Inheritance Tax – Watchout !

Synopsis: The freezing of the nil rate band has gone ahead.  

One of the Conservatives’ tax pledges in their draft economic manifesto was ‘We will raise the Inheritance Tax threshold to £1 million…’. No specific timing was given. With the focus on other issues – notably National Insurance – the idea has seemed to be heading towards the aspiration category.  Given the cost of the measure (£1.4bn a year on Treasury estimates) and the size of the Budget deficit, it is most unlikely that Mr Osborne will announce such a change in June should he become the next Chancellor.

Indeed, the Conservative policy on IHT is looking rather strange at present. The ‘wash-up’ Finance Bill, rushed through with all party agreement, included the five year freezing of the nil rate band announced in the Budget. It might have been expected that preventing this change would have been more important to the Conservatives than blocking the 10% hike in cider duty or maintaining the existing holiday-let rules.

One issue to watch with the uncertainty about the future of the nil rate band is the potentially unwelcome effect of some old (pre-October 2007) Wills. Before the advent of the transferable nil rate band, a basic planning strategy was to use the nil rate band on first death as far as possible, typically via a discretionary trust. That could prove to be a serious mistake now, as the example below shows.

With the Benefit of Hindsight…

The excitement of the General Election was too much for Joe, who had a massive heart attack and died on 6 May 2010. In his four year old Will he created a nil rate band (£325,000) discretionary trust and left the rest of his estate to his wife, Gale.

Four years later Gale died, leaving an estate of £1.5m. By then the nil rate band had been increased to £1m, so there was an inheritance tax bill of £200,000.

If Joe had left everything to Gale in 2010, her estate would have benefitted from two nil rate bands (hers and Joe’s) in 2014 and, unless the estate had exceeded £2m, it would have been completely free of IHT.

WEALTHFLOW COMMENT

From a tax planning viewpoint, leaving everything to the survivor looks the right strategy if the Conservatives form the next government – or possibly the one after that. What matters is the size of the nil rate band at second death, whenever that occurs.