, looks at the effects of the pre- budget inheritance tax changes.

FOR many married couples (and civil partners) the inheritance tax reforms announced by the Chancellor in October 2007 might, at first glance, suggest a return to much simpler estate planning.

The law already allows you to leave an estate worth up to the level of the nil rate band (presently £300,000 and due to increase to £312,000 from April 6 2008) without having to pay any inheritance tax.

Over and above the nil rate band the remainder of your estate will be charged to inheritance tax at the rate of 40%. Transfers between spouses and civil partners are exempt for inheritance tax purposes.

The new “transferable nil rate band” means that on the death of the second spouse or civil partner, that person’s nil rate band will be enhanced by the transfer of any unused nil rate band from the estate of the first to die.

This applies to deaths on or after October 9, 2007 and is irrespective of the date of death of the first spouse/civil partner.

By way of example, if a husband dies first leaving a simple Will by which everything passes to his surviving wife then on her later death, when the estate passes to their children, the husband’s full nil rate band is transferable.

If the nil rate band at the death of the wife is £350,000 (as the Chancellor has announced it will be for the tax year 2010/2011) then her estate will need to exceed £700,000 before any inheritance tax is payable.

If, by way of contrast, the husband dies first, having used up 50% of his nil rate band, then only the remaining 50% will be available for transfer.

On his wife’s later death (if in the tax year 2010/2011) the enhanced nil rate band will be £525,000 (wife’s nil rate band of £350,000 plus £175,000 being 50% of the then nil rate band).

It is clear that those who intend to rely on the transferability rule will need to keep good records, including records of gifts made by both parties, potentially over a period of many years.

The question being posed by many is whether the Chancellor’s announcement marks the end of nil rate band discretionary trust Wills. The answer is not necessarily so.

Detailed consideration will be required for each case, but discretionary trusts may still be appropriate where there is property which qualifies for business or agricultural property relief, where there is concern about long term care or where it is anticipated that an asset might appreciate in value faster then the nil rate band.

It should be noted that the proposals are not yet law and may not receive Royal Assent until July 2008. There is a lot to be said for leaving Wills of this nature as they are and assessing the situation following the first death.

As ever, the importance that flexible, well-drafted Wills can play in a family’s long-term tax and financial planning cannot be underestimated.

For advice on tax efficient wills and planning for your future contact Fiona Grogan or Kirstin Cook on (0191) 232-8345 email Fiona.grogan@hay-kilner.co.uk

www.hay-kilner.co.uk