IHT-Solutions

How many times can you use your IHT Nil Rate Band ?

The answer is simple. How many years will you live divided by 7.

Whilst, for many people,they may never need to utilise more than one nil-rate band (currently £325,000.00) to avoid IHT or £650,000.00 for a married couple or civil partners utilising the transferable nil rate band, there are, of course, a number of people whose assets will exceed the limits set by one IHT nil rate band.

The good news is that with appropriate IHT planning you can fully use your IHT nil rate-band at any time of your life by making an appropriate gift, often into trust, of the current nil-rate band. If you then live another 7 years, the slate is wiped clean and you can start again utilising the then current nil-rate band, as applicable.

As an example, if you take a married couple who are both currently 70 years old, their current acturial life expectancy will be 15.2 years (man) and 17.7 years (woman). On the assumption that this couple has significant assets at the age of 70 and lived their acturial lives, you will see that it is possible for them to gift tax-free three IHT nil-rate bands.

Even on the assumption that the IHT nil rate band remained fixed at £325,000.00, this would potentially save £780,000.00 of inheritance tax as follows:-

1. Gift at age of 70 - £325,000.00 x 2

2. Gift at age of 77 - £325,000.00 x 2

3. Gift of IHT threshold on death of survivor (over 84 years) - £325,000.00 x 2

As you will note, the total of the gifts made within the IHT thresholds equates to £1,950,000.00, The rate of tax is 40% and thus this creates the saving of £780,000.00 IHT, in this example.

Evidently, this post, sets out good reasons to carefully consider IHT planning from an early age,

If appropriate. I am aware of a number of innovative financial products whereby gifts can be made into trust and utilise the full IHT nil-rate band applicable whilst still allowing the donor to retain a substantive income and/or capital from the same.

Dealings with such products are, of course, properly regulated by the FSA and outside my ambit of regulation, I am, however, very happy to recommend specialist IFA's who deal with this type of product, on request.

A New Tax Year, a New IHT nil-rate band

Tomorrow, the 6th April 2009, is the start of the new tax year.

In line with long-standing announcements of the government, the IHT nil-rate band will increase from £312,000.00 to £325,000.00.

An increase of £13,000.00 in the band at an IHT rate of 40% means a potential IHT saving in the new tax year of £5,200.00 for an individual and £10,400.00 for a married couple or civil partnership where the survivor is able to claim both their own and the transferable nil-rate band.

On the 6th April 2010 the nil-rate band will increase to £350,000.00 per individual.

There is little in the economy to be cheerful about at the moment but at least the burden of inheritance tax is becoming less of an issue for many people.

A really unusual IHT relief

My attention as recently been brought to an inheritance tax relief which presumably was used so rarely that the Revenue did not even produce a pre-prepared relief claim form.

In the light of the current state of the economy there is every likelihood that the relief may be used in far more case.

So what I am talking about? The relief claimed is in respect of potentially exempt transfers (PETs) made within the seven years prior to the date of death, where the value of the PET has fallen upon the date of death.

As an example, if a bachelor testator died in November 2008 with an estate valued at £512,000 in date of death assets and an additional gift of a property valued at £400,000.00 had been made in 2006 (a PET), there would be a tax liability based on the 2008/2009 IHT threshold of £312,000.00 totalling £240,000.00 (40% of £600,000.00).

If between the date of the PET in 2006 and the date of death, the property that was gifted had fallen in value by 20% (£80,000.00), it is possible to claim IHT relief on the loss incurred on the PET of £32,000.00 (40% of the loss) by simple application to the Revenue.

Evidently, this relief will not affect all PETs but if applicable, consideration should be given as to whether or not it may, in the current economy.

Getting an IHT rebate as a result of falling house prices!

In these difficult economic times, it is fair to say that there is little cheer around, notwithstanding Xmas being around the corner.

There is, however, inheritance tax relief available in those circumstances whereby inheritance tax was payable based on a property valuation as at the date of death but a sale takes place some time later at a reduced price.

The good news in these circumstances is that a rebate of inheritance tax in respect of the loss can be claimed on any loss incurred in respect of an open market sale within 4 years of the date of death (3 years in certain unusual circumstances).

