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.