Since October 2007 it has been possible for any unused Nil Rate Band to be transferred between spouses or civil partners. In this article we set out to clarify how this works in practice.
The Inheritance Tax (IHT) threshold or ‘nil rate band’ is the amount up to which an estate will have no IHT to pay. If the estate – including any assets placed in trust and gifts made within seven years of death – is more than the threshold, IHT will be due at 40% on the amount over the nil rate band.
If a person dies and their taxable estate falls below the nil rate band, any unused allowance can later be claimed on the death of a spouse or civil partner. The amount that can be claimed will be based on the proportion of the unused nil rate band at the time of death of the first spouse or civil partner but at the rate applicable on death of the second spouse or civil partner.
Any estate left to a spouse or civil partner is exempt from IHT, however, gifts to other beneficiaries, such as children or a trust, are potentially taxable.
For example, Bob died in June 1988 when the nil rate band was £110,000. He gifted £55,000 to his children in his will with the remainder of his estate passing to his wife and therefore 50% of the nil rate band was used at that time. His wife, Mary, subsequently died in September 2008 when the nil rate band was £312,000. Her estate was valued at £500,000. Mary’s personal representatives were able to claim an additional £156,000 (i.e. £312,000 x 50%) in respect of Bob’s unused nil rate band to bring her total non-taxable allowance to £468,000. Therefore only £32,000 of Mary’s estate was subject to IHT (i.e. £500,000 less £468,000).
If an individual is widowed more than once, their personal representatives will be able to claim any unused nil rate band for all the deceased’s spouses or civil partners, subject to a maximum additional limit of 100% of the current nil rate band.
Taking the above example, if Mary married Geoff in 1995, who then died in November 2000 leaving 60% of his nil rate band unused, on Mary’s death her personal representatives would be able to claim an additional 100% nil rate band from the unused allowances from Bob and Geoff. Although the combined total unused allowances amount to 110%, the maximum transferrable nil rate band is 100%.
Any claim to transfer unused nil rate band must be made within 24 months of the second death (i.e. within 24 months of Mary’s death in the above example).
There is no time limit as to how far back the claim for unused nil rate band can go, in fact a recent case has allowed a claim going back to the Second World War! However, documentary evidence will be required to support any claim and this will need to include as a minimum the death certificate of the first deceased, a copy of their Will as well as the grant of probate from that death. A claim for the transfer of unused nil rate band can only be made if the second death occurred on or after 9th October 2007.
This is a very brief summary of the provisions. Personal representatives will need to have detailed records of the deceased’s estate and any gifts made in the seven years prior to death. The provisions do not exclude the need for effective Inheritance Tax planning which can ensure the effective use of available allowances and of course the distribution of assets as the deceased would wish.
If you would like to discuss the provisions further, either generically or specifically to a potential claim, please do not hesitate to contact us.