Budget Update – Freeze on Inheritance Tax
In the Budget, the Chancellor froze the level of the nil rate band for Inheritance Tax purposes at its current level, until the tax year 2014/2015.
This is the first time in over 15 years that the Nil Rate Band has been frozen for such a period of time, as it has typically increased year on year in the Budget since 1995.
The impact of this calls into question Inheritance Tax planning that you may have undertaken in your Will.
The Nil Rate Band is the amount at which you pay Inheritance Tax on your death at 0%. It is currently £325,000 per person, meaning that subject to your individual circumstance, you will pay Inheritance Tax at 40% on the balance of your Estate. All transfers between spouses and to charities are exempt, and there are more specific reliefs that may also be available.
In 2007 the transferrable Nil Rate Band was introduced. Prior to this, if a spouse left everything to his wife, there is no Inheritance Tax to pay on his death, but when his wife subsequently passed away, she only had her own Nil Rate Band to use. This meant that she would have to pay the Inheritance Tax upon everything over the Nil Rate Band, including that which she had inherited from her husband. The same is true in reverse.
The Transferrable Nil Rate Band introduced the possibility of transferring to your spouse the Nil Rate Band so that on the second death there was the possibility of using two Nil Rate Bands. One of the advantages to this is that when the Nil Rate Band increases year on year, if there is a time lag between the deaths, the available Nil Rate Band on the second death can be more than would have been available on the first spouse’s death.
However, now that the Nil Rate Band no longer seems set to increase for the foreseeable future, it may not be so advantageous to utilise the transferrable Nil Rate Band. There are other important planning steps that can be taken in your Will or during your lifetime to mitigate your Inheritance Tax liability and preserve your assets, which may be more advantageous This may include setting up Trusts within your Will or during your lifetime or taking certain steps with your assets.
With everything else increasing in value and with house prices set to rise in the future, with the Inheritance Tax Band remaining static, it is highly likely that your Estate or the Estate of someone you know will fall into the tax bracket and Inheritance Tax will be payable. It has therefore never been more important to review and revise your Will and your tax planning and take specialist advice as to savings that may be made.
Wolferstans have a dedicated Wills and Trust Department who can assist you in all elements of tax planning, will drafting and preserving your assets. Contact Samantha Buckthought, Head of the Wills and Trust Department at Wolferstans on 01752 663295 or at our Plymstock office on 01752 401515.
