July 2008

Preparation is everything

Ensuring that maximum use is made of tax allowances has always been one of the fundamental aims of successful financial planning. This has been a particular issue for many married couples and, latterly civil partners, in the area of inheritance tax and nil rate band planning.

For such couples the introduction of transferable nil rate bands with effect from 9 October 2007 has, apparently, made this type of planning much easier, such that many clients may feel that advice in this area is no longer necessary.

However, dig deeper into the practical requirements of how the new rules work and it becomes clear that clients now have an even greater need for advice than ever in relation to efficient use of inheritance tax nil rate bands.

This need for advice can be broken down into two broad areas:

1. An assessment of the most appropriate way for a couple to ensure that use of inheritance tax nil rate bands is maximised. In this respect the transferable nil rate band is one more option for the adviser to consider along with the more traditional facilitators of such planning, for example nil rate band discretionary trusts. In many cases taking advantage of the new option will be the most appropriate course to take, particularly if the main or only asset is the family home. Nevertheless, there are still many good reasons for using a trust.

2. Once a decision has been made to go down the transferable nil rate band route, clients will need advice and guidance about the process involved and the documents that will need to be kept in order for the personal representatives (PRs) of the surviving spouse or civil partner to make a successful claim to transfer any unused nil rate band of the first to die.

It is this second advice requirement that is the primary focus of this article.

The new rules give the option to transfer any unused nil rate bands between legal spouses and civil partners where the surviving spouse dies on or after 9 October 2007. The date of death of the first to die is not relevant. It is a proportion (0% to 100%) of the unused nil rate band that is transferred. Even if the first spouse to die had no assets on death 100% of their nil rate band is still transferable.

The key word in the preceding paragraph is option. In order to make the transfer happen the PRs of the surviving spouse need to make a claim to HMRC using form IHT 216. It will not happen automatically. This may be news to many clients.

Deadline

The deadline for the personal representatives (PRs) to make a claim is 24 months after the end of the month of the death of the second spouse to die. Form IHT 216 makes it clear why forward planning is needed. The volume of information and supporting documentary evidence required to make a successful claim is pretty daunting and includes the following:

- Inheritance tax account of the first spouse/civil partner to die (IHT200, IHT205/C5 in Scotland, or full written details of the assets in the estate and their values);

- Death certificate of the first to die;

- Marriage certificate or civil partnership certificate for the couple;

- Copy of the grant of representation (Confirmation in Scotland) of the first to die;

- If the first to die left a will, a copy of it;

- Any deed of variation pertaining to the estate of the first to die.

In addition to these documents the PRs making the claim will need the following information in relation to the first spouse or civil partner to die:

- Who benefited under their will or intestacy and what each beneficiary was entitled to receive;

- Whether their estate included any jointly owned assets that had passed to the remaining joint tenant(s) under the survivorship rules;

- Whether there were any trust assets (for example where the first to die enjoyed an interest in possession) included in the estate;

- Whether any gifts or other transfers had been made in the seven years before their death that were chargeable on their death;

- A valuation of any assets that passed other than to the surviving spouse or civil partner on first death;

- Evidence to support the availability of any relief, such as business property relief or agricultural property relief, claimed on first death where relievable assets were left to other than the surviving spouse or civil partner,

- Where the first to die was aged over 75, details of any alternatively secured pension fund from which they received a pension.

Detailed records

Clients clearly have to be made aware of the need to keep detailed records at the time they are making decisions about how best to utilise their nil rate bands. The PRs of those clients who have not had the benefit of advice may find it difficult, if not impossible to provide this information. Often these documents will not be readily available, having been lost or destroyed, because of the time between the two deaths. While it will certainly be possible to obtain copies of some of the documents that are, like wills, a matter of public record, it may be difficult or even impossible to obtain all of the documents required by HMRC to justify a claim. This will be particularly true in cases where property is jointly owned which on first death passes automatically to the surviving joint owner(s).

It is also worth noting that if PRs are making a claim to transfer an unused inheritance tax nil rate band it must be that the estate they are dealing with is worth more than the current inheritance tax nil rate band. As such the PRs will need to also submit an Inheritance Tax Account using form IHT200. Form IHT200 is eight pages long. However, HMRC's notes on completion of IHT200 and the supplementary pages run to an eye watering 154 pages.

One common complicating factor that many PRs will need to take into account is the increasing incidence of second and subsequent marriages. Re-marriages have increased from 17% of all weddings in 1970 up to 40% in 2003(1). The new rules allow any unused nil rate band to be transferred from more than one deceased spouse or civil partner up to a total limit of one additional nil rate band (i.e. a maximum total amount of £624,000 in the current tax year).

For those advisers dealing with clients in this category there is likely to be a good deal of scope to add value, perhaps working with the client's solicitor, in terms of giving advice as to the most suitable option to maximise the availability of nil rate bands using trusts (per advice area 1 above). If the transferable nil rate band option is chosen there is an increased emphasis for records to be kept about a new partner's previous marriage or marriages. In terms of dealing with HMRC, a separate claim form is required for each spouse or civil partner who died before the deceased.

The PRs of a surviving spouse will need to know complete details of the assets that are likely to affect the transferable nil rate band and valuations as set out above. It would be sensible for this information to be kept by the surviving spouse with their will so that it is readily accessible to the PRs when the time comes.

The introduction of transferable nil rate bands can certainly be viewed as a step forward in terms of adding a convenient way for some couples to maximise their use of available inheritance tax nil rate bands. It can, however, still be complicated and time consuming to exercise the option to transfer, especially if there is more than one marriage involved and/or where the first to die passed away a long time ago. Furthermore, the new rules do nothing to help the growing population of unmarried couples who still need to ensure that they understand the possible impact of inheritance tax when one of them dies and that they have made appropriate plans, particularly if there are children involved.

From an adviser's perspective, these changes, while apparently reducing the need for advice in this area, actually mean that it is even more important that clients seek and receive quality estate planning advice.

Mark Wilkinson
Head of Development
AXA Wealth Management