Inheritance Tax

10% to charity on Death:

From 6 April 2012, if, by Will, you leave at least 10% of “your estate” to charity, the remainder of your chargeable estate is charged at 36%, rather than the usual 40%. This will only be of interest to you, if your estate exceeds the Nil rate Band (see below).

What consitutes “your estate” is somewhat more complicated to define, than the above statement may suggest. If you would like to make use of this scheme, we can discus the advantages/disadvantages of doing so, when preparing your Will.

Transferrable Nil Rate Band:

On 9 October 2007 the then Chancellor, Alistair Darling, as part of his Pre-Budget Report and Comprehensive Spending Review, introduced a number of changes to the rates and method in which various taxes are charged, the most important of which, we believe, is Inheritance Tax..

Before the Pre-Budget Report an individual was entitled to a £300,000 allowance (Nil Rate Band) on his or her death. This has since been increased to £325,000 in April 2009 and has remained this since. This meant that assets below the Nil Rate Band were taxed at 0% and everything exceeding £325,000 was taxed at 40%. Anything passing between spouses or civil partners on death was covered by spouse/civil partnership exemption and hence no Inheritance Tax was payable. What this generally meant was, where the first spouse died leaving everything to the other spouse and the surviving spouse later died, their estate would consist of the amalgamated assets but would still only be entitled to the £325,000 allowance.

Couples therefore needed to take advantage of the £325,000 allowance on the first person’s death so as to ensure that the surviving spouse’s estate was either kept below the threshold or alternatively was significantly reduced to reduce the amount of Inheritance Tax on their death. This generally involved the drafting of a Nil Rate Band Discretionary trust or an absolute gift of the half share of the property (having first transferred their property into Tenants in Common).

Following this change, the above planning is not so necessary as it introduced a method of “transferring” the Nil Rate Band from spouse to spouse or civil partner to civil partner. What this now means is if a spouse or civil partner dies leaving everything to their spouse/civil partner then on the surviving person’s death they are entitled to a £650,000 Nil Rate Band. However, this allowance is only for spouses and civil partners, not co-habitees. This allowance is only applied if the surviving spouse/civil partner dies after the 9 October 2007. It is, however, applied retrospectively so that if the first spouse/civil partner died before this date the new Nil Rate Band would apply.

This”new” regime will assist most couples to avoid Inheritance Tax and to ensure that their beneficiaries receive their maximum entitlement but this may not always be the case and our staff will gladly advise you of other methods to ensure your estate is tax efficient.