Private Client UPDATE

Issue No.5 March 2008

Welcome to the next in our occasional series of Private Client Newsletters. In this we look at matters concerning the proposed changes to the nil rate bands of spouses/civil partners and also the case of Phizackerley. If you would like to discuss any of the issues raised below, or if you wish to review whether you should make any changes to your Will, do get in contact. If any of the issues discussed below change in the forthcoming budget we will let you know in our next newsletter, which will deal with Powers of Attorney and also delegating health care decisions.

NIL RATE BAND CHANGES – SHOULD YOU CHANGE YOUR WILL?

The Chancellor’s Autumn statement announced changes to the way married couples’ and civil partners’ estates will be charged to IHT. It is expected that the forthcoming budget will confirm those proposals.

Broadly, the proposals are that when the second partner dies any part of the nil rate band (NRB) not used when the first partner died can be added to the second partner’s NRB. It is added at the rate applicable at the second partner’s death. If, for example, a man died when the NRB was £210,000 and gave £70,000 to his children and the rest of his estate to his widow, 2/3 of the NRB would have remained unused. If on the widow’s death the NRB is £300.000, this would increase by 2/3 to £500,000.

Many of our married clients have created NRB trusts in their wills, which on the death of a second spouse may have had substantially the same tax effect as the above proposals – the actual effect (amongst other things) depends on whether the assets in the NRB trust increase at a greater or lesser rate than the amount of the NRB in successive Budgets.

Much comment in the press has suggested that clients with NRB will trusts should make a new will leaving everything to the surviving spouse. We do not agree that this will be necessary in the majority of cases. You may wish to consider the following:

• If the surviving spouse/civil partner is a potential beneficiary of the NRB (normally they are), the trustees can appoint the fund absolutely to the survivor between 3 months and two years of the date of death. If that appointment is properly made, it speaks from death of the first partner, thus preserving the NRB for use on the second death.
• It may be that wealthier couples will wish the trusts to continue, with either a life interest being created in favour of a surviving spouse or the trustees determining that other family members receive income or capital. If these disposals benefit family members other than a surviving spouse, there will be no transferable NRB when the second spouse dies, as it will have been used on the death of the first spouse.
• Most “letters of wishes” which we suggest clients should leave with their wills will need updating to reflect the changes brought about by the Autumn Statement.
• You should bear in mind that whilst HMRC is already acting on the basis that the proposals will become law, we await the small print in the Finance Act 2008 to be sure that the proposals are enacted. The Finance Bill has not yet been published and will not go to Royal Assent till around July.
• Please also note our comments below regarding the Phizackerley case.

The proposed legislation is retroactive. It doesn’t matter when the first spouse or civil partner died or dies so long as the survivor dies after 8 October 2007 and relief is claimed within 2 years of that death. Any client who is a surviving spouse or civil partner should consider consulting us to ensure that all relevant information including copy paperwork is available to make a claim on second death.

NIL RATE BAND TRUSTS – PHIZACKERLEY

Following on from the above many of you may have read articles in the general press about the case of Phizackerley. This concerned a nil rate band (NRB) trust that failed to have the intended effect of enabling the survivor effectively to use the NRBs of both spouses. As noted above it is likely that a surviving spouse/civil partner will by statute shortly be given the benefit of any unused proportion of NRB of the first spouse/civil partner to die. We would very strongly recommend that you contact us to review any NRB trust that you have included in your Will if the following circumstances apply:

• Your home is your main asset and its value may be over the nil rate band (which will rise to £312,000 from April 2008).
• You have gifted a share in your house to your spouse or civil partner who has not contributed (or possibly not contributed significantly) towards its purchase or mortgage.
• Both spouses are still alive or it is still within two years of the date of death of the first to die.
  

Note:

Please note that this newsletter is not intended to be a comprehensive statement of the law and should be used for guidance purposes only. If you require specific legal advice please contact Nick van der Borgh or Sharon Rutter or by telephone 020 7493 2903.