Planning for Inheritance Tax

This article was provided by: Michael Anvoner of Michael Anvoner & Company Solicitors, who specialise in this area of the law. For further information, you can contact them at: Michael Anvoner & Company, Constable House, 5 Bulwer Road, Barnet, Herts EN5 5JD Tel: 020-8449 0003.

Planning for Inheritance Tax is calculated on the value of all you own at your death. This includes your share of any home you own, as well as the value of any substantial gifts you have made in the seven years prior to your death. Anything given to your husband or wife, or legal civil partner - either during your life or on your death - is free of Inheritance Tax, as are gifts to recognised UK charities and major political parties. Subject to that, you are allowed to leave £300,000 (in the tax year 2007-2008) free of Inheritance Tax, but all you own in excess of that is taxed at 40%.


Well-advised married couples will have ensured that their solicitor has drawn up for them Wills which incorporate Inheritance Tax planning. When drafted correctly, these Wills ensure that their late spouse’s £300,000 exemption is not wasted, without having to pass assets down to the next generation on first death. This is achieved by including a
provision in the Wills called a discretionary gift (a nil-rate band discretionary trust), which enables the surviving spouse to have use of the funds or assets, but without these being included when calculating the value of all their assets when they eventually die. If these assets had simply been passed to the surviving spouse on first death, the Inheritance Tax exemption of the first spouse to die would have been wasted.

The government has recently introduced legislation whereby, if the exemption (or a proportion of it) has not been used by the first spouse to die - usually because he or she has left everything to the surviving spouse - that unused exemption can be transferred to the surviving spouse, and added to their own exemption when they die. This is achieved by submitting a claim, in which quite detailed information regarding the first spouse has to be included, and sending documentation such as the marriage certificate, death certificate, grant of probate, etc. This has greatly helped widows or widowers, as it means that potentially they can double the value of assets they can pass on their death free of Inheritance Tax. However it has not, as originally supposed by some, meant that Inheritance Tax planned Wills are no longer a sensible part of estate planning.

The Chancellor’s announcement has made no difference to people who have Inheritance Tax planned Wills in place, because the surviving spouse has already been able to use their late spouse’s exemption as well as their own. However, the beauty of Inheritance Tax planned Wills is their flexibility, and they are useful for reasons other than simply tax saving. If you already have up to date, fully tax planned Wills in place, these will almost certainly not need to be re-written. If, at the death of the first to die, the survivor simply wants to take all the assets so that on their death their estate has the benefit of the transferred Inheritance Tax allowance, as long as it is appointed in their favour within two years they will be able to do that. However, depending on the age and circumstances of the surviving spouse, the following should be borne in mind.

With Inheritance Tax planned Wills, the Inheritance Tax exemption of the first spouse
to die is ring-fenced in a nil-rate band discretionary trust, which means that although the surviving spouse may be able to borrow it, it should be safe from:-

• Remarriage of the surviving spouse, whereby his or her assets may end up going to their new spouse or the new spouse’s family.

• Long-term care fees, because if the surviving spouse has to fund their own care,
this will not include the assets which did not pass to him or her automatically as they are in the nil-rate band trust and belong to the estate of the first to die rather than the surviving spouse.

• Divorce or bankruptcy of children. If either of these apply when the second spouse dies, it is a simple matter to keep in the trust that child s share of the nil-rate band of the first spouse to die, thus protecting it. If it had simply passed to the surviving spouse on first death, it would usually be left to the child outright on second death, and would form part of their assets when any assessment was made in divorce or bankruptcy proceedings.