NIL-RATE BAND PLANNING

It is important to understand that the government is only targeting ‘Lifetime tax planning’ and is not questioning the right to pass on a tax-free sum on death.

Here is an example of how Nil Rate Band planning can save £105,200 in tax (based on April 2005 IHT figures):

If Mr. & Mrs. Smith have a joint estate worth £600,000, they may upon the death of the first spouse give away to their beneficiaries £275,000 without having to pay Inheritance Tax, thereby utilizing a Nil Rate Band. However, if they do not do this and simply pass the estate to the remaining spouse, when the estate is eventually split it will only be allowed a single Nil Rate Band, rather than the two which could have been used.

Using 2 Nil Rate Bands:
Mr. & Mrs. Smith have £600,000 upon the death of the first spouse. £275,000 is given away free of Inheritance Tax, using the Nil Rate Band, leaving £337,000 to the second spouse. Upon the death of the second spouse, another £275,000 will be allowed free of Inheritance Tax, using the Nil Rate Band, leaving only £74,000 liable to Inheritance Tax at 40%, resulting in Inheritance Tax of £29,600.

Using only 1 Nil Rate Band:
Mr. & Mrs. Smith have £600,000. Upon the death of first spouse, all the money is left to the remaining spouse without using the Nil Rate Band. Upon the death of the remaining spouse, only the one Nil Rate Band of £275,000 will be allowed, leaving an estate of £337,000 liable to Inheritance Tax at 40%, resulting in Inheritance Tax of £134,800.

For personal advice about nil-rate band planning, ask at www.ihtsaver.co.uk