Managing inheritance tax liability is not always top of people's financial agenda, but being aware of the reliefs and options available to you and planning accordingly can reduce the financial burden, following the death of a spouse or civil partner.
Recent changes, following the Chancellor's pre-budget report, will result in significant inheritance tax savings. While the nil rate band' or threshold for payment of inheritance tax remains at £300,000 each, as of October 9, 2007 the unused balance' of the deceased partner's nil rate band', can now be transferred to the survivor's estate on death.
This effectively raises the inheritance tax threshold to a maximum of £600,000 for married couples, although the new rules will not benefit unmarried or non-civil partnership couples, or siblings who have lived together.
If you are dealing with the estate of the first spouse or civil partner to die, there is nothing you need to do now to transfer unused nil-rate band. The claim for this must be made by the accountable person when the surviving spouse or civil partner dies.
The new rules do mean it is now more important to maintain full records of all gifts, which are another popular way of managing inheritance tax liability, as the Revenue will be carefully checking where claims for unused allowances are made.
If, on first death, 50 per cent of the nil-rate band was used, on second death, there is a recalculation, and 50 per cent of the then prevailing nil-rate band will become available. If there are successive marriages, the maximum that will be available is equivalent to one additional nil-rate band.
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The main beneficiaries of these proposals will be those whose main asset is the family home. However, for those whose assets are more wide-ranging, it still remains good practice to ensure all other reliefs are captured.
Discretionary Will Trusts, originally set up to protect the home from care fees, are also still relevant.
In addition, where assets are likely to increase in value, it's also still good practice, where possible, to transfer these either by potentially exempt transfer or into trust so the capital value can be taken out of the transferor's estate.
The need for specific tax advice must always be considered. The HM Revenue & Customs also have some information on their website and will be issuing more detailed guidance in the near future.
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