Inheritance Tax Planning after 2007 Budget
The 2007 pre-budget report has brought dramatic changes to the inheritance tax treatment of husband and wives and civil partners. Before the budget report it has been a long standing problem that when the first member of a couple dies the natural wish for all of the assets to pass to the remaining spouse has been tax in-efficient for inheritance tax purposes. When the second person died the inheritance tax nil rate band of the first person of up to £300,000 was lost. The inheritance tax cost of this is 40% up to a maximum of £120,000.
It was possible to avoid this double taxation by either giving the funds directly to beneficiaries i.e. children or creating a trust to separate the assets. This added costs and complications but the saving of the inheritance tax was sensible planning.
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From the 9th October 2007 this has all changed!
Now it is possible to transfer the balance of any spouse's unused inheritance tax nil rate band to the surviving spouse and this will include spouses who may have died many, many years ago. This is a very welcome improvement; however it does mean that the standard inheritance tax planning of creating an inheritance tax nil rate band within your estate for your spouse can be counter productive.
If all the assets are left to the spouse instead you have the following advantages:
• The spouse has no insecurity with their tenure in the family home and less restrictions with regard to managing the family assets. It also removes the possibility of a capital gains liability on trustees or children owning a part share of the family home.
• The amount of nil rate band tax which can be transferred on the death of the first spouse is increased in line with the inheritance tax nil rate band which is currently set to increase at a significantly higher rate than inflation.
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What Should I Do?
If you are in the position where the market value of your main residence is in excess of £300,000 (the current nil rate band) the current advice would be to change your will to ensure the whole of your estate now goes to your spouse. We are therefore strongly recommending that all clients review their wills to check they are still appropriate.
It must be remembered the most important factor is that your will achieves what you require and it should not be dictated solely for tax reasons.
CONTACT: Adrian Berkeley on 0161 371 0011.
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