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Protect your estate from the affect of inheritance tax

November 2012

By Steve Hopkins FCII, Managing Director - Firth & Scott Financial Services Ltd

A few years ago the Government changed the way that inheritance tax thresholds were calculated for married couples and registered civil partners, effectively increasing the threshold on their estate when the second partner dies, to as much as £650,000 in 2012-13.

Protecting your estate from the affect of inheritance tax is an important part of any financial planning programme, so I think it’s always a worthwhile exercise reminding ourselves exactly how this works.

Below is an example of how the unused inheritance tax threshold (or ‘nil rate band’) of a late spouse or civil partner can be transferred to a second spouse or civil partner and utilised when they die.

Transferring the whole of an unused threshold

Mark dies in May 2007.  He leaves an estate worth £400,000 to his wife Sharon.  She dies in August 2008, leaving £600,000.  When Mark died the Inheritance Tax threshold was £300,000.  When Sharon died, the threshold had gone up to £312,000, so her estate was over the threshold.

None of Mark’s threshold was used when he died because he left his entire estate to his wife and he hadn’t made any lifetime gifts.  So Sharon’s personal representatives can transfer 100% of Mark’s threshold to increase her threshold.  They don’t transfer £300,000 – the threshold when Mark died – but the percentage of the nil rate band he didn’t use, i.e. 100%.  They then apply this percentage to the threshold at the time Sharon died.

So Sharon’s threshold increses to £624,000, twice the 2008-09 threshold of £312,000, using 100% of her nil rate band and 100% of Mark’s.  This means there’s no Inheritance Tax due on her estate*.

So to summarise remember that if none of the threshold has been used then 100% can be used by the surviving spouse/civil partner.  Using the current levels this would amount to £650,000.

However, what would happen if a legacy was made on the first death to a person who wasn’t exempt (as far as inheritance tax is concerned)?*

Jamila dies in May 2007, leaving an estate worth £300,000.  She leaves £40,000 to each of her children and the rest of her estate (£180,000) to her husband Kamil.  Whem Jamila died the Inheritance Tax threshold was £300,000.

Kamil dies in September 2009, leaving an estate worth £500,000 which he leaves equally to his three children.  When Kamil died the threshold was £325,000.

The amount of Jamila’s threshold that can be transferred to Kamil is:

  • Threshold at the time of the first death (Jamila) = £300,000
  • Minus the legacies to her children who aren’t exempt = £120,000
  • Leaving a remaining threshold of £180,000 

The percentage by which to increase the threshold on the second death (Kamil) is:

  •  The threshold remaining from Jamila’s death (£180,000)
  • Divided by the threshold at the time of Jamila’s death (£300,000)
    Multiplied by 100 (£180,000 divided by £300,000 x 100 = 60%)

So the threshold available to transfer to Kamil’s estate is £325,000 x 0.6 (60%) = £195,000.  This is added to Kamil’s own threshold of £325,000, increasing his threshold to £520,000.  Because Kamil’s estate is lower than this – there’s no Inheritance Tax to pay.*

Whatever your financial planning needs let Firth & Scott, one of the limited number of chartered financial planning companies in the UK, help you make the right financial planning decisions going forwards. 

Why not book an appointment?

Call Nottingham 0115 8400 333 or complete our online enquiry form and take advantage of an independent review of your current financial situation.

Steve Hopkins FCII

Managing Director

Firth & Scott Financial Services Ltd

* Source


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