Inheritance Tax Update: February 2008

Transfer of nil rate band
Here are the facts

1. The transferable allowance will be available to all survivors of a marriage or civil partnership who die on or after 9th October 2007, no matter when the first partner died / dies.
   
2. The claim to transfer unused nil-rate band must be made by the accountable persons when the surviving spouse or civil partner dies and not when the first spouse or civil partner dies. So if you are dealing with the estate of the first spouse or civil partner to die, there is nothing you need do now in terms of making a claim. However you will need to record the proportion of the nil-rate band that goes unused, and the detailed guidance will explain what sort of records will need to be kept in order to support a claim when the surviving spouse or civil partner dies. 
   
3. Where a valid claim to transfer unused nil-rate band is made, the nil-rate band that is available when the surviving spouse or civil partner dies will be increased by the proportion of the nil-rate band unused on the first death. For example, if on the first death the chargeable estate is £150,000 and the nil-rate band is £300,000, 50% of the nil-rate band would be unused. If the nil-rate band when the survivor dies is £325,000, then that would be increased by 50% to £487,500.
   
4. The amount of the nil-rate band that can be transferred does not depend on the value of the first spouse or civil partner’s estate. Whatever proportion of the nil-rate band is unused on the first death is available for transfer to the survivor.
   
5. The rules apply in the same way whether the first spouse or civil partner to die leaves a Will or dies intestate.
   
6. The rules allow unused nil-rate band to be transferred from more than one deceased spouse or civil partner, up to a limit of one additional nil-rate band. So if someone has survived more than one spouse or civil partner, then on their death the accountable persons may be able to claim additional nil-rate band from more than one of the relevant estates.
   
7. The new rules will not change the effect of existing Wills. So people who have, for example, a nil-rate band trust written into their Will do not have to take any action as a result of this measure. But if someone wants to change their Will to take account of the new rules, that change can usually be made by a Codicil, rather than having to rewrite the Will.

Example of How the New Rules Will Work
A dies on 14 April 2007 with an estate of £400,000, which he leaves entirely to his spouse, B. B dies on 17 June 2009 leaving an estate of £600,000 equally between her two children. When B dies the nil-rate band is £325,000. As 100% of A’s nil-rate band was unused, the nil-rate band on B’s death is doubled to £650,000. As B’s estate is £600,000 there is no IHT to pay on B’s death.

Transferable nil rate band – Frequently asked questions

1. What do you mean by a transferable nil rate band?
A transferable nil rate band arises when one party to a marriage or civil partnership dies and the amount of their estate that is chargeable to IHT does not use up all of the nil rate band they are entitled to. Where this happens, the unused part can now be transferred to the surviving spouse or civil partner when they die.

2. How does that work then?
Everyone is entitled to a nil rate band for IHT. Assets that pass from one spouse or civil partner to another are exempt from IHT. So if on death, someone leaves everything they own to their spouse or civil partner, it is exempt from IHT and they have not used any part of their nil rate band. That unused nil rate band can now be transferred to their surviving spouse or civil partner and used in working out the IHT liability on their estate when they die.

3. Does it matter when the deaths occurred?
Yes – this applies where the surviving spouse or civil partner died on or after 9th October 2007. But it does not matter how long before them their spouse or civil partner died.

4. What if both deaths occurred before 9th October 2007?
Where both spouses or civil partners have died before 9th October 2007, no allowance may be transferred.

5. How much is the nil rate band?
For 2007/08 the nil rate band is £300,000 – rising to £312,000 in 2008/09.

6. So you mean that if I inherited all the assets from my spouse or civil partner, my executors could add their nil rate band to the nil rate band that applies when I die?
Essentially yes – but it works by looking at what proportion of the nil rate band that was unused when your spouse or civil partner died and uprating the nil rate band available when you die by that same proportion.

7. What do you mean by uprating the nil rate band available by the same proportion?
The amount to be transferred is worked out by taking the proportion of the nil rate band that was unused on the first death and applying that to the nil rate band available when you die. So if your spouse or civil partner left assets worth £150,000 to your children with everything else to you and the nil rate band on their death was £300,000; one-half of their nil rate band is unused and is available for transfer. If, when you die, the nil rate band had increased to £325,000, the amount available for transfer would be 50% of £325,000 or £162,500 giving your estate a nil rate band of £325,000 + £162,500, or £487,500 in total.

8. What if my spouse or civil partner’s estate was only worth £100,000, so that they did not need all of their nil rate band. Is the amount that can be transferred tied to the amount that they actually left to me?
No - it doesn’t matter what the size of first estate was, whatever proportion of the nil rate band is unused may be transferred to you. If your spouse or civil partner’s estate was worth only £100,000 and they left everything to you, they will not have used any part of their nil rate band. So 100% of the nil rate band is available for transfer when you die.

9. What about any gifts my spouse or civil partner may have made in the 7 years before they died; or any other assets that were chargeable when they died?
Gifts and any other assets that are chargeable on the first death (say assets in trust or assets owned jointly with a son or daughter) all eat into the nil rate band in the normal way and so reduce the amount that may be available for transfer.

10. What happens when there has been more than one marriage?
My first husband died whilst we were still married; I subsequently remarried but am now divorced, can my personal representatives make a claim to transfer any unused nil rate band from my first husband’s estate?

Yes, any unused nil rate band from your first husband’s estate can be transferred to your estate as a result of a claim made by your personal representatives.

11. What happens if my surviving spouse or civil partner remarries or enters into another civil partnership and they die before their new spouse or civil partner?
Where this happens, the nil rate band available to your spouse or civil partner will be increased by any unused amount of your nil rate band that their personal representatives wish to claim. If your surviving spouse or civil partner dies first and decides to leave all their assets to their new spouse or civil partner, then again, the full amount of the nil rate band on their death is available for transfer to their new spouse or civil partner. But the maximum that can be added to anyone’s own nil rate band is 100% of the nil rate band applicable to their death.

For advice on how these changes may effect you contact Daly Harvey Morfitt here. 

Notes on using this fact sheet:
This fact sheet is published solely to provide information and it does not constitute advice or a personal recommendation. Always take detailed financial advice from a suitably qualified individual before making important financial decisions.