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New testament

Last week, I took an introductory look at the Conservatives’ proposed £1m nil-rate band for each of a couple. Let’s look in detail at what the introduction of a transferable £1m nil-rate band might have on a selection of key investor categories.

Let us look at unmarried individuals not in a civil partnership and with estates of up to £1m. The tax saving incentive attached to lifetime giving and survival of the gift by seven years would be removed, especially in view of the revaluation of assets on death for capital gains tax purposes.

How about those with estates worth more than £1m? Subject to the CGT revaluation point and non-tax considerations, lifetime giving is still valid from a tax point of view for assets in excess of £1m.

Actually, for both these categories, if there is no close family, one tends to find that inheritance tax is not seen as the most pressing of taxes to plan for. Traditionally, the IHT planning market is made up substantially of married couples. For these, I would like to look first at the impact that a £1m transferable nil-rate band might have on testamentary (the posh word for will) planning.

Clearly, there would be an increased incentive to ensure that wills reflect intentions and to maximise the use of the nil-rate band for the couple while reflecting their desires for the destination of their estates on death.

It will be important to remember that if the use of the transferable nil-rate band appeals, intestacy will not necessarily achieve that objective. If the first of a couple to die is to leave all their estate (and therefore their nil-rate band in many cases, subject to lifetime chargeable transfers made in the seven years preceding death) to the surviving spouse, it is worth making this clear with an unambiguous provision in one’s will.

The issues to consider in relation to whether to use all or part of the nil-rate band with a bequest – outright or to a trust – to other than a surviving spouse will be just as valid with a £1m transferable nil-rate band as now. The following issues will be relevant in deciding on whether a first-death gift or a gift to the surviving spouse with the use of the transferable nil-rate band will be preferable for any particular individual:

  • The expected or projected increase in the value of the assets given. If the increase in an asset’s value is likely to exceed the increase in the nil-rate band, a first-death gift to the intended beneficiaries could be IHT attractive.

  • If the first of a couple to die requires some element of certainty or continuing control over the assets in question, then a first-death gift to a trust may appeal. A discretionary trust with the surviving spouse as a potential beneficiary who could receive advancements or loans may be worth considering. This may be the case particularly where the married couple have children from a previous marriage who they would wish to benefit.

    Alternatively, the trust could give a life interest to the surviving spouse, with remainder to the couple’s children or grandchildren. The spouse’s interest under such a trust would be treated as an immediate post-death interest, so the nil-rate band of the first to die would be transferred to the survivor and the trust would not fall in the relevant property regime.

  • If one or both spouses have already inherited a full unused nil-rate band on the death of a previous spouse, there will be no IHT advantage in that person’s spouse leaving their unused nil-rate band to them if they predecease them as the maximum increase in the nil-rate band is 100 per cent.

  • The implication of a spousal inheritance on possible care fees needs to be considered.

    Testamentary planning could be even more important in a £1m nil-rate band world. Some scenario modelling to arrive at the most tax-effective and appropriate solution for a couple will be important, especially for bigger estates.

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