Experts are urging married couples and civil partners to revisit their wills after the changes to inheritance tax (IHT) rules announced this week.

The Chancellor has changed the rules to allow married couples and civil partners to transfer IHT allowances to each other when they die. The changes apply from October 9 this year, with the limit set to rise to £700,000 by 2010. The measures will also be backdated, which is expected to benefit about three million widows and widowers, says BDO Stoy Hayward, the accountant.

In the past, advisers have urged couples to set up complicated financial structures that are not subject to tax. This has helped to minimise the amount of property that was subject to IHT. However, tax experts say that IHT planning will now be more simple. Chris Sanger, of Ernst & Young, another accountancy firm, says: “The simplification of IHT will be a huge relief for elderly couples, who until now had to go through complicated planning, dividing assets between them to take advantage of two separate IHT thresholds.”

Peter Penneycard, of PKF, the tax adviser, adds: “The changes to IHT have made many established tax-planning techniques redundant. The rules are complex and the terms of everyone’s will and trusts, if they have them, are different. Everyone should review the existing terms of their wills with a tax specialist.”

He also says that huge rises in house prices in recent years mean that IHT will continue to be a problem for the hundreds of thousands of people who own properties worth more than the £600,000 IHT threshold.

Times Money explains the new rules and what you should do now.

How exactly will the new rules operate?

Under the old regime, everyone had an IHT-free allowance of £300,000. Married couples were entitled to pass an almost unlimited number of assets to each other tax-free when one died, but the allowance could not be transferred. Now any unused element of a spouse’s £300,000 tax-free allowance can pass to the surviving party. For example, if a husband who dies bequeaths £100,000 to his children and the remainder of his assets to his wife, he can pass on the unused £200,000 allowance so that she can bequeath £500,00 free of IHT.

Would I benefit if I were single, divorced, or unmarried but living with my partner?

For single people, divorcees and people who live together, there has been no increase in the limit at which IHT applies. James Odds, of Matthew Arnold and Baldwin, a firm of solicitors, says: “Their heirs are likely to be worse off when compared with a married couple or a civil partner.”

Experts point out that IHT planning has already ensured that many couples will keep the bulk of their estate free of the tax and they are unlikely to benefit further.

Will family members who live together benefit?

No. As with singles and unmarried, couples, the changes do not apply to family members. Where two family members live in a house worth £600,000, and their wills leave everything to each other, there will be a tax charge of 40 per cent on the value of the estate above £300,000 on the second death.

I have not yet begun planning for IHT. What should I do now?

Most married couples and civil partners can now simply make a will that leaves all their assets to each other, secure in the knowledge that the combined estate will be below the IHT threshold.

How will these changes affect my existing IHT planning?

The changes present a good opportunity for those who have already drawn up their wills to revisit their arrangements.

Julia Whittle, of Punter Southall, the financial adviser, says: “Many people may want to unwind the nil-rate-band trusts and complex schemes involving the family home as they can benefit more from their assets now and improve quality of life while they are both together.”

However, Carolyn Steppler, tax director at KPMG, the accountant, says: “Some people use discretionary wills because they want to pass assets to the next generation before they die. There is no one size fits all. Think about your personal circumstances and use this as an opportunity to make sure that your beneficiaries do not lose out.”

There may also be issues to consider if one spouse or civil partner dies and the survivor requires long-term care. Mr Odds says: “The whole of the combined estate may be within the purview of the local authority for the purpose of care home fees. It may be sensible to consider the use of a trust or diverting the nil-rate band to other family members.”

If my partner dies and I remarry, will I still be able to benefit from my late partner’s allowance?

The simple answer is no. The rules do not allow widows and widowers to stockpile multiple IHT-free allowances. Penny Bates, of Menzies, the accountant, says: “If someone survives more than one spouse or civil partner, he or she can claim additional nil-rate bands, but never more than twice the nil-rate band in force at the time of the survivor’s death.”

My estate is worth more than £600,000. What can I do to protect the amount that exceeds the IHT-free allowance?

One option is to make use of the various gift exemptions. You can make tax-free gifts of any amount, called potentially exempt transfers, as long as you survive for seven years after making the gift. You are also permitted to give away a total of £3,000 a year to one or more individuals free of IHT, as well as any number of gifts of up to £250 to different people. Parents can give their children £5,000 as a wedding gift and £2,500 to their grandchildren.

Shares in certain companies on the Alternative Investment Market (AIM), if held directly for more than two years, also qualify for business property relief, which means that they will be excluded from your estate for IHT purposes. However, investing in AIM companies can be risky, so choose carefully or consult a broker or fund manager.

Discretionary trusts can also be used, although these can be complicated when it comes to bequeathing a family home.

CASE STUDY WIDOWER WELCOMES NEW THRESHOLD

NICK NICHOLLS, a 78-year-old widower who owns his home, will benefit from the Government’s proposed changes to inheritance tax. Mr Nicholls, who is a pensioner, also owns a share of the florist business that he began ten years ago when he retired from the Army. The business is now run by his daughter, Caroline.

Mr Nicholls, pictured with his daughter, has paid off the mortgage on his home, which is valued at £450,0000. This year he released £100,000 of equity from the property, which he divided equally between his two children as a means of minimising inheritance tax.

He says: “I was a strong supporter of the Conservatives’ plans to raise the threshold to £1 million. The Government’s announcement is good news for me as it applies to widowers. My wife died seven years ago and I will leave an estate of about £600,000.”