Before last year’s election there was talk that the inheritance tax (IHT) nil rate band would be raised to £1 million. During the election campaign this idea gradually moved into the hinterland of ‘aspirational’ policies. After the election, the formation of the Coalition Government meant that the £1 million goal was abandoned: increasing the personal income tax allowance was given priority over reducing the impact of IHT. The June 2010 ‘emergency’ Budget confirmed that Alistair Darling’s planned freeze of the nil rate band at £325,000 until at least April 2015 would be implemented. 

The 2011 Budget contained a statement which, on first hearing, seemed to offer some easing of the IHT burden. However, once the details emerged in the many pages of HM Revenue & Customs’ briefing notes, it became apparent that this easing was not as generous as it had seemed. What has been proposed is that for wills coming into effect from 6 April 2012, the rate of IHT will be reduced to 36%, provided at least 10% of the taxable estate is left to charity. 

This is good news if you are already intending to make substantial charitable donations in your will. If you are now close to the 10% threshold, it could even pay your beneficiaries for you to increase your charitable bequests, once the legislation takes effect. However, if your sole aim is to maximise what your beneficiaries will receive, the concession is of no use. as the example shows.

Nothing for something?
Alex has an estate of £625,000 when he dies in July 2012. He has a full nil rate band – still £325,000 – but neither reliefs nor exemptions. He has one beneficiary, his grandson, John.    If Alex’s will leaves 10% of his taxable estate to charity, the charity receives (£625,000 – £325,000) x 10%: £30,000
John receives:
Gross estate	£625,000
Charitable gift	(£30,000)
Inheritance tax (£270,000 @ 36%)	(£97,200)
Net estate distributed to John	£497,800
If Alex’s will leaves everything to John, John receives:
Gross estate	£625,000
Inheritance tax (£300,000 @ 40%)	(£120,000)
Net estate distributed to John	£505,000

The charitable gift rate reduction may not be the only revision to IHT in the next few years. The Office of Tax Simplification (OTS), which was set up in 2010 by George Osborne, was highly critical of the current IHT regime in its final report, issued shortly before the 2011 Budget. The OTS pointed out that the £3,000 annual exemption had not been increased since 1981, nor had the exemptions for gifts on marriage changed since 1975. 

However, rather than simply proposing that these exemptions be uprated, the OTS went much further and suggested that it would be better ‘to consider the scope and operation of inheritance tax with reference to the original and desired policy rationale’. The OTS’s conclusion was that IHT ‘is a tax that needs a ‘top down’ review’. 

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The FSA does not regulate will writing, tax advice and some forms of inheritance tax planning.