Alistair Darling's new rules to allow spouses and civil partners to make full use of their combined nil rate bands (NRB) for inheritance tax (IHT) are now in force.
In response to the Pre-Budget Report, Standard Life has launched a new NRB Flowchart to assist financial advisers in their, all important, fact-finding process with clients. In addition to whether a client has previously been widowed, there are now many variables that need to be taken into account when advising clients on estate planning.
For situations where a client is widowed, Julie Hutchison, estate planning specialist with Standard Life Assurance Limited, commented: “At first glance, the new IHT rules seem simple to understand, but it is not just a case of assuming that a client automatically has a double nil rate band where the client has been widowed.
"There are a number of factors which affect this, including what lifetime gifts were made by the deceased and also the terms of the will. Record-keeping now becomes vital, to ensure a detailed note is kept of what NRB was unused in the first estate.”
Going forward, the new NRB rules need to be taken into account when considering what lifetime gifts a client wishes to make. Since Budget 2006 a transfer to a flexible trust is treated as a chargeable transfer (CT) attracting an upfront 20 per cent IHT charge if the transfer is over the available nil rate band.
It should be noted that the way the new IHT rules are written means that the enhanced NRB is only available to claim on second death. This means that the combined NRB cannot be used to set against a lifetime chargeable transfer (CT) at the time it is made, so will not apply to transfers above £300,000 made to a flexible trust, for example. For that the client’s ‘normal’, single, NRB still applies, above which 20% IHT is due on the chargeable transfer to the flexible trust.
Hutchison continued: “Client behaviour with estate planning could be affected, since a potentially exempt transfer (PET) could effectively benefit from these new IHT rules where a chargeable transfer would not. This is because IHT on a PET only arises on a death within 7 years, at which point any enhanced NRB would apply. This makes PETs, such as an outright gift to an individual or a gift to an absolute or bare trust, particularly attractive.”
In considering the use of absolute or bare trusts, Julie concluded: “It should be remembered that any gift to an absolute or bare trust involves fixing the beneficiaries at outset. This inflexibility needs to be balanced against the IHT advantage for the client making the gift. An absolute trust will not suit every family, since it does directly add value to another individual’s estate and the beneficiaries of the trust cannot be changed, but it does suit those whose needs are more certain.”
