Consequences of Doubling the Nil Rate Band
Article by Institute Professional Will Writers

The changes to Inheritance Tax Nil Rate Band

On October 9th 2007 in the Pre-Budget Report the Chancellor announced changes to the way Inheritance tax is to be calculated. The changes allowed those who had been widowed to 'uplift' their Nil Rate Band allowance (NRB) by the percentage of the NRB allowance which was not used when their spouse died. Effectively, at the current rate of £300,000 this would provide a NRB allowance of £600,000.

The new provisions are relevant to married couples and civil partners and applies to deaths of surviving spouses/partners on or after the 9th October 2007; however, the date of death of their spouse is irrelevant. So if a surviving spouse were to die today it would be immaterial if their spouse had died 30 years ago for example - they would still be able to uplift the value of the NRB as it was at that date.

NB: The article refers to married couples and spouses but the rules also apply to Civil Partners and any references to spouses or widows should also be read as applying to Civil Partners.

Example:

Jill dies June 2006 (NRB = £285,000) and she made a will leaving all her estate to her husband John. John dies on the 10th October 2007 (NRB = £300,000). Thus John has an estate of £300,000 in his own right and his wife's estate which has grown to £300,000 thus totalling £600,000.

Under the old rules his wife's NRB would have been wasted and consequently taxed at 40% = £120,000. Under the new rules, because Jill did not make use of her NRB (gifts between spouses/partners are exempt), Jack will be able to claim an uplift on his allowance of the percentage amount of Jill's unused IHT allowance - in this case 100% - and thus Jack's estate will enjoy an increased NRB allowance of £600,000.

Implications of the Changes

It is important to realise that the Chancellor has not increased the NRB allowance but has simply allowed couples to use both allowances, something which they have always been able to do via the making of Wills.

So what do the changes mean and what impact will they have? The information and advice set out below has been provided courtesy of The Institute of Professional Will Writers (IPW) from their quarterly magazine 'Inheritance Matters'.

1. Unmarried Couples

   Nothing has changed with regards to unmarried couples as the new rules only applies to spouses or civil partners. Such couples need to consider drafting Wills with a first death gift of the NRB either absolutely to a non exempt beneficiary or in a Discretionary Will Trust.
   If they need to use some or all of the value of their jointly owned property to make such a gift, the joint tenancy of the said property will need to be severed to tenants in common and their respective shares in the property should be gifted to a Discretionary Will Trust with a provision for the surviving partner to borrow assets from the trust in return for an IOU or a charge.

2. Married Couples/Partners who have made 1st death gifts to non exempt beneficiaries

   In these circumstances, the married couple will have Wills which leaves a sum of money on the first death to non exempt beneficiaries such as the children. Such couples will need to consider whether they want to make amendments to their Wills.
   They will need to bear in mind that the said gift will use some or all of the first spouses IHT NRB allowance which will mean that the surviving spouse will receive less than 100% uplift to THEIR IHT NRB allowance.
   Such couples will thus need to re-evaluate the effect that first death legacies will have on their estate planning, and will need to be assessed on a case by case basis.

3. Married Couples/Partners who have made 1st death gifts into a NRB Discretionary Will Trust

   Generally, such couples DO NOT need to change their Wills. The Will Trust can be set up on the death of the first spouse and the trustees can then decide whether to continue the trust or to give the capital out of the trust to the surviving spouse. If the latter is completed 3 months and within 2 years of the death of the first spouse it is treated as a direct gift from the first spouse to the surviving spouse and thus being an exempt transfer, the IHT allowance will not be used up.
   The IPW argue that it makes no sense for such couples to undergo costs in changing their Wills right now in removing the trust provisions as it can be easily done on the 1st death and with the possibility of the rules changing again in the near future.

4. Elderly Couples who have made 1st death gifts into a NRB Discretionary Will Trust

   These couples DO NOT need to amend their Wills. However, whilst IHT might not now be a concern, there might be some concern about their assets being used to pay for Nursing Home Care fees. The NRB Discretionary Will Trust on 1st death will provide some relief against this providing the trustees do not lend the trust assets to the surviving spouse and they remain in the Discretionarily Will Trust.
   A Discretionary Trust does not provide guaranteed benefits for any beneficiary and some couples might not like this uncertainty. Some might prefer a Will trust which gives then a life interest. Other couples might have personal wealth which is above the IHT allowance limit of a Discretionary Will Trust and would benefit from all of their assets going into a Life Interest Will trust to maximise the wealth that is protected from the local authorities.
   Such people need to re-evaluate their concerns and consider amending their Wills to replace the 1st death NRB Discretionary Will Trust with a 1st death Life Interest Will Trust.

