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INHERITANCE CHANGES DON'T HAVE TO BE TAXING
In his pre-budget report, the Chancellor of the Exchequer made some significant changes to Inheritance Tax. Before October 9th, a person could leave as much as they liked to their spouse without facing a tax bill, but when the survivor died, the estate faced a tax charge of 40% on everything above £300,000. The rule changes means that rather than each partner having a £300,000 allowance, which only they can use, married couples would be able to make use of a £600,000 joint allowance. These new rules apply between husbands and wives and also between civil partners. If you have already been widowed, then you will be able to make use of any unused allowance left by your deceased partner. The tax-free threshold of £300,000 is scheduled to increase to £312,000 next tax year, £325,000 in 2009 and £350,000 in 2010. If your partner dies this year when the threshold is £300,000 and uses 20% of the allowance leaving assets to someone other than yourself and if you then die in 2009 when the threshold has increased; you will be entitled to leave your £325,000 plus 80% of the 2009 allowance, a combined total of £585,000 without a tax charge. Many couples will already have made wills to ensure that both nil-rate band allowances are used. This they will have done by providing that on the first death, a Discretionary Trust is created equal to the tax-free allowance on the first death. The new law does not make such trusts invalid or ineffective and they can still be included in new wills. In fact, in many cases, Discretionary Trusts are still desirable. For example: -- They allow the family flexibility in distributing the estate of the first to die.
- They protect the assets in the trust from the risk of the surviving partner, leaving them to a second spouse or civil partner or to someone who you would not have wished to benefit from your estate.
- They can protect the assets in the trust from being taken by the State to pay the Care Home fees for the survivor.
- If the surviving partner lost their mental capacity to handle their own affairs, the trust assets could be managed without the expense and inconvenience of involving the Court of Protection.
- If the assets are gifted outright to the surviving partner and grow in value more than the increase in the tax-free allowance, that growth in value will be taxed on the second death. That growth in value would have escaped inheritance tax with a Discretionary Trust.
- If you have business or agricultural assets that qualify for relief from Inheritance Tax, it is important to either give them outright in your will to someone other than your spouse or civil partner or into a Discretionary Trust. Otherwise, the benefit of the relief is lost.
- If the surviving spouse or civil partner were to re-marry or enter into a second civil partnership and they outlived their second spouse or civil partner, then the benefit of your nil rate band allowance would be lost. If a Discretionary Trust had been included in your will then the benefit of the tax-free allowance would have been preserved.
- If a Discretionary Will Trust has not been used in the will, the personal representatives of the surviving spouse or civil partner will have to claim any unused allowance on the second death. Considerable difficulties could be encountered in satisfying HMRC on whether or not the tax-free allowance had been used on the first death or on the extent to which it had been used. If a Discretionary Trust is used then this problem can be avoided.
Bury Hospice are organising a full day seminar in connection with the issue of Inheritance Tax to be held at The Village Hotel in Bury on Wednesday 30th January 2007. There will be various speakers throughout the day including Stephen Parr from Woodcocks. The tickets for the event are priced at £25.00 each, with all proceeds going to Bury Hospice. Lunch and refreshments will also be included. If you would like more information about this forthcoming event or would like to purchase a ticket please call Stephen on 01706 213356 or e-mail sjp@woodcocks.co.uk
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