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Malcolm Finney looks at Inheritance Tax planning involving the transferable Nil Rate Band between spouses and civil partners.

Introduction

Inheritance tax (IHT) at 40% on death is somewhat penal. Very few changes to the laws governing the levying of IHT are favourable to the taxpayer. However, one favourable change is the introduction of the so-called Transferable Nil Rate Band, or TNRB.

Every individual is entitled to a Nil Rate Band (NRB). On death the first £325,000 (if death in the tax year 2009/10) of the individual’s estate is subject to IHT at 0%. However, the TNRB rule permits a transfer of the whole (or part) of any unused NRB of the