Wills and Probate specialist Stephen Abbott explains the latest Inheritance Tax changes. Last October the Government announced significant changes to the way in which the nil rate band (“NRB”) of Inheritance Tax applies to the estates of married couples and civil partners. The NRB is the threshold above which Inheritance Tax applies, and is currently £300,000 per person. Whilst the value of any part of the estate which is left to a spouse or civil partner is exempt from Inheritance Tax, the remainder can be liable to tax at 40% to the extent that it exceeds the NRB.

The problem in the past was that any unused NRB allowance on the death of the first spouse or civil partner could not be used on the death of the second. This usually meant that far more of the estate was potentially taxable on the second death.

To avoid this, Wills of married couples and civil partners often contain substantial gifts to children or other dependents on the first death to make maximum use of the “tax free” NRB, and reduce the potential tax on the second death. Sometimes this choice is made only for tax planning purposes even though the couple may otherwise have concerns about the surviving spouse or partner not inheriting the whole estate.

However, the Government has now confirmed that where a surviving spouse or civil partner dies after 9 October 2007, any unused NRB can now be claimed even if the first partner died before then (and under the old rules). This could be extremely important for couples, who may now be able to avoid tax on up to £600,000 worth of the estate on the second death. With the NRB continuing to lag behind house prices, the ability to “carry forward” unused allowance may enable arrangements to better balance practical family needs against tax planning.

Wills should be regularly reviewed to reflect changes in circumstances. Couples who already have Wills should take the opportunity to seek professional advice on how the new rules may affect them and the arrangements they already have in place. For those who have not yet made a Will, the new rules are another reason for making one with professional advice as soon as possible. If not, Mr. Brown could be you major beneficiary!