Couples benefit from inheritance tax break

Following the Chancellor's Pre-Budget Report, the inheritance tax (IHT) threshold for couples has been increased to £600,000 - and will rise to £700,000 in 2010.

Alistair Darling says this new threshold is above the value of 97% of UK homes - most people's biggest asset when calculating IHT liability - and represents the biggest overhaul in death duties for 20 years.

But is it? Many IHT experts would argue that not a lot has changed. Hitherto, under the law, the implementation of a discretionary will trust has allowed, on the death of the first spouse, £300,000 to be transferred to beneficiaries without being subjected to IHT. There is no change to the 40% IHT rate or allowances; the Chancellor has merely made the IHT nil rate band transferable between couples, so that the second one to die automatically enjoys double relief. They have to be married couples, or in a civil partnership, to benefit; or to have been married when their partner died, as the £600,000 threshold is to be backdated indefinitely for every widow and widower.

An up-to-date will is your best defence against inheritance tax

According to the Chancellor, the changes mean certainty for up to 12 million married couples, with up to a £600,000 allowance rising to £700,000; the same entitlement for three million widows and widowers.

Not everybody benefits

Under the old IHT rules the value of anyone's estate above £300,000 was taxed at 40% when that person died, the notable exception being that married couples and civil partners could transfer unlimited assets between each other without being liable when one died.

However, when the surviving spouse died, the estate was taxed at 40% above £300,000. Now, the surviving spouse will be able to bequeath up to £600,000 tax free. Too bad if you're not married, though; single persons, couples in long term cohabitation and divorcees who have not remarried will be no better off. IHT will still be levied at 40% above £300,000 on their estates when they die.

This seems a mite unfair where siblings or divorcees are concerned. Note the recent case of the Burden sisters; they had lived together all their lives, then one died and the other, in her eighties, was forced to sell their home to meet the IHT bill.

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However, government officials said that the treatment of divorcees and those who chose not to enter civil partnerships would be examined when the changes are reviewed.

Discretionary trust unnecessary

For many married couples, of course, the changes mean they needn't have bothered with the expense and hassle of setting up a discretionary will trust. Couples can now benefit from both of their nil rate bands without the need for tax planning on the first death. What has always been possible by changing property ownership to tenants in common (instead of joint tenants) and minor will adjustments, has now become automatic.