Tax Matters December 2007

Taxing Times!

You have probably noticed by now that tax is back at the top of the political agenda. Proposals put forward by the Conservatives at their annual conference were followed by some eye-catching and, on the face of it, significant changes to inheritance tax and capital gains tax by the Government in the Pre-Budget Report (“PBR”) on 9 October.

Although things are not completely finalised yet, we believe that public spending commitments have limited the Chancellor’s room for further manoeuvre, so we can advise with a fair degree of certainty on what the new changes will mean for you and your business.

Inheritance Tax (“IHT”)

You have no doubt read the headlines eg “Chancellor Alistair Darling has doubled the value of assets which couples can leave behind when they die without incurring inheritance tax” (BBC website 9/10/07). Before the PBR it was possible for couples to plan so as to make wills using the “nil rate band” to ensure that between them they could shelter assets up to £600,000 from IHT. So after the PBR, can you guess the amount couples can now shelter from IHT? £1.2m? No, it’s still £600,000. The big difference is that now, you do not necessarily need to make nil rate band wills to do so, although that may still be a good idea in any event to preserve assets (perhaps thinking about care home fees, or to ensure that your wealth is not squandered by your children or others) and will still be essential planning for business owners.

The main point to note is that you no longer have to claim one IHT nil rate band when one of a couple dies. If Mr X dies leaving everything to Mrs X, when Mrs X dies she can claim two nil rate bands, which on current figures would mean no IHT on joint assets up to £600,000 (2 x £300,000). However, Mr X’s nil rate band is valued at Mrs X’s death, so that if he dies now and Mrs X dies in 2010/11 when the nil rate band will be £350,000, Mrs X can then claim nil rate bands worth £700,000 (2 x £350,000), not £650,000 (£300,000 + £350,000). Mr X’s nil rate band can only be claimed though on Mrs X’s death to the extent it is unused on his death. So if he leaves 50% of it (£150,000) to his children on his death now, on Mrs X’s death in 2010/11 only 50% of its value then (£175,000) will then be available.

It should be noted though that there is one definite winner under the new rules: any widow(er) whose spouse died before 9 October without using the full nil rate band available. In such a case, an extra nil rate band is potentially available when the widow(er) dies.

Do not necessarily assume that the nil rate band should not be used up when one of a couple dies. It is possible that, once the headlines have died down, the nil rate band may not increase quickly in subsequent years, and if assets are likely to increase in value over time it may be better to put them in a nil rate band trust on the first death rather than hope the extra nil rate band on the second death will exempt them from IHT. We can advise on this as necessary. The other scenario to be aware of is where an entrepreneur dies owning a business; if that business is sold after his death but before his spouse dies, IHT on the proceeds of sale at 40% can be avoided through the use of a nil rate band trust.