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IHT Planning

Transferring an unused inheritance tax nil-rate band

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When it comes to inheritance tax (IHT) planning, one question we are often asked is, how to transfer any unused nil-rate band (NRB). Since 9th October 2007, it’s been possible to transfer any unused percentage of the NRB from a deceased spouse or civil partner to the surviving spouse or civil partner.

This transferable NRB is available to survivors of a marriage who die on or after 9th October 2007, regardless of when the first spouse died. In the case of civil partners, the rules are slightly different, and the first death must have taken place on or after 5th December 2005. This was the date when the Civil Partnerships Act received Royal assent in the UK.

If the first death in a marriage or civil partnership happens after the couple are divorced, then no transferable NRB is available. If the first death happened before 13th November 1974, then the full NRB might not be transferable. This is because the amount of the spouse exemption was limited before 1975.

The transferable NRB isn’t automatically applied, so it needs to be claimed. The time to claim is following the second death, not when the first spouse or civil partner dies. Claims are made using the HM Revenue & Customs form IHT402. There is a time limit for claiming the transferable NRB, which is generally two years from the end of the month in which the second spouse or civil partner died.

In order to claim, the executors or personal representatives will need to send form IHT402 and any supporting documents to HM Revenue & Customs. HM Revenue & Customs offer the following example to illustrate how the transferable NRB works in practice:

A spouse died when the threshold was £250,000. They left legacies totaling £125,000 to their children with the remainder to the surviving spouse or civil partner. The legacies to the children would use 50% of the threshold, leaving the other 50% unused.

On the death of the surviving spouse, when the threshold is £325,000, this would be increased by 50% to £487,500. If the surviving spouse’s estate isn’t worth more than £487,500 there’ll be no IHT to pay on their death. If it is, there’ll be IHT to pay on the value above that figure.

Introduced in April, the new residence nil rate band (RNRB) can also be transferred between spouses and civil partners. The unused percentage of the RNRB from the estate of the first spouse or civil partner to die can be claimed following the second death. Unlike transferring the unused NRB, with the RNRB, the transfer can take place regardless of when the first death happened. In fact, the unused percentage of the RNRB can be used even if no residential property was owned at their time of death.

There will always be an additional 100% RNRB, with the exception of cases where the first spouse or civil partner’s estate was valued at more than £2million.

One last thing, it’s been said that the happiest mourner at a rich person’s funeral is the Chancellor of Exchequer, so please don’t hesitate to contact Wells Gibson if you are concerned what impact inheritance tax might have on your own estate and wealth transfer plans.

Inheritance Tax (IHT) and the Residence Nil-Rate Band

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Recent changes to Inheritance Tax (IHT) legislation are certainly helping individuals to pay less tax on death, however it’s fair to say the system is slightly more complicated.

Last year, the government introduced a new allowance, the Residence Nil-Rate Band (RNRB) to reduce the impact of IHT on families and to make it easier to pass on their home to children and grandchildren.  The allowance applies where a residence is passed on death to a direct descendant.  The RNRB increased from £100,000 to £125,000 in April 2018 and will rise to £175,000 in tax-year 2020/21 when it will continue to rise in line with the Consumer Price Index.  One thing though, the RNRB cannot exceed the value of the home passed onto children and grandchildren.

The RNRB is different to the existing nil-rate band which applies to everyone and will remain at £325,000 until tax-year 2020/21.  Married couples and civil partners may transfer their assets to one another tax-free and the surviving partner can use both allowances.  This means that couples can pass on up to £650,000 in tax-year 2018/19. However, if the estate includes their home and is to be passed onto their children and/or grandchildren, they can pass on £900,000 when both RNRB allowances of £125,000 are included.  By tax-year 2020/21, they will be able to pass on up-to £1mn in assets tax-free.  Furthermore, the RNRB is available to anyone who has downsized, (or rightsized as we like to refer it as!) or ceased to own a home on or after 8thJuly 2015.

Some complications

Because the RNRB only applies to direct descendants, it does not apply to individuals with no children or to individuals who would like to leave their home to others not regarded as direct descendants.

Another complication is the tapered reduction in the RNRB at a rate of £1 for every £2 by which an estate’s value exceeds £2mn.  However, assets given away in the 7 years before death will not be included in the value of the estate when calculating the tapered reduction – this potentially encourages death bed tax planning to ensure one’s estate falls below £2mn!

Worth also adding that buy-to-let properties do not qualify if they have not been a residence of yours.

Final Thoughts

Despite the RNRB being welcomed by clients and their advisers, the number of individuals with an IHT liability continues to increase.

Estate planning is a key area where Wells Gibson can add value and is a core part of our Wealth Planning service – in fact, there are a wide range of effective IHT planning techniques at our disposal and these include gifting allowances, Potentially Exempt Transfers or PETs, trusts and Business Property Relief-qualifying investments.

As always, if you have questions and would like to discuss IHT further please contact us.