The two main points in this Budget had been announced previously; the first being that the nil rate band is being frozen at £325,000 for an extra two years up to and including 2017/18, and the second being two changes to the position for non-domiciled spouses.
The nil rate band has been frozen in order to fund reasonable care costs, which are capped at £72,000, for older people from 2017-18. Practically speaking, this freezing will mean that approximately an additional 5,000 estates will become tax paying per year. This will increase their administrative burden as more complicated forms will be required. The freeze will also mean that lower value trusts, which did not pay tax previously, will now pay tax; and more of those that were not required to file inheritance tax returns, will now have to do so.
The first change for non UK domiciled spouses is that the current lifetime limit of £55,000 for transfers from a UK domiciled to a non-UK domiciled spouse is to increase to £325,000. This is then intended to keep pace with any future increases to the nil rate band.
The second change for non-domiciled individuals married or in a civil partnership with a UK domiciled spouse, is that they can elect to be treated as UK domiciled. This election will be for IHT purposes only and will not affect their non-domiciled status for capital gains tax or income tax purposes. The election can be made during a person’s lifetime or within two years of the death of their spouse. It can be back dated up to seven years prior to the election, but the earliest date that can be specified is 6 April 2013.
There is one IHT anti-avoidance measure that had not been previously announced, which is to limit the deduction for liabilities that can reduce the IHT payable on an estate. Various IHT mitigating schemes that have involved loans have been challenged by HMRC in recent years and this measure looks to legislate against the availability of the deduction for those loans. It will apply in a few scenarios such as where the loan is not repaid after death. Another example is where loans are raised against chargeable assets to purchase other assets that are exempt or subject to an IHT relief such as agricultural property; how that can work practically remains to be seen.