Taxing times ahead
Safeguarding an inheritance

Q: After hearing the announcements in the Pre-Budget Report relating to inheritance tax, I always thought I could leave everything to my spouse without paying this tax?
A: The Chancellor has not changed the so-called "spousal exemption" which means that assets passed between spouses, or civil partners are free of IHT regardless of their worth. The change relates to the amount of money a couple can leave to their heirs, in most cases their children.

Q: Prior to the Pre-Budget Report I thought that both my wife and I had a £300,000 allowance, and were able to leave up to £600,000 between us without incurring inheritance tax?
A: This is correct but the reality was that many people never took advantage of this, particularly in regards to the inheritance of the family home, as this involved changing the ownership of the home, drafting new Wills and setting up a trust. The changes announced in the Pre-Budget Report mean that far more couples will utilise their joint inheritance tax exemption, and it will be far simpler for families to ensure that more of their assets go to their heirs, rather than end up in the hands of the taxman.

Q: Who can take advantage of this new 'couple's allowance'?
A: It is estimated that this change will benefit 12m married couples and those in civil partnerships plus a further 3m widows and widowers. For the first time they will be able to transfer their individual allowance, so when the first spouse dies, their share of the home and any other assets can be simply be transferred to the surviving spouse. But on the death of the second spouse inheritance tax will only be paid if assets exceed £600,000. Previously in the above example only the second spouse's personal allowance of £300,000 would have been used.

Q: So how much less tax will people have to pay?
A: Assuming you have avoided paying IHT on the full £300,000 (in other words your estate is worth at least £600,000), this means that your children will have avoided a tax bill of £120,000.

Q: I have lived with my partner for 39 years, but have not married. Will we be able to benefit?
A: No. This change is for married couples and civil partners only. Single people and those who co-habit will not benefit. However, as you both have an individual allowance of £300,000 you will collectively be able to pass on £600,000 tax-free to children or other heirs. The crucial difference is that you cannot leave assets of more than £300,000 to each other without being subject to inheritance tax. And of course, if assets are transferred between you on the death of the first partner this will "mop-up" any inheritance tax allowance.

Q: My spouse died before these changes were announced, will I be able to benefit?
A: The Government has back-dated tax legislation and for once this will be beneficial for taxpayers. Anyone whose spouse has already died, regardless of how long ago this was, should be able to utilise the full "couple's allowance". There will be a couple of things to look out for: if your wife or husband did leave significant gifts elsewhere for example to children, grandchildren or into a trust, these will be deducted from their £300,000 allowance. But any unused allowance will be bolted on to your own exemption when distributing your estate to heirs.

Q: I already have a trust in place in order to make the most of both my and my husband's IHT allowances, how is this affected?
A: The chances are this is a nil-rate band discretionary trust. These are fairly straightforward to set up, and are usually included in your Wills. If both you and your spouse are still alive the trust hasn't been created yet, there will be a codicil in your Will that will set up the trust on the death of the first spouse. Following the Pre-Budget Report changes announced it would be a good time to review your Will and estate planning.

Q: Are there any cases where I should keep the trust?
A: Trusts still have a key role to play in many people's estate planning, and the inheritance tax changes do not alter this. These trusts can be particularly useful if you want to ensure that money is passed directly to children or grandchildren, if they are from a previous marriage. If you are passing assets to minors you will need a trust structure to ensure they are managed in their interest until they come of age. In some cases people also like to ensure that a large financial estate is managed on behalf of a surviving spouse.

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