ࡱ> GIF @ $bjbjFF BB,,"8<4"C#$>>"``````"""""""$g$R&"`````"``"```"`"`2 0ھDv "#0C#'P'""'```````"""""" THE FINANCE ACT 2008 TRANSFERABLE NIL-RATE BAND ALLOWANCE Explanatory Notes Parrott & Coales LLP Solicitors 14 Bourbon Street Aylesbury Buckinghamshire HP20 2RS Telephone: (01296) 318500 THE FINANCE ACT 2008 THE TRANSFERABLE NIL-RATE BAND ALLOWANCE On 9th October 2007 the Chancellor announced sweeping changes to the way inheritance tax (IHT) is calculated which took effect from 9th October 2007. The legislation came into force in July this year. The changes are extremely advantageous for married couples, civil partners and families where a spouse or civil partner may have already died. The new transferable allowances are designed to enable married couples and civil partners to make use of both their nil rate bands (NRB) for inheritance tax planning purposes. (The NRB is the element of an estate which is taxed at 0% for IHT or is, in effect, free of IHT. The NRB is currently 312,000 and is due to increase to 325,000 in April 2009 and 350,000 in April 2010. Background Prior to October 9th, if a Will left all assets to the surviving spouse or civil partner and then, for example, to their children or other parties, there would have been no IHT when the first person died as any gift between a spouse or civil partner is free of IHT. However, when the second person died their estate would only have their NRB to offset against the IHT liability which would be calculated on their joint estates. Many families are subject to IHT due to the value of their house and they may have little scope to make use of the lifetime planning steps available as they may not be in a position to give assets away in their lifetime. Tax Planning Wills incorporating the so called Nil Rate Band Discretionary Trust, with the facility to carry out planning with the family home, (please see our separate handout which covers this in more detail) were a very effective, and flexible, form of tax planning. This scheme enabled married couples and civil partners to make use of both their NRBs which would mean that, under current figures, their estates could have up to 624,000 free of IHT. This could result in an IHT saving of up to 124,800 (312,000 x 40%). Transferable allowances enable married couples and civil partners to make use of both NRBs without the need of necessarily using detailed tax planning Wills. (Tax Planning Wills should still be considered where, for example, flexibility is required; where people own business or agricultural assets; or where it is wished to protect money from actually passing to the surviving spouse or civil partner absolutely, for example in a second marriage or for nursing home fees reasons.) Since October 9th 2007 a Will leaving everything to each other and then, for example, to their children or other parties, will now be tax efficient. How Transferable Allowances operate When the first person dies everything will still pass to the surviving spouse or civil partner free of IHT. When the second person dies their NRB will be available as before (subject to any gifts they may have made within the previous seven years). Their executors will then look at applying to use transferable allowances. The executors need to determine what proportion of the first persons NRB was unused when they died. If, for example, they had left everything to the surviving spouse or civil partner everything will have passed free of tax and 100% of their NRB was unused. The executors then apply the unused proportion of the first persons NRB to the second persons estate. However, rather than applying the NRB which was in force when the first person died (which was probably lower than the rate when the second person dies) it will, in fact, apply to the second persons NRB. Therefore, if when the first person died the NRB was 312,000 but the second persons NRB was 350,000, the total NRB available would be 700,000 (i.e. 2 x 350,000). If, however, the first person had left half of their NRB to, for example, their children, only 50% of the NRB can be transferred to the second estate. If the first partys NRB was 312,000, this would therefore mean that the NRB available on the second death would be 525,000 (350,000 plus 175,000 i.e. 50% of 350,000). Another benefit of the new regime is that if the first person to die did not have assets in their sole name to the value of the NRB, this no longer matters as, provided all their assets passed to the surviving spouse or civil partner, again 100% of their NRB would be available to transfer to the second estate, as outlined above. It does not currently matter when the first party died provided the second party died after 9th October 2007 - the principle of being able to transfer their unused NRB still applies. Existing Wills If tax planning Wills have already been prepared incorporating the Nil Rate Band Discretionary Trust, there are two main options available: 1. change the Will to remove the trust so that the transferable allowances will operate in due course; or 2. retain the trust and do nothing. Under current legislation it is possible to, in effect, avoid using the trust after the first person has died and to make use of the transferable allowances instead. Such steps cannot be taken within three months of the first person dying but must be taken within two years of their death. One Party has already died Where someone has already died and their Will incorporated the Nil Rate Band Discretionary Trust, it may be possible to make use of option 2 if they did not die more than two years ago. In this case, the trustees could transfer the funds to the surviving spouse/civil partner, even if the trust has already been set up. In this way, it will be treated as if the first persons NRB had not been used and the transferable allowance will apply. Unfortunately, if the first person died more than two years ago this option is not available. However, as mentioned above, the tax planning Wills we prepared prior to 9th October 2007 were, and are still, extremely effective and can save up to 124,800 IHT, based on current figures. This handout is an overview into the new regime. If you would like to discuss matters further, please contact a member of the Private Client Department who would be happy to discuss matters in more detail. If you have already prepared a tax planning Will with Parrott & Coales LLP incorporating the Nil Rate Band Discretionary Trust and would like to review this and your options, please again contact a member of our Private Client Department who would be happy to see you. This booklet deals in general terms with a complex subject. While we believe the contents to be correct, they should not be regarded as sufficiently full, accurate or precise so as to apply to any particular situation. You must always seek legal advice concerning any situations referred to in this booklet and Parrott & Coales LLP or its author can accept no responsibility for any loss suffered by any person as a result of acting in reliance upon the contents of this booklet. 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