Transferable Nil rate band
From October 2007, under mounting pressure to deal with the furore over inheritance tax, the government introduced the transferable nil-rate band.
This made an immediate massive difference to the inheritance tax planning schemes for many married couples. Prior to the introduction of the transferable nil rate band scheme, in order to benefit from a double nil-rate band most married couples, who were over the inheritance tax threshold, would sever the tenancy of their properties and create wills that set up a discretionary IOU loan trust
for the benefit of the surviving spouse. This had the effect of utilising the nil-rate band of the first spouse to die so as to benefit from a double threshold of inheritance tax allowances.
If you created wills that transferred part of your estate to a nil-rate band discretionary trust you must review them. This does not mean that for every case the discretionary trust must be removed. There are many cases such as second marriages and partners living together where the discretionary trust still has a vital role to play.
If you have opted to remove the discretionary trust and you are a married couple you can now benefit from the transferable nil-band, this means that when the first spouse passes away their nil-rate band is transferable to their surviving spouse. This means that when the second spouse passes away their executors will be able to reclaim the nil-rate band allowance of the first spouse to die and thus they will be able to claim two lots of nil-band. This equates to £650,000 inheritance tax free that could pass to your children.
In addition to this the government have currently set legislation so that if and when the first spouse dies the nil-rate band at that time is £325k if when the second spouse dies the nil-rate band is set at £450k, the executors of the second person to die will be able to claim two lots of the higher rate of the nil-rate band i.e £900k before inheritance tax is payable, this is known as up-lift. We believe successive governments will review this. We shall see.
At the same time, another major shock to the tax planning community was the allowance of a second spouses nil rate band. To clarify; if the first spouse dies they can transfer their allowance to their surviving spouse. The surviving spouse then has two nil-rate bands to utilise when they die, but supposing they got married again. If they did then their new spouse would also benefit from a nil-band, thus with careful planning heir combined estate would not be subject to inheritance tax unless it exceed three times the nil-rate band. Please note this is not straight forward and the new spouse must leave their nil-rate band to somebody other than the spouse with the two nil-rate bands available. However of course they could leave it to a discretionary trust
for the benefit of the surviving spouse.
If you need help with any of the issues here then please call us on 0845 600 3527
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