5. People with Wealthy Children

   These people need to consider the negative affect that leaving their estate to their wealthy children could have on their children's finances. As such they need to consider leaving some or all of their estate to their grandchildren in their Wills or creating a Discretionary Will Trust for their children and grandchildren, and would enable the trustees - who could be the children - to decide only after both their parents have died how the estate should be divided between them.
   Such Will trusts for grandchildren do incur tax charges if the value of the trust exceeds the IHT NRB allowance, but the charges will be lower than the full rate of IHT.

6. Married Couples where either one or both have been widowed before

   These couples are able to make use of three NRB allowances.

   Example:

   Joan and John both make Wills leaving 1st death NRB Discretionary Will Trusts with IOU/charge provisions incorporated. John dies and in his Will leaves his IHT allowance in trust, Joan borrowing the trust assets. When Joan dies, she has her own IHT allowance, she doesn't have an uplift from her second husband's IHT allowance because it was used to create his NRB Discretionary Will trust but she could have 100% uplift from the unusued IHT allowance of her first husband. So her estate is discounted by the loan from the Discretionary Will trust; then she has her own IHT allowance; and then the 100% uplift on her own NRB's.

   
   These people should consider drafting Wills including 1st death NRB Discretionary Will Trust - if they already have such Wills they SHOULD NOT amend them.
7. People who have a business/farm which qualifies for 100% relief from IHT and the business/farm can be continued or sold upon their death

   On first inspection there seems little point planning with these assets as there is 100% IHT relief upon the owner's death. However, the IPW point out that this is not guaranteed. If the business/farm is owned by a husband, can he guarantee that his wife will continue to run it? And if she does there is no guarantee that she will continue to run it in future years. Added to that uncertainty is the possibility of the tax treatment changing.
   These people should consider leaving their business/farm in a Discretionary Trust with an IOU/charge provisions. The surviving spouse will be able to borrow the business assets from the trust and if he/she then sells the business, the realised cash will not qualify for IHT relief on their death, but the value of the loan will be a legitimate deduction from their estate. The loan will be repaid to the Discretionary Will Trust. There will be tax charges due when the money from the loan is paid to beneficiaries but it will not be as high as the full 40% IHT charge.

8. People whose Spouse has died and their Will has created a NRB Discretionary Trust

   These people need to consider whether the trustees should call in the IOU/charge (if one is present) and then give the capital to the surviving spouse. As mentioned above, if this is done within 3 months and within 2 years for the 1st spouse's death it will be treated as a direct gift from spouse to spouse and thus the NRB will not be used, thus enabling 100% uplift for the surviving spouse.
   The new rules provide that if the NRB allowance is not used on the 1st death the surviving spouse enjoys 100% of the NRB value as it stands at THEIR death. Naturally this is likely to be higher than previous years and thus it might be more beneficial to take this route. Continuing to run the trust will involve thinking about how best to invest the capital and various charges which will arise.

9. Those who have not made a Will

   A brief look at the intestacy rules will clearly illustrate why making a Will is still extremely important. According to the intestacy rules, when a married person dies some of their assets above £125,000 are passed to their children and if there are no children then some of their assets above "200,000 are passed to other family members which can not only deprive the surviving spouse of assets but also use up the IHT allowance of the first spouse, thus reducing the uplift available to the surviving spouse's IHT allowance when they die. Ultimately, this would result in more IHT being paid.
   The IPW urge that even the making of a simple set of Wills which leave everything to each other would be better than not making a Will at all, because in such event the surviving spouse will be able to utilise 100% uplift of the IHT allowance. The changes in the legislation have NOT rendered Wills redundant and persons who have not made Wills yet should consider making even the basic of Wills along the lines mentioned.

Procedure for Claiming the unused NRB

The Inland Revenue have issued guidance notes on the paperwork that needs to be suppoied to them about the affiars of the previous spouse (s) when claiming the uplift on the spouse's NRB. Such documents include death certificate, Grant of Representation (if there is one), estate valuations, details of gifts to non exempt beneficiaries (via Will or intestacy) and details of gifts made in the 7 years before death.

People who want to make use of the NRB uplift rules are advised to gather the necessary paperwork to make life a little bit easier for their executors.

Conclusion

Thus it is clear that that despite the changes, there is still a very real need for estate planning through Wills. The change simply means that rather than churning out lots of standard Wills nowadays - with the exception of the vary basic Will where couples leave everything to each other - the Will documents will need to be tailored to the individual's circumstances.

Acknowledgements: The information and advice provided in this article has been taken from the Institute Of Professional Will Writers quarterly magazine 'Inheritance Matters - Your Money Matters' Feb 2008 edition.