WILLS AND INHERITANCE TAX – THE CHANCELLOR'S ANNOUNCEMENT OF 9.10.07 

On 9 October 2007 the Chancellor of the Exchequer Mr Alistair Darling announced proposals for significant changes to Inheritance Tax.

It is important to remember that Mr Darling made proposals. He did not change the law over night.

What he intends to do is to put new draft legislation before the House of Commons, which the House of Commons are due to consider in the period April to July next year.  If they accept Mr Darling’s proposals without amendment, his proposals will become law by August 2008 and will be backdated then to 9^th October 2007.

Any changes which persons make to their Wills at present are therefore somewhat premature – in that the law has not yet been changed.   What we have is a politician’s promise to change the law.   Many are  almost one hundred per cent sure that Mr Darling will indeed change the law in line with his proposal.  There is however the possibility that the economic climate may change in the coming months and that he has to rethink his proposals and then has to withdraw them, or amend them.   Or, that the House of Commons will want to make some changes to his proposals and they will become law but in a different format or with some amendments.

Mr Darling's proposals in a nutshell are as follows:

The Executors of the estates of widows or widowers dying after 9.10.07 will be able to claim, on current figures, allowances against Inheritance Tax of up to £600,000.00 i.e. the first £600,000.00 of the widow or widower's estate will be exempt from Inheritance Tax.

This is "much better" at first sight than what we had before 9.10.07 because, on current figures, for the widow or widower’s “estate” to be exempt from Inheritance Tax up to a value of £600,000.00, the first-to-die had previously to have made a Will leaving his or her nil rate band (currently £300,000.00) to a nil rate band discretionary trust. The need for this, subject to what is said below, has now "disappeared", so long as the proposals made on 9.10.07 do indeed become law.

There are of course some "ifs" and "buts" which include

(a) For the full £600,000.00 to be claimed, the first-to-die must have used up none of his or her own nil rate band on the first death i.e. in reality he or she must have left everything to his or her spouse. If some of the first-to-die's nil rate band has been used on the first death, the allowance available on the second death is reduced proportionately and according to a simple formula. The more the allowance has been used up on the first death, the less (almost exactly pound by pound) is available on the second death. The idea presumably is that couples should be able to use up two full nil rate bands, but not more!

(b) The Executors of the second-to-die must be able to demonstrate the extent to which the first-to-die did not use up all of his or her own nil rate band. If the first-to-die died many years ago (as might well be the case), a search will have to be made for the papers relating to the administration of that person's estate at that time – and if the first-to-die died for example in 1975, papers from over 30 years ago will therefore have to be "unearthed", and it is to be hoped that those old papers will cover all the points which will be needed for the claim to succeed. There is a particular concern that some old papers will have been destroyed (meaning that the claim will almost certainly fail) and that where old papers are found, they will not cover the value of important items such as some gifts made in the years before death or the value of jointly owned bank accounts which will be an important part of the calculations which have to be made in support of the claim.

WHAT TO DO NOW?

A. Married couples and civil partners who are still alive and who have included nil rate band discretionary trusts in their Wills.

The options at present include the following        

1. A "switch back"

This is the phrase some Lawyers are using to describe the choice open to a married couple who originally had Wills leaving everything to each other and who then, on advice (so as to save substantial sums of Inheritance Tax), changed their Wills so as to include a nil rate band discretionary trust on the first death. They may now wish to “switch back" to what they had before and make new Wills simply leaving everything to each other. This is fine so long as (a) Mr Darling's proposals become law and (b) all the relevant paperwork is preserved on the first death until the second death (see above) and (c) leaving everything to each other (for other reasons) still suits. It may not, after careful consideration actually be the best thing to do, as is explained later in this article.

2. "Wait and See"

Leave things as they are until August 2008 and then review matters at that stage, as by then (August 2008) we will know for sure what the law is to be.

B. Unmarried couples/cohabitees

Mr Darling's proposals do not affect you. You will, as before, need to consider using nil rate band discretionary trusts in your Wills if you are to gain exemption, on current figures, from Inheritance Tax up to £600,000.00. In one sense, you are lucky in that there is less for you to consider at this stage than is the case for lots of other people.

