The Transfer Window is open
The Transfer Window is open
Inheritance tax (“IHT”) was again a political football in the run-up to the Pre-Budget report in October 2007. To counter the Conservative proposal for a nil rate band of £1 million, Alistair Darling played safe and introduced the “transferable nil rate band”. Certainly not as radical as the Conservative proposal, but an improvement to the previous position.
The background
Everyone has a nil rate band allowance for inheritance tax, currently £325,000. Before 9th October 2007, married couples had to ensure that they used their nil rate band (“NRB”) on the first death instead of leaving all their property to the survivor, otherwise the NRB would be wasted and the couple’s heirs would lose out on a potentially large IHT saving. In a lot of cases, there was not enough cash on the first death to do this simply, so fairly complicated discretionary trust arrangements were set up under Wills to ensure that the first NRB was used.
Now the transferable NRB should do away with the need for these trusts in the majority of cases and simplify tax planning for many married couples and civil partnerships. In this article we refer to spouses but the same rules apply to civil partners.
The basics
On an individual’s death on or after 9 October 2007, a claim can be made to transfer the unused NRB from their predeceased spouse to the surviving spouse’s estate, even if the first death took place before that date.
The amount that can be transferred is calculated by taking the proportion of the then NRB unused on the first death and applying it to the value of the NRB on the second death.
This is added to the survivor’s own NRB so that potentially two NRBs could be available on the second death.
For example:
If you decide to leave assets worth £81,250 to your children and everything else to your spouse on your death, you will use 25% of your NRB (81,250/325,000), so 75% will be unused and available to transfer. If your spouse dies some years later when the NRB has increased to £350,000, the amount available on her death will be:
|
Survivor’s NRB |
£350,000 |
|
75% of first deceased’s NRB at rates on survivor’s death (75% x £350,000) |
£262,500 |
|
Total available deduction for IHT on your spouse’s |
£612,500 |
How the relief is claimed
The claim is made to HMRC Capital Taxes, usually by the personal representatives of the second to die, although beneficiaries who suffer tax can also make the claim.
The time limit is within 2 years of the second death, but in most cases will be made at the same time that the IHT account is submitted to HMRC.
HMRC must be provided with enough information to show that the NRB (or part of it) was not used on the first death.
They will also need to be provided with copies of the following documents:
- Death certificate for the first spouse to die
- Grant of Representation to the estate of the first spouse to die
- the Will (if any)
- any Deed of Variation.
Special Situations
There are a number of situations where it is worth clarifying the impact of the transferable NRB. A couple of these may not come up that often, but it is as well to bear them in mind:
- The NRB can only be transferred to reduce the impact of IHT on the death of the survivor. This means that if a widow makes a lifetime gift into a discretionary trust after her husband’s death, she cannot make use any of her spouse’s unused NRB to set against that gift. So if the value transferred is greater than her own available NRB, lifetime IHT will still be payable.
- The maximum NRB that can be transferred from one spouse to another is one full additional NRB, even if the deceased has been married more than once and his former spouse(s) have not used their full NRBs.
- Where the survivor remarries after the death of his first wife and she has not used her NRB, it will be possible for the survivor to still transfer his unused NRB to his second wife, whilst using his first wife’s unused NRB on his own death. This means that on his second wife’s death, her estate benefits from her own NRB and the one transferred from her husband.
Illustration:
Victoria died leaving her whole estate to her husband, David, so she did not use her NRB. Some years later, David marries Cheryl. On David’s death, he leaves his children £325,000 (the current NRB) on trust and the rest of his estate to Cheryl. David’s personal representatives can claim Victoria’s unused NRB to set against the gift to his children. David’s own NRB will then remain unused and will be available to transfer to Cheryl’s estate for use on her death together with her own NRB.
The Future?
Q: I have a flexible NRB discretionary trust under my Will, do I need to change it?
A: The short answer is no. It is possible to end the trust within two years of the first death in favour of the surviving spouse with the effect that the deceased will be treated as having left his whole estate to the survivor and not to have used his NRB.
In the future, there will be few instances where it will be necessary to include a NRB discretionary trust so married couples or civil partnerships with fairly straightforward affairs should find that IHT planning for their deaths becomes a simpler process. However, those couples with more complicated affairs, whose combined estates are worth over two NRBs or contain assets such as business property or overseas property will still need to think carefully about IHT planning using trusts in their Wills.
Q: I didn’t want to put a trust in my Will - I just left legacies to my children using up the NRB. Do I need to change that?
A: If you want the legacies to take effect, do nothing. If you only did it for tax reasons and prefer the money to go to your widow, we suggest you should review your Will and possibly cancel the legcies so that the full transferable NRB can take effect on the second death.