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Band aid

The introduction of transferable inheritance nil-rate bands for married couples and civil partners continues to provide a massive opportunity for financial advisers to demonstrate their added value to clients and professional introducers.

This may strike some as a strange statement, particularly as inheritance tax appears to have disappeared as a key concern for many clients the state of the markets, the credit crunch and house prices being done to death instead around many a dinner party table.

There appears to be a widespread feeling that inheritance tax is no longer an issue for most people. The truth is that neither transferable nil-rate bands nor the Conservatives’ policy announcement of a £1m nil-rate band has made a significant change in the need to plan for inheritance tax. The Tories’ announcement is only theoretical as they are not in power and may not win the next election. The introduction of transferable nil rate bands is welcome but, in essence, merely automates a process which people was aided in any case by will planning.

We are left with a great deal of uncertainty and misunderstanding among customers. This is prime territory for advisers to step in with clear advice and reassurance. One thing that has not changed is the need for all clients, married or otherwise, to ensure they have a made a valid will and this is kept up to date and is reviewed periodically to ensure it continues to reflect their wishes.

The introduction of the new rules is a perfect opportunity for advisers to encourage clients to review their wills. This should lead to opportunities to engage with the clients’ lawyers and possibly to build and develop new working relationships.

The new rules are fairly simple but there is more to them than meets the eye. In brief, the practicalities of the transferable nil-rate band are as follows:

  • The rules give the option to transfer any unused nil-rate bands between legal spouses and civil partners.

  • The transferee deceased spouse’s personal representatives must claim the relief within two years of death. Note, however, that the date of the death of the transferor spouse is not relevant.

  • It is a proportion (0 per cent to 100 per cent) of the unused nil-rate band that is transferred. Even if the first spouse to die had no assets on death, 100 per cent of their nil-rate band is still transferable.

  • In cases where an individual has been married more than once, a maximum combined total of 100 per cent of the nil rate band is transferable. Personal representatives of a surviving spouse will be able to make a claim against the nil-rate bands of previous marriages where there is an available unused nil-rate band, as well as against the estate of their last spouse.

  • There is a significant amount of paperwork for the personal representatives to produce, including the will of the first spouse(s) to die, the death and marriage certificates and a copy of the grant of representation, in order to make a successful claim.

    The introduction of transferable nil-rate bands is certainly a step forward in making life easier for many married couples and civil partners who may have otherwise been unable or unwilling to make use of both inheritance tax nil-rate bands. It can, however, still be a complicated and timeconsuming process to exercise the option to transfer, especially if there is more than one marriage involved and/or where the first to die passed away a long time ago.

    It does nothing to help the population of unmarried couples who still need to ensure they understand the possible impact of inheritance tax when one of them dies and check they have made appropriate plans, particularly if there are children involved.

    It certainly does not mean the end of inheritance tax liabilities for all but the very wealthy. How many of your clients own a house that is valued over £624,000?

    Despite much commentary to the contrary, this change in the law does not necessarily mean the end of traditional nil-rate planning for married couples and civil partners. The transferable nil-rate band is another option that needs to be taken into account by advisers when giving advice and when dealing with a client’s other advisers, most probably their solicitor.

    For married clients whose main or only significant asset is the family home, the ability to transfer means they no longer have to manufacture the use of a nil-rate band on first death by, for example, using the IOU or charge schemes that had grown in popularity in recent years. But, this aside, there remain a number of good reasons why married clients and civil partners may want to use a discretionary will trust.

    Use of a trust may be desirable in circumstances where, as is often the case, the clients are concerned that they may require long-term care in future as assets directed into a trust on the first death should not count as part of the surviving spouse’s resources for the purposes of the local authority charge.

    A trust may also be useful in cases where there is a concern about letting children inherit assets outright. In such cases, a trust will mean protection from the claims of creditors and ex-spouses.

    For cases where there are children from a previous marriage, the discretionary trust option may be preferred as a means of either benefiting such children on first death or it may be that the couple decide that they do not want the survivor to have complete legal and beneficial control of the assets following first death.

    A nil-rate band trust may also be useful in a case of serial marriage to ensure that all available nil-rate bands are used to the fullest extent possible. The situation for previously married clients can be very complicated and if the planning is not done correctly, may result in an unnecessarily large inheritance liability.

    Use of a trust would also be appropriate if it is felt likely that the trust investments will grow by more over time than the nil-rate band. This in itself should give most clients pause for thought, notwithstanding the more generous nil-rate band increases in recent years.

    Finally, a trust could be used to increase the overall inheritance tax efficiency of the arrangements if the trustees are in a position to make loans to the survivor that would have the effect of reducing their taxable estate on death. Such planning is only effective if the survivor had not made previous lifetime loans to the first to die deceased spouse.

    If the surviving spouse is in good health, an alternative to a discretionary will trust on first death may be for all assets to be left to the survivor with a view to him or her making lifetime gifts.

    Provided the survivor lives the necessary seven years, this will maximise the inheritance tax savings as the survivor’s nil rate band becomes available again and they will also still have an entitlement to 100 per cent of the nil-rate band of the first spouse to die.

    However, the lifetime gifting option does have the downside that generally the survivor will not be able to retain any interest in the asset given away. If future access is required a discounted gift arrangement or loan trust may be more appropriate.

    Trusts still have a part to play in nil-rate band planning.Given that many clients’ circumstances will change over time, maybe the safest planning option will always be to use a discretionary trust and let the trustees decide the most appropriate course of action when death occurs.

    Remember that, under section 144 of the Inheritance Tax Act 1984, there would be scope for the trustees to make absolute appointments from the discretionary trust and achieve the same inheritance tax outcome as if the asset or assets had been left direct under the client’s will provided that such appointments are made more than three months after, and within two years of the client’s death.

    The transferable nil-rate band is not a one size fits all solution to be used for every client. There are still many opportunities to give quality, focused will planning advice, often with the client’s solicitor, that will pay the client dividends in the long run.

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