Beating the taxman with nil rate band planning
Just as you have dashed to rewrite your will to remove special inheritance tax trusts following the government’s decision to allow spouses to transfer their unused inheritance tax allowances to their surviving spouse, it might just be time to re-think the whole strategy.
In the Budget last month the Chancellor announced the Inheritance Tax Nil Rate Band (NRB) will be frozen for the next four years. This means that it is not likely to be increased again until the tax year 2015/2016.
In contrast, the Conservatives have stated they would raise the allowance to £1 million, although it remains to be seen if this would ever be implemented.
This freezing of this tax allowance re-opens the scope for very effective tax planning when making Wills and dealing with estates for the recently deceased, particularly as estates and trust funds may grow more rapidly than the nil rate band.
For example, if Spouse A dies when the nil rate band is £325,000 and leaves 90% of his nil rate band unused and Spouse B dies when the nil rate band is say £450,000, Spouse B’s executors can claim one nil rate band allowance of £450,000 and 90% of the transferred nil rate band allowance from Spouse A amounting to £405,000 (90% of £450,000).
This makes the transferable nil rate band allowance very generous.
The greater the increase of the nil rate band between deaths, the more generous the allowance is.
However, by contrast where there is little increase between the deaths of Spouse A & Spouse B (achieved by freezing the nil rate band for four tax years – the situation we now face) the obvious utilising of the transferable element is not always the best option.
If funds were instead hived off on the first death (after the death of the Spouse A) into a carefully worded Trust arrangement – and of course using an appropriately designed and reviewed investment strategy – the funds could potentially grow at a much faster rate than the nil rate band.
This would in effect provide the ultimate beneficiaries with a higher level of tax efficient capital; not forgetting the valuable protections and controls that devolving an estate in this manner brings to a family situation as ‘icing on the cake’.