New inheritance tax rules announced last October, allowing the transfer of unused allowances between spouses and civil partners on the first death, should not lull you into a "false sense of security", says Harriet Meyer in The Daily Telegraph. There are new pitfalls to watch when considering your will.
One is a common form of tax avoidance known as "nil-rate band discretionary trusts", which may need rewriting to make sure your heirs are not worse off than if you had not set up a trust at all. Under the new rules, if the first spouse dies now, when the nil-rate band is £312,000, but the second dies in a few years' time, when it rises to £400,000, the first spouse's use of a nil-rate band trust would result in a total tax-free allowance of £712,000.
Yet if the first spouse had not used a trust, heirs would get £800,000 tax-free on the second death. Nil-rate-band trusts can still be useful, says Dean McCarthy of Cobalt Financial Services, but only if you expect the asset placed in the trust to grow faster than the nil-rate band. In this example, had the first spouse's assets grown to £500,000 within the trust by the second death, beneficiaries would receive £900,000 tax-free.
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