In the March Budget statement Alistair Darling announced that the nil rate band would remain at £325,000 until 5 April 2015. The measure was passed in the hastily approved Finance Act 2010: the Conservatives chose not to challenge it.

Subsequently the Conservatives' Election manifesto proposed a nil rate band of £1m. However, this was abandoned when the Coalition Agreement was struck. The Agreement states 'We will prioritise (increases in the personal allowance) over other tax cuts, including cuts to Inheritance Tax'. Hence the June Budget raised next year's personal allowance by £1,000 but made no mention of Inheritance Tax.

PLANNING POINTS

Time to review your estate planning

The introduction of the transferable nil rate band in October 2007 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 change. 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 Will in the last three years, 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 2009/10, you can makes gifts totalling £5,000 covered by the annual exemption in 2010/11.
• The £250 small gifts exemption. You can make as many outright gifts of up to £250 per individual 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.

Planning, politics and IHT

The Conservatives said during the Election campaign that they would raise the nil rate band to £1m. In theory this could still happen, although not until after the next Election. In practice, some commentators feel that abandoning the £1m nil rate band as part of the Coalition deal was canny politics: in an era of austerity, a promise to cut the tax on large estates was an easy target for the rival parties.

It would be unwise to rely on a £1m nil rate band arriving in 2015 or later to solve your estate planning problems. Today's estate planning should be based on today's tax structure, albeit with as much flexibility built in as practical to cope with possible changes. For example, life assurance to cover the potential IHT liability on your estate can usually be written on a short-term renewable basis. Choosing this route allows you to continue cover for as long as necessary at a lower immediate premium cost and gives more flexibility than would be the case if you had opted for a whole of life policy.

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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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