Transferable Nil Rate Band
Inheritance Tax - The Transferable Nil Rate Band
April 2008 - amended September 2009
Where the amount of the aggregate chargeable transfer on the death of a deceased person, (including the total of any lifetime transfers), does not exceed the maximum level of the nil rate band, then no IHT is payable. If it does, then IHT at the rate of 40% is payable on the excess.
For deaths occurring between 6th April 2009 and 5th April 2010 the nil rate band is £325,000.
However, any property passing on death to a lawful spouse, (including a registered civil partner), of the deceased is exempt from tax, whatever the value.
Prior to 9th October 2007 the nil rate band applicable on the death of the first spouse to die had to be used in relation to his or her estate, otherwise it would be lost.
The practice therefore developed of including in husband and wife Wills a "nil rate band legacy" either directly to the children or on discretionary trusts which could include the surviving spouse. In this way the value of the property passing, and therefore the IHT burden, on the second death could be substantially reduced.
In his pre-Budget statement to the House of Commons on 9th October 2007 the Chancellor of the Exchequer announced that in relation to second deaths occurring on or after that date any nil rate allowance not used on the first death could be transferred to the estate of the surviving spouse. Provisions to this effect were enacted by the Finance Act 2008.
This now makes it unnecessary, in order to save IHT on the second death, to include a nil rate band legacy in the Will of the first spouse to die.
Any claim to transfer to the deceased’s estate the unused amount of the predeceased spouse’s nil rate band must be made to HMRC no later than 24 months after the end of the month in which the deceased died. The deceased must have died on or after 9th October 2007, but the death of the predeceased spouse may have taken place earlier than that date.
The way the transfer works is that the nil rate band which is available to the estate of the deceased is increased by the percentage of the nil rate band that was unused when his or her spouse died. Any property which passed on the first death other than to the deceased, e.g. legacies to children, trust funds in which the spouse had a life interest, assets owned jointly with a third party other than the deceased, must be deducted from the spouse’s nil rate band in order to calculate the relevant percentage. For example:-
A husband died in September 2007 when the nil rate band was £300,000. He had a life interest in a trust fund worth £50,000, which passed to his children on his death. He owned land jointly with his sister which passed to her by survivorship on his death, the value of his share being £25,000. He left legacies totalling £75,000 to his children and the remainder of his estate to his wife. His wife died in May 2009, when the nil rate band was £325,000.
The property which passed on the husband’s death otherwise than to the wife totalled £150,000, i.e. £50,000 (trust fund) + £25,000 (property passing by survivorship) + £75,000 (legacies to children).
The effect of this was to use up one half of the nil rate band of £300,000 applicable on the husband’s death, leaving the other half unused.
On the wife’s subsequent death her nil rate band of £325,000 would therefore be increased by 50% to £487,500. If her estate did not exceed £487,500 there would be no IHT to pay on her death. If it did then tax at 40% would be payable on the excess.
There is no requirement that the value of the first spouse’s estate must equal the applicable nil rate band, or indeed any minimum sum at all.
Thus if the first spouse had died intestate on 30th April 2009 leaving an estate of £250,000, all of which passed to the surviving spouse under the intestacy rules, the nil rate band on the death of the latter would be increased by 100%, even though the value of the first spouse’s estate was less than the amount of the nil rate band applicable to it, i.e.£325,000
If in the above example the first spouse had instead left a Will giving the whole of his estate to his children, the unused proportion of the nil rate band would still be transferable to the estate of the surviving spouse. So the uplift on the second death would be 75,000, (i.e. the unused amount of the nil rate band) divided by 325,000 = 23.077%.
The greater the increase in the nil rate band between the death of the first spouse and that of the surviving spouse, the greater will be the potential benefit which could be obtained by postponing its use until the second death instead of utilising it on the first death.
If a future Conservative government were to increase the nil rate band to, say, £1million, then under the current arrangements the increased amount available on the second death could be as much as £2million, regardless of the date of death of the first spouse and the nil rate band then applicable.
Should existing Wills containing gifts to children or a nil rate band discretionary trust on the first death therefore be altered in the light of this change in the law?
In many, perhaps the majority, of cases the answer to this question will be yes, as anything passing on the first death otherwise than to the surviving spouse will have the effect of reducing the proportion of the nil rate band transferable to the survivor’s estate.
However, where the Will of the first to die contains a nil rate band discretionary trust with the surviving spouse as one of the beneficiaries, the situation can be retrieved by the Trustees within two years after the first death (but not within 3 months immediately following the death) appointing the trust assets in favour of the surviving spouse, thus preserving the nil rate band for the ultimate benefit of the survivor’s estate.
Normally any necessary amendments can be made by means of a Codicil, and thus should not involve undue expense.
There may of course still be good reasons, other than tax ones, for including in Wills a nil rate band legacy on discretionary trusts, e.g. to provide flexibility in the light of future family circumstances.
When a claim to transfer any unused nil rate band allowance on the first death arises following the death of the surviving spouse it will need to be supported by such of the following documents or information as may be relevant in relation to the estate of the first spouse to die:-
• a copy of the IHT200 or full written details of the assets in the estate and their values
• death certificate
• marriage or civil partnership certificate for the couple
• copy of the grant of representation
• copy of the Will, if there was one
• a note of how the estate passed if there was no Will
• a copy of any Deed of Variation or other similar document if one was executed to change the beneficiaries entitled to the estate
• any valuation(s) of assets that pass under the Will or intestacy other than to the surviving spouse
• the value of any other assets that also passed to any third party in relation to the death of the first spouse, for example jointly owned assets, assets held in trust and gifts made in the 7 years prior to death
• any evidence to support the availability of relief (such as agricultural or business relief) where the relievable assets pass to someone other than to the surviving spouse.
It is strongly advisable for the surviving spouse to keep these documents and details and to ensure that they are brought to the attention of his or her executors so as to facilitate their task when making the claim.
Other than this there is nothing which can or need be done until the second death has occurred, as the current policy of HMRC is to decline any requests to agree in advance the amount transferable to the estate of the survivor.
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