Chancellor Alistair Darling’s first pre-Budget report gave the impression of simplifying inheritance tax but may actually drive more people towards estate planners.
New legislation, to be introduced in the Finance Act 2008, will allow married couples and civil partners to transfer their nil-rate band to their surviving spouse or partner, effectively giving them a combined allowance of 600,000.
Those in the know recognise that the move does not, of course, give away anything that could not already be taken but some experts are welcoming the move nevertheless.
Standard Life estate planning specialist Julie Hutchison says: “For once, I find myself welcoming retrospective tax rules. These new rules address the problem that the nil-rate band of the first to die can often be wasted, if assets are simply left to the surviving spouse since spouse exemption applies.”
She says that, historically, these sorts of planning issues fuelled the popularity of nil-rate-band will trusts, which allow for the use of a spouse’s nil-rate band, and retrospective deeds of variation.
Deeds of variation are where all the beneficiaries of a will agree to change the outcome of the will and make use of a spouse’s nil-rate ban if this was not included in the will.
Arguably, the latest move will do away with the need for nil-rate-band will trusts and deeds of variation but many experts feel that the Chancellor’s announcement will have little impact on clients’ planning needs.
Liz Henderson, of James Hay’s technical unit, says: “Where a couple have included some nil-rate-band tax planning measures in their will already, this will make no difference to their overall IHT liability. So the only real benefit would seem to be for couples who have not fully used their nil-rate bands on first death, as now they can avoid the need to affect a deed of variation.”
So should thousands of wills now be rewritten, in particular, those which include nil-rate band will trusts? Opinion is divided.
Baker Tilly head of tax George Bull says: “Transferable exemptions mean that nil-rate trusts no longer have a purpose. With trusts under continuing tax pressure in the UK, people who have just reviewed their wills after the last tax changes may have to start again.”
Hargreaves Lansdown head of financial practitioners Danny Cox says: “It makes the tax planning of some wills redundant but there may be other reasons why people would leave a legacy on the first death in trust for, for example, a minor.”
Cox also makes the point that the Chancellor’s move is unlikely to impact on those looking to mitigate IHT through existing methods, such as gift and loan trust wrappers for offshore bonds that allow any growth to fall outside the client’s estate and can provide income which, within limits, will not trigger an income tax liability.
The appeal of these arrangements for those with bigger estates is unlikely to be diminished.
Bradford & Bingley says there are still a great many exceptions under the planned changes to IHT legislation, significantly for single people and divorcees.
Head of wealth Andrew Stead says: “The notable exclusions make the need for professional estate planning even more vital but many people persist in burying their heads in the sand.”
According to B&B’s recent research, 61 per cent of people are failing to seek advice about how to minimise their IHT liabilities.
With the IHT change dominating the headlines after the pre-Budget report, advisers can expect an increased volume of calls from clients unsure of what they should do next.
This could provide an opportunity to review the client’s overall inheritance planning as well as their current financial situation. There will be no harm in clients checking that their existing financial plans are still fit for purpose.
Cox says: “The Chancellor is giving away nothing and all the pre-Budget report move amounts to is massive spin. However, I am sure we will get calls from clients on the back of it.”