For example, if a death occurred in August 2007 when the inheritance tax threshold was £300,000 and the home, of the deceased was valued at £400,000, and other cash assets equated to £50,000 then inheritance tax of £60,000 would have been payable (£450k - £300k = £150k x 40% = £60,000)

If a sale of the property is completed in December 2008 for £350,000 (a reduction of £50,000 of the date of death valuation) then the executors of the estate can claim inheritance tax relief of £20,000 (40% of £50,000).

In conclusion, losses incurred in the sale of a property are a bitter pill to swallow but if inheritance tax has been paid on the relevant property and the sale is effected within the relative period, you effectively cut the loss incurred by 40%.

How to make use of the new Transferable IHT Nil Rate Band

Last year's big story in relation to inheritance tax was the introduction of the new IHT Transferable Nil Rate Band. After nine months, the use of the band is now becoming part and parcel of the everyday work of professional pratitioners dealing with probate work. In fact, as of the 21st July 2008, it actually became fully enshrined in law when the Finance Act 2008 gained Royal Assent.

Although the new transferable IHT nil rate band is essentially simple to understand there are a number of hoops to jump through before it can be fully effective. It is the object of this post to try and assist with its practical application,

The Transferable IHT Nil Rate Band will need to be claimed if a surviving spouse or civil partner has died and the value of their own estate exceeds their own individual IHT Nil Rate Band which is currently £312,000.00 during the tax year (2008-2009).   

If a claim needs to be made the executors must complete a full IHT 200 form in respect of the estate of the survivor and in addition a new form IHT 216 in respect of the Transferable IHT Nil Rate Band.

The IHT 216 form seeks to establish the value of the Transferable Nil Rate Band which can equate to a current maximum of £312,000.00 (2008/2009). It does this by establishing details of the way in which the estate of the fist spouse/civil partner to die (first deceased) was disposed of.

As such, the form asks questions about and requires evidence in respect of the Will and any Grant of Probate or Administration of the first deceased and any chargeable gifts made by the first deceased prior to their own death.

Interestingly, the form also requests a copy of the marriage (civil partnership) certificate of the deceased and relevant national insurance number.

Of course, a Grant of Probate and marriage certificate, for instance, can be obtained from public records, It will, however, now always make good sense upon the completion of the administration of the estate of the first party to a marriage or civil partnership to keep easily to hand all relevant details required in respect of a claim under IHT 216. In particular, solicitors who act in probate matters should have specific storage policies in this regard.

The request by the Revenue for details of the gifts (if any) made by the first deceased within 7 year of their death is going to be very interesting. Theoretically, the first death could have easily occurred 20 or 30 year prior to the death of the widow or widower and in practice, it is dififcult to see how the Revenue are going to vigorously enforce the rules in this regard. Nonetheless, it will obviously be important in the future to keep detailed records of any potentially taxable gifts for at least 7 years.

Once the form IHT 216 details have been completed, it will calculate the total uplift applicable to the new transferable IHT nil rate band.

If, as will often be the case, the first spouse left everything to the survivor, the estate of the survivor will  get a 100% uplift, meaning an additional £312,000 nil rate band applying in the current tax year.

On the other hand, if the first spouse died in December 2002, when the nil rate band was £250,000 and the first spouse left a gift of £100,000 to children then 40% (100k/250k) of the applicable nil rate ban would have been used up. As a result, if the surviving spouse died this year, there would only be an uplift of 60% of the current nil rate band (£187,200).

A small quirk of the system is that it rounds up the uplift to the next whole percentage point. Thus a calculated uplift of 85.1543% will become 86%, a small victory for the taxpayer. *

The IHT 216 form will now be very much a part of the IHT landscape and it is well worth knowing well.

* Update (5th December 2008) - I have now received a letter directly from the revenue on a case where the transferable nil rate band has been utilised. The relevant part reads:- "The percentage of the transferable nil rate band should be calculated to four decimal places. We are are aware that the calculator on the website does not do this but this is only for general guidance. This will be improved in due course."