Inheritance tax changes in last week's pre-Budget report are not all they're cracked up to be, with potentially millions of people not benefiting, tax specialists say.
While the Conservatives had thrown down the gauntlet the previous week with their proposal to raise the IHT threshold for all individuals to £1m, the Chancellor, Alistair Darling, responded last Tuesday by increasing the threshold to just £600,000 for married couples and civil partners – with incremental rises to £700,000 by 2010.
This transfer of an unused "nil-rate" band between spouses or civil partners was sold as an effective "doubling" of the current £300,000 IHT threshold, but tax experts say the move is not as generous as it seems. "It merely achieves what any well-advised married couple would do anyway – in terms of ensuring both nil-rate bands are used up, " says Andrew Goldstone, head of personal tax and estate planning law at solicitors Mishcon de Reya.
Philippa Gee, at independent financial adviser (IFA) Torquil Clark, adds that individuals could already put in place a discretionary will trust so that on their death, £300,000 would be moved to their beneficiaries without IHT.
"Then on the death of his or her spouse, an additional £300,000 could be passed free of IHT," she says. "Those willing to involve a solicitor and take a more detailed approach to their wills are no better off today than they were before."
Meanwhile, unmarried couples and single people won't benefit from the changes, as their IHT allowance remains unchanged. "Who are the actual winners in the new proposals?" asks Julia Whittle at IFA Punter Southall. "There has actually been no change to IHT for the majority of people."
Dean McCarthy at IFA Cobalt Capital comments: "There's no benefit to single people or cohabitees. This is just headline-grabbing."
Many people have been "left in the lurch" by the changes, says Tony Bernstein, tax partner at accountants HW Fisher.
He draws attention to the case of sisters Joyce and Sybil Burden, aged 89 and 91, who went to the European Court of Human Rights last year to fight for cohabitants to enjoy the same tax rights as married people and gay couples in civil partnerships. The sisters, who have lived to-gether in Wiltshire all their lives, lost their fight on IHT rules last year. They are appealing against the ruling.
While single people and cohabitees will miss out, tax specialists agree that the real winners from the changes are widowers and widows, as they will be able to use the unused relief of their deceased spouse. "The retrospective element for widows and widowers is welcome," says Penny Bates from accountants Menzies.
That said, those who have taken steps to mitigate IHT will now have to look again at their plans, says Andrew Tailby-Faulkes, tax partner at accountants Ernst & Young. "Any wills that contain nil-rate band discretionary trusts to reduce IHT should be reviewed."Reuse content