Inheritance Tax (IHT)
For the tax year 2009/10, IHT is payable on all assets in excess of £325,000.00 at a flat rate of 40%.
Until October 2007 the best way for married couples to maximise their IHT saving potential, was to prepare Wills incorporating a complicated “Nil Rate Band Discretionary Trust”. This served to double the allowance available to the surviving spouse on their death.
However the Pre Budget Report in October 2007 announced that with immediate effect, on the death of a surviving spouse, they may now leave their own allowance plus any “unused” allowance of the spouse who dies first. In addition, the first spouse’s allowance is uplifted to the allowance in force at the death of the surviving spouse.
Example
Mr and Mrs Smith have an estate valued at £750,000.00 split equally between them.
Mr Smith died in January 2008 with a Will leaving all of his estate to his wife. There was no IHT liability as spouses are exempt from IHT. He therefore did not use “any” of his IHT allowance of £300,000.00.
Mrs Smith died in June 2009 with an estate being left to her 2 children, now worth £750,000.00. Her executors are able to use her IHT allowance of £325,000.00 and all of Mr Smith’s allowance which is “uplifted” to £325,000.00.
Mrs Smith’s liability to IHT is therefore calculated at £750,000.00 minus £650,000.00 (2 x £325,000.00) = £100,000.00 x 40% = £40,000.00
For unmarried couples however, the “transferrable IHT allowance” as mentioned above in the example of Mr and Mrs Smith is not available, and advice should be taken as it still remains possible to save in excess of £100,000.00 by preparing correctly structured Wills.
Clients who also have business related assets should also take advice, as their Wills should be structured in such a way so as to protect the value of the business from future tax liabilities.
