Pothecary Witham Weld Solicitors

Chancellor’s Pre-Budget Report of 9th October 2007

The Chancellor’s recent announcements in his Pre-Budget Report have received much attention and highlight how important the areas involved have become for a lot of people. The main news centred on the changes to the thorny issue of Inheritance Tax (“IHT”). The changes are considered to be an attempt by the Government to go some way to alleviate the impact of IHT on the family home in consideration of recent rises in property prices.

The Report also provides a timely reminder of the importance of wills, tax planning and proper advice. The potential IHT advantages on offer should not blind people to the more important fact that they need proper advice and properly drafted wills. Such advice will make sure that full advantage is taken of all the tax planning opportunities on offer and that estates are distributed according to people’s wishes.

Making a Will

If you do not have a will when you die then your estate will be ‘intestate’. An intestate estate is divided according to rules set down by law between members of your family in a way that you may not agree with. A will allows you to properly consider the position and benefit family, friends or charities exactly how you wish on your death.

You must, however, make sure that your will is properly drafted by a suitably qualified professional so that the will is effective. As an idea for saving money, making a home made will has the potential to be very short sighted. The costs of attempting to correct the errors of a poorly drafted will after your death are generally much greater than the cost of having your will properly drafted in the first place. The effect can be simply to postpone greater cost to be suffered by the beneficiaries, and can also delay the administration of the estate. At worst, a poorly drafted will has limited or no effect and will leave all or part of your estate as intestate.

The Details - Immediate Inheritance Tax Benefit for Married Couples

Returning to the Pre-Budget Report, the headline announcement was on changes to inheritance tax (“IHT”), and the option for married couples to transfer the nil rate band (“NRB”). The provisions apply equally to civil partnerships.

By way of background, the NRB is the amount that any individual can transfer on their death without incurring IHT, and for the current tax year is set at £300,000. Assets in an estate in excess of the NRB will generally suffer IHT at 40%. If a spouse leaves everything to their surviving spouse, however, they benefit from a complete exemption from IHT and do not suffer any tax (known as the ’spouse exemption’). Prior to the Chancellor’s announcement, the consequence of such a complete transfer to the surviving spouse on the death of the first spouse was that the NRB of the first spouse would effectively be ‘lost’ as the whole of their estate would pass tax free to the surviving spouse. The surviving spouse’s estate would be increased by that received from the deceased spouse, and on the death of the surviving spouse there would only be their NRB available to set against the increased estate.

Further to the Pre-Budget Report, the position now, effective from 9th October, is that any ‘unused’ portion of the NRB of the first spouse to die can be transferred to the surviving spouse and claimed on their death on top of the surviving spouse’s NRB. The surviving spouse can therefore now have up to double the NRB available at their death. At the current value of the NRB of £300,000 there is therefore up to £600,000 that can pass to the beneficiaries of the surviving spouse’s estate before IHT is incurred. This can therefore represent a great saving of IHT in certain cases.

It should also be noted that these provisions apply equally to widows, widowers and civil partners whose spouses have died before 9th October, and offers an immediate new benefit to them.

The NRB generally rises with each tax year, and is set to rise to £350,000 in the tax year 2009/2010. The consequence is that up to £700,000 would be available to pass free of IHT in the estate of a surviving spouse who died in that year.

Wills and IHT Planning Advice

The position remains, however, that each individual case is different, and as can be seen it certainly should not be assumed that everyone immediately receives double the NRB. This only applies to married couples and also depends on how the estate of the first spouse is distributed. Proper advice should therefore ALWAYS be taken to review the complete picture. The advantages brought in by the Pre-Budget Report offer in certain cases increased and improved options for IHT planning and, generally, a more straightforward approach. There still remain other options for IHT planning available to all individuals.

Other Important Changes

The other major changes announced relate to Capital Gains Tax, and also to those taxpayers with connections abroad who are either considered nondomiciled or non-resident in the UK.

Selling or Gifting an Asset?

The maximum rate of Capital Gains Tax is set to be reduced from 40% to 18%, with other associated changes, from next April. There is also to be a 10% rate for the first £1 million of gains realised from business assets known as “entrepreneurs’ relief”. Generally this will be seen as potentially good news for most individuals. The changes are set to come into effect on 6th April 2008, and anyone intending to sell or gift an asset needs immediate advice as to how to take advantage of, or avoid being penalised by, this change before it comes into effect.

Foreign Connections

There are also to be changes effective from 6th April affecting those with non- UK domicile or residence but who live in the UK for part or all of the time. There are potentially heavy penalties for those affected, and careful planning before 6th April 2008 is required to plan appropriately.