In his Pre Budget Report made on 9 October 2007, the new Chancellor, Alistair Darling, announced some significant changes to inheritance tax. To understand these, we need to recap on the basic way in which inheritance tax is charged.

Inheritance tax is charged at two rates: for the tax year 2007-2008 the first £300,000 is charged at 0% (the nil rate band – ‘NRB’); and any amount above £300,000 is charged at 40%. Transfers of assets between spouses or civil partners are generally exempt from inheritance tax.

Prior to 9 October 2007, if an individual passed their estate to a spouse or civil partner then, on the death of the survivor, there would be only one NRB to set against the whole of the value of the estate and the first person’s NRB will have been lost. It was possible to protect that NRB by leaving part of the first person’s estate to a discretionary trust, enabling the survivor to have access to the assets albeit it they don’t own the assets outright, for example they can continue to live on in the matrimonial home whist its value is held in a discretionary trust.

From 9 October 2007 it is possible to transfer any unused NRB on a person’s death to the estate of their surviving spouse or civil partner, allowing the survivor to have up to two NRB amounts and minimise the inheritance tax liability on their death. Although the new rules will not be enacted until July 2008, they will apply from 9 October 2007.

Graeme Lindop, who specialises in tax and IHT planning at Coles Miller, says that the proposed changes to the way in which the NRB is used do not mean you have to change your Will. In fact, if you currently have an existing NRB discretionary trust Will, there are several good reasons for not changing, thereby retaining the flexibility either to use the discretionary trust or to change its nature, or even to wind it up at a later date, allowing the first person’s NRB to be transferred to the surviving spouse.

• Nil rate band discretionary trusts are likely to be more useful if you have assets (such as property) which are likely to grown in value more quickly than the nil rate band which is due to increase in line with the retail price index.
• Nil rate band trusts will also protect assets against care fees if a survivor goes into residential care.
• They will also provide protection for legacies left to children in the event that they divorce at a future date or in the case that the surviving spouse remarries.

If it turns out that there would be no inheritance tax due on the value of the joint estate at the time of the first person’s death, the trust could be wound up relatively simply and provided this was done within two years of the first person’s death, the survivor would be entitled to the first spouse’s NRB.

If you are thinking of making a new Will, NRB discretionary trust Wills may still be worth considering because they offer the survivor and trustees the flexibility to deal with the estate in the best way at the time of the first death depending on the circumstances, the value of the estate and the level of the NRB at the time.