Wednesday, October 10, 2007

The Inheritance tax con update

Now I have had a look, here is the position:

New rules allow one half of a married couple, or civil partnership, to use any remaining nil band inheritance tax when they die.

As an example couple A and B have assets valued at £600,000. A dies and leaves their bit to B. This is not taxed at all, regardless of the value of the estate. Person B dies and then wants to leave it all to C, but the day before yesterday would have paid 40% of £300,000 or £120,000. Now if C lived with A and B this could put the family home in jeopardy.


Well, I will come to that.

What used to happen, is that a large slice of the people who would be affected by inheritance tax in this way set up what are called nil band trusts. So when A dies he leaves his half to C rather than B, but held in trust whilst B is still alive. B then dies and does the same (The wills are written to account for any order of death) so no inheritance tax is paid anyway.

So it is not the giveaway it looks.

Where it is good though is that firstly it does not rely on clever tax planning, and is also semi automatic. The long and the short of it is that people who have not done the clever tax planning don't get caught out, and to be fair why should they. However the extra allowance will still need to be claimed which will require some form of proof. there is also the question of what happens if A dies when the IHT limit is say £300,000 and B when it is £400,00? What is the combined IHT threshold? Is it £700,000 or £800,000? Also what if A used some of their allowance, say £100,000?

The other good thing is that Labour has finally had to recognise marriage in the tax system. That is a major ideological battleground surrendered without a second thought it seems.


lady macleod said...

all righty then.

Anonymous said...

on a technicality - no money needs to be left into the trust on first death, it can be left to the survivor B and owed to the trust on B's death.

Again we come to the cynical spin. If Darling had said he was simplifying things so people did not have to alter their wills ( it can actually be done after death with a deed of variation)then that would be true. It is not true that he has doubled IHT the exemption.