A Beneficial Tax Change?!

Don't fall over with shock, but at last we have found a tax change that is beneficial to the tax payer. Associate and tax planning lawyer Katherine Neal outlines the details.

Back in October 2007 the Chancellor announced that, from that date forward, spouses would be able to use their husband's or wife's unused nil rate band when they died. Effectively this means, on the second death, there are two nil rate bands to be used (if the first to die had not used it all up).

At first, the changes were viewed with suspicion; why would the Government give such a big concession? Many commentators felt that it was another way to stop people using trusts to protect wealth for future generations and, if husbands and wives were given tax breaks to leave everything to each other, then the survivor would have more money in their estate to pay nursing home fees and the like.

However, the change has presented us with some interesting tax planning opportunities to use more than two nil rate bands.

Imagine the situation where a husband and wife have £1 million in assets, even with the doubling up of the nil rate band, we are looking at an overall tax charge of £140,000, but could that have been reduced or even avoided at all?

If, on husband's death, he leaves everything to his wife on a life interest trust, there is no Inheritance Tax as it is spouse exempt. The wife then gifts the nil rate band to the children, either outright or on further trusts if she is worried about them having the money outright. If wife then survives 7 years, the gift is outside her estate and, on her death, she still has her own and her husband's nil rate bands to set off against any tax liability. Even if the nil rate band stays as it is, this will save £130,000 in tax.

The life interest preserves and protects family wealth from unscrupulous second husbands or other interested third parties but allows the surviving spouse to enjoy the benefit of it.

To make the most of this change, it is important that everything is recorded and documents retained.

For more information or advice please contact Katherine Neal on katherine.neal@harveyingram.com or call 0116 257 4459.