Transferring the inheritance tax nil rate band
One of the questions I was asked at our inheritance tax planning seminars on Thursday was about the ability to transfer the nil rate band.
Since 9th October 2007, it’s been possible to transfer any unused percentage of the nil rate band from a deceased spouse or civil partner to the surviving spouse or civil partner.
This transferable nil rate band 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 nil rate band is available.
If the first death happened before 13th November 1974, then the full nil rate band may not be transferable. This is because the amount of the spouse exemption was limited before 1975.
How to claim the transferable nil rate band
The transferable nil rate band 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 nil rate band, which is generally two years from the end of the month in which the second spouse or civil partner died.
In order to claim, personal representatives will need to send form IHT402 and any supporting documents to HM Revenue & Customs.
An example of how it works
HM Revenue & Customs offer the following example to illustrate how the transferable nil rate band 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 up half of the threshold, leaving the other half (50%) unused.
On the deceased’s death, the threshold was £325,000, so their threshold 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 Inheritance Tax to pay on their death. If it is, there’ll be Inheritance Tax to pay on the value above that figure.
What about transferring the new residence nil rate band?
Introduced in April, the new residence nil rate band can also be transferred between spouses and civil partners.
The unused percentage of the residence nil rate band from the estate of the first spouse or civil partner to die can be claimed following the second death.
Unlike transferring the unused nil rate band, with the residence nil rate band the transfer can take place regardless of when the first death happened.
In fact, the unused percentage of the residence nil rate band can be used even if no residential property was owned at their time of death.
There will always be an additional 100% residence nil rate band, with the exception of cases where the first spouse or civil partner’s estate was valued at more than £2 million.
Inheritance tax planning, including the ability to transfer unused nil rate band and residence nil rate band, can be complicated and we welcome any questions on the subject.
You can call us on 01483 274566 or email me at firstname.lastname@example.org.