Inheritance tax has dropped out of the headlines in recent times. The introduction of the transferable nil rate band in October 2007 took some of the political sting out of the tax. Falling house prices – the Halifax index for March 2009 is now down 21.2% from its August 2007 peak – have also helped lower the tax's profile.

The nil rate band has increased to £325,000 in 2009/10, a move that was legislated for in 2006 by Gordon Brown.

The Chancellor announced that the availability of agricultural property relief and woodlands relief would be extended to agricultural property and woodlands situated in the European Economic Area. This change is effective from 22 April 2009, and earlier in certain circumstances.

Time to review your estate planning

The introduction of the transferable nil rate band 18 months ago has made inheritance tax planning considerably simpler for many married couples. It is now no longer necessary to ensure that your nil rate band is used on first death to minimise IHT liabilities. This reform can result in significantly reduced IHT bills for widows (and widowers), even if their spouse died many years ago.

Not everybody has benefited from the reform. If you had already planned (and had the resources) to use the nil rate band on first death, you are no better off as the result of the introduction of transferability. If you are not married, you cannot benefit, other than as a widow/widower.

If you have not reviewed your estate planning and Wills in response to nil rate band transferability, you should do so now. It may be that no change needs to be made to your existing arrangements but, as ever with estate planning, it is better to be safe than sorry. Even though a revised plan may not reduce your IHT bill, it could simplify estate administration by, for example, removing the need to include a complex trust in your Will.

Regular and out of income....

There are three yearly exemptions which are available for IHT planning:

•  The £3,000 annual exemption. Any unused part of this exemption can be carried forward one tax year, but it must then be used after the £3,000 exemption for that year. So, for example, if you made a gift of £1,000 covered by the annual exemption in 2008/09, you can makes gifts totalling £5,000 covered by the annual exemption in 2009/10.

•  The £250 small gifts exemption. You can make as many outright gifts of up to £250 per tax year as you wish free of IHT, provided that the recipient does not also receive any part of your £3,000 annual exemption.

•  The normal expenditure exemption . Any gift that you make is exempt from IHT if:

•  it forms part of your normal expenditure; and

•  taking one year with another it is made out of income; and

•  it leaves you with sufficient income to maintain your usual standard of living.

The normal expenditure exemption is often forgotten. You may be making regular gifts which you think are covered by the £3,000 exemption, but which could actually count under normal expenditure, leaving your £3,000 exemption unused. For example, if you pay premiums for a life policy held under trust, such payments frequently satisfy all the conditions to be treated as normal expenditure, leaving the £3,000 exemption available for other gifts.

Turn low values to your advantage

The value of most investments today is substantially lower than twelve months ago. For instance the FTSE 100 index closed on Budget Day at 4018.2. At the start of April 2008 it was 5702.1.

There is one way to turn depressed investment values to your advantage, and that is by making lifetime gifts of some of those investments now. This has three main advantages:

•  The value of the gift will be based on the depressed value, so any potential IHT liability is correspondingly reduced.

•  While the gift will usually count as a disposal for capital gains tax purposes, the gain will be that much less (if any).

•  Any subsequent growth in value of the investment is outside of your estate and, at worst, subject to 18% capital gains tax, rather than 40% IHT as part of your estate.

Footnote The same logic suggests that if you think investments will recover, now is the time to place fresh investments into trust for your children and grandchildren.

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The contents of this Bulletin are based on the proposals put forward by the Chancellor in his Budget speech and explained in documents subsequently published by HMRC and the Treasury.
All Budget proposals may be subject to change before the Finance Act is passed. References to spouse, husband and wife and married couples include references to registered civil partners and civil partnerships.
This Bulletin is provided for general consideration only and no action should be taken or refrained from based on its contents alone. Accordingly, no responsibility can be accepted for any loss occasioned as a result of any such action or inaction.
Professional advice must always be taken.

This news item is provided strictly for general consideration only and is based on our understanding of law and HM Revenue & Customs practice as at July 2008. No action must be taken or refrained from based on its contents alone. Accordingly no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case.

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