Tax Wars
Barely a week after the Conservatives announced plans which would virtually scrap Inheritance Tax the Chancellor came out with his own changes to protect thousands of families from this hated tax.
Alistair Darling has come out with a plan that is more complicated and not so comprehensive as the Conservative proposals. But it will relieve most families from the fear of the tax and cost £1.4 billion by 2010.
The basic threshold for Inheritance Tax has not been changed. It is £300,000 this year and will rise year by year to £350,000 by 2010/11. In most cases when someone dies and leaves more than that – including of course the value of their home – the tax will still be due at 40% of the excess.
But the announcement this week will effectively double that threshold for married couples and registered civil partners. At the moment if a married person leaves all their property to their spouse when they die no tax is due. But when the second partner dies tax is due on anything over the threshold. So the first spouse has effectively wasted their £300,000 allowance. In future that will not happen. Any part of the allowance which is unused when the first person dies will be transferred to their spouse. So when the second partner dies the estate will have a threshold up to double the normal level.
For example a widow who inherited everything from her late husband who dies this year will have no tax to pay on her estate if it is worth up to £600,000. And by 2010 that figure will be £700,000. That will ensure most family homes are protected from the tax.
The new rule applies to anyone who is a widow at midnight on Monday this week or later. So it applies to all living widows as well as those widowed in the future.
Under the present law couples have been advised to leave as much as they can to their heirs to use up their £300,000 allowance and just the balance to their spouse to use up their allowance. Some have split the ownership of their home so each can leave half to their children. All these plans are now unnecessary for married couples. The new rules bring the same tax saving without any need for them.
In future couples should leave everything to their spouse. If they want to leave money or items to a child or relative they should state that in a letter of wishes with the will and the survivor should make those gifts later. That will always reduce the tax that is ultimately due on the second death.
The change only applies to married couples and registered civil partners. There is no change in the threshold for single people and it will not apply to unmarried couples or relatives who share a home.
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