C. Widows or Widowers whose late spouse died before 9.10.07 and who included a nil rate band discretionary trust in his or her Will.

Mr Darling's proposals do not affect you. This is all a bit unfair. Take detailed advice, but it is quite on the cards that you will be advised that the Trust set up under your late spouse's Will should continue to be operated, so that on your death maximum allowances from Inheritance Tax (i.e. hopefully as much as £600,000.00 on current figures) will be available. You are stuck with the fact that your late spouse used his or her nil rate band when including the nil rate band discretionary trust in his or her Will, and your Executors will not, unless the trust is kept going, be able to claim on your death the "two" allowances (totalling £600,000.00 on current figures) which are now available to couples where on the first death everything was left to the surviving spouse. The answer is to keep the trust going (and properly).

D. Recent deaths i.e. Widows or Widowers whose late spouse died after 9.10.07 and who included a nil rate band discretionary trust in his or her Will.

You benefit from Mr Darling's proposals! You can either

(a) Operate the Trust, and on the second death claim the two allowances. Or

(b) End the Trust with the help of your lawyer  - either as soon as three months have passed from the death of your late spouse (and if you are doing this before August 2008 you are taking the risk that the proposals may not become law) or in August 2008 once the law has been changed, provided this (for technical reasons) is more than three months after the death

Of these two options, many advisers favour the first option over the second as they predict that in the long term (and on the basis of past performance by governments and so far as inflation is concerned) it will prove financially better for persons to seize their tax breaks while they are available e.g. on the first death, rather than store them up for use at a later date e.g. on the second death,. There are some detailed calculations which can be done which support this.

MOST MARRIED COUPLE'S BASIC AIM

Most married couple’s basic aim is to provide in their Will for both their surviving spouse and their children. Historically people achieved this by the first-to-die leaving everything to the surviving spouse and on the second death the married couple's estate was divided amongst the children. Then, since about the early 1990's, more and more married couples have been making Wills whereby on the first death there is to be a nil rate band discretionary trust. Now, in the light of Mr Darling's proposals, many married couples will be tempted to repeat what married couples historically did and simply say in their Wills that everything on the first death is to pass to the survivor and only on the second death will the children benefit.

This historical position conflicts with what some would say is basically common sense. Does it make sense to leave everything to the surviving spouse? Many people believe that it does not because, for example, the surviving spouse might remarry and leave his or her estate (which by then includes what he or he has inherited from the first spouse) not to the children but to the new spouse. Remarriage, remember, automatically revokes a previous Will unless the Will is written in contemplation of that marriage. Whirlwind romances and death bed marriages do happen, and can wreak havoc with a married couple's intentions that on the second death everything should go to their children.  

Another danger is that the surviving spouse might, short of getting married, give the money away or spend it. Or, he or she may go into a Care Home and wish to claim support from the state in paying the fees of that home. Much of the estate may then be paid out in Care Home fees.

All the above pitfalls can be avoided if instead of giving everything to the surviving spouse, the nil rate band of the first-to-die or all or a substantial part of his or her estate is left instead to a suitably worded trust.

Equally, the surviving spouse may lose the capacity to manage his or her own affairs and thereby become exposed to financial abuse, which has been identified as a growing problem in the UK. A suitably-worded Trust in the Will should eliminate this risk.

Additionally, there are considerations when drawing up a Will as to making the best use of other exemptions from Inheritance Tax, over and above the Inheritance Tax "break" which is available through the nil rate band. If a person owns business property or agricultural property, all advisers are agreed that it is a mistake from an Inheritance Tax planning point of view to leave such assets to the surviving spouse. They should instead be given to "non exempt" beneficiaries such as children or trustees for such children.

All these considerations add up to the following. Don’t just leave everything to the surviving spouse without first thinking about it very carefully, and take good legal advice before finalising your plans in your Will.

 RICHARD WARNER

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