Many wills drafted in recent years for spouses will include a clause that says assets will pass to the surviving spouse as long as they live for 28 days from the date of death of the first spouse to die. Now that it is possible to transfer the unused proportion of the nil rate band to the surviving spouse, this may not be the most tax efficient drafting.
Technical Terms
IHT – Inheritance Tax
A tax due on death based on the value of the estate less the nil rate band. Due at 40%.
Also due on some transfers made during lifetime at 20%.
NRB - Nil Rate Band
An exempt amount. The amount of the estate below this threshold can be transferred free of IHT. The NRB amount for 2009/10 is £325,000.
Spouse Exemption
Assets can be left to the spouse free of IHT.
Transferable NRB
If the first spouse to die does not give assets of a value of at least the NRB to someone other than the spouse they will not use their NRB. The unused proportion is then available to the surviving spouse when they die in addition to their own NRB.
For example if the first spouse to die uses half their NRB then the surviving spouse can have one and a half NRBs when they die later.
What Is A 28 Day Clause For?
Prior to the ability to transfer NRBs between spouses, the 28 day clause ensured that the nil rate band of the first spouse to die was not wasted.
This also saves some paperwork. It prevents assets from being passed to the surviving spouse only for them to die a few days later and to have the assets transferred on to someone else within such a short time frame.
It was meant to ensure the NRB was not wasted in the scenario where for example husband and wife are in a car crash and wife dies at the scene and husband dies a few days later.
If both spouses die at the same time the older of the couple is deemed to die first.
The Issue
Wendy and Peter Smith (married) have estates worth £100,000 and £400,000 respectively.
Peter dies and his will says that all assets pass to Wendy as long as she survives him by 28 days. If she does not survive him by 28 days all assets pass to his brother Paul.
Wendy then dies ten days later and the assets go to Paul.
Peter’s estate creates an IHT liability of £30,000 (£400,000 - £325,000 at 40%).
Wendy’s estate is covered by her NRB and no IHT is due.
If the will did not have the 28 day clause and Wendy’s will also left the assets to Paul:
When Peter died his assets would pass to Wendy. No tax would be due as it is covered by the spouse exemption. Wendy then has assets of £500,000.
When Wendy died she would have had the benefit of her own NRB and another full NRB transferred from Peter as he had not used his. So no IHT would have been due.
A saving of £30,000.
What Do I Need To Do?
Check your will. If it has a 28 day clause in it consider reviewing the will and getting the clause removed.
If your will is more than 5 years old, it is probably worth asking your accountant or solicitor to review your will anyway as some clauses are likely to be out of date.
List out your assets and how each one is owned. Put a rough value by each one and make a rough calculation of the value of the estate of each spouse.
Consider who you want to benefit from each asset ultimately and make an appointment with your accountant or solicitor to make sure your will achieves what you want in the most tax efficient manner possible.
If you have not got a will or if you have married since your will was drafted you need to put a will in place. You can ask your solicitor to do this for you and then ask your accountant to review the will for tax purposes when it is in draft form.
If you die without a will, your assets are unlikely to pass as you would wish and some assets may even pass to the state.
If you require any further information please contact Linette Hall.
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