A Brief Summary of the Current Inheritance Tax Rules
Every individual's estate has an inheritance tax allowance of £325,000 (the "nil rate band" for the 2009/10 tax year). The estate includes property, bank accounts, investments, shares, cars, & jewellery and for tax purposes includes any substantial gifts made in the 7 years before death. Some business assets are exempt, as are gifts left to the deceased's spouse or civil partner or to registered charities (but NOT to unmarried partners who are not civil partners). If the total taxable estate falls below this amount then no tax is payable. If it exceeds the nil rate band then the remainder is taxed at 40%.
The law was changed for the better in 2007 so that the estate of the survivor of a married couple or civil partners could add any unused part of the inheritance tax allowance of the first to die to the second estate. For example, Mr & Mrs A each have an estate of £300,000. Mr A dies first and leaves £100,000 to their only chilc, B, and the rest to Mrs A. There is no tax to pay because his taxable estate is within the nil rate band. Mrs A dies a few years later and leaves the whole of her estate to B. Under the old rules Mrs A's taxable estate would have been her own £300,000 plus the £200,000 inherited from her husband, total £500,000. After the nil rate band, £175,000 would have been taxed at 40% so B would have had to pay £70,000 inheritance tax.
Under the new transferable nil rate band rules, Mrs A's executors can calculate the share of Mr A's allowance that was not used. In this example he only used £100,000 of his £325,000 allowance with his gift to B, the rest was exempt as it passed to his spouse, so approximately 70% of his allowance is still available. The executors can therefore claim 170% of the present allowance (which works out to be just over £550,000) before paying any tax on Mrs A's estate - which therefore passes to B free of tax.
This means that inheritance tax planning is not a priority for the majority of married couples or civil partners if their total combined estate is valued at less than £650,000. Those with estates in excess of this should speak to a financial adviser or accountant to work out whether they should take tax mitigation measures. Also, unmarried couples who are not civil partners cannot benefit from the transferable nil rate band scheme and may need further advice on tax planning if their total estate exceeds ONE tax allowance of £325,000.
Just Inheritance are able to offer general information about inheritance tax but do not offer a tax planning service as part of our Willwriting service. It you have concerns about tax please discuss them with us when we take your Will instructions and we can often put you in touch with a suitable professional person who can assist you.