Rosalind Johnson, from Tenterden Solicitors Pengelly & Rylands, discusses the importance of planning for Inheritance Tax.
When interviewing clients to make Wills I am frequently struck by how many are unaware of a significant change to Inheritance Tax which came into effect on the 9th October 2007.
Everyone has an Inheritance Tax allowance currently of £325,000 and anything above that is taxed at 40%. In the past husbands and wives (and more recently civil partners) have been able to inherit all their spouses assets without being liable to Inheritance Tax – in effect a tax free transfer. However when the surviving spouse died their assets were liable to tax on everything above their own allowance.
The change is that in addition to the Inheritance Tax free transfer on the first death any unused allowance from the first death also passes to the surviving spouse. This means if a husband dies first, leaving everything to his wife, there will be a double allowance at the time of his wife’s death. If the second death occurred now the allowance would be £650,000 before any Inheritance Tax had to be paid.
The rule is enacted retrospectively so can be claimed by all widows/widowers no matter when their spouse died. This even includes people whose spouses died in the Second World War.
The calculation is based on the percentage of the allowance used (that is to say any assets transferred other than to the surviving spouse) on the first death and applied to the allowance at the time of the second death.
For example, a husband died in 1977 leaving everything to his wife, except a legacy of £1,500 to his son. At that time his allowance was £15,000. If his widow died now she would be entitled to her allowance of £325,000 and 90% of her husband’s allowance at today’s rate, i.e. £292,500, making a total allowance of £617,500.
If you have been married several times and each spouse has died you can elect the allowance of the spouse who has used up the least amount and claim that. You cannot however claim more than one allowance.
The important thing is to have kept the paperwork from the death of the first spouse. If you do not have it or may have lost it there are investigations which can be carried out through the courts to confirm the Rosalind Johnson, partner at Pengelly & Rylands Solicitors arrangements when the first spouse died. The Revenue will not just assume the allowance is available. It is advisable for any widows/widowers to do the investigations now and have everything in order so that on their own deaths there should be no delay in their Personal Representatives claiming any allowance and administering the estate for the beneficiaries.
Each case is different and if you would like to discuss the matter with a solicitor or anything else connected with Wills and estate planning please contact Rosalind Johnson or Gillian Snow on 01580 762248.
Pengelly & Rylands.