Pre-Budget 2007 > Key topic
 

Inheritance tax

Inheritance tax nil rate band
Inheritance tax provisions for alternatively secured pensions
Inheritance tax anti-avoidance: transfer of pension savings on death



Inheritance tax nil rate band

From today individuals will be able to set any unused nil rate band on their spouse’s death against their own estate in addition to their personal nil rate band.

An estate is not subject to inheritance tax if it is within the nil rate band (currently £300,000).  Transfers between spouses are generally free of inheritance tax. If an individual simply leaves all their estate to their surviving spouse then the nil rate band is effectively wasted. Many married couples have in the past drawn up relatively complex wills to ensure that the nil rate is used on the first death.

The new rules allow a surviving spouse or civil partner to use any nil rate band that their spouse, or civil partner, did not use against their inheritance tax estate, in addition to their own nil rate band.  

The new rules apply to deaths after today, so they are in part retrospective as unused nil rate bands arising on deaths before today can be added to the nil rate bands of surviving spouses, or civil partners, dying after today.

For example:
Mr Jones died in May 2007 having made no chargeable transfers. He left his entire estate to Mrs Jones. Mrs Jones dies in March 2008 and can set £600,000 of nil rate bands against her inheritance tax estate.

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Inheritance tax provisions for alternatively secured pensions

The IHT provisions for alternatively secured pensions (ASP) will change in line with the new proposals for transferring the balance of the unused nil rate band on the death of a surviving spouse or civil partner. Under current provisions, a charge arises on left-over ASP funds once a relevant dependant’s pension benefits cease. The rates of tax that apply are those in force at that time rather than those that apply at the date of death of the scheme member. This rule is to be modified to take into account the proposed changes so that relief will be given where the IHT nil-rate band was not fully used when the original ‘owner’ of the ASP died. This proposal is to be welcomed.

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Inheritance tax anti-avoidance: transfer of pension savings on death

From 10 October the Government has further tightened the anti-avoidance rules aimed at preventing pension scheme members from avoiding inheritance tax by arranging their pension entitlement so as to benefit their relatives after their death. The legislation imposes an unauthorised payments charge at an aggregate 70% for the member and the scheme. It does not apply to schemes with 20 or more members where the pension increase caused by the arrangements is at the same rate for all. There is a secondary inheritance tax charge, with offset for the unauthorised payments charge, where the member dies after reaching age 75, raising the aggregate rate of charge to 82%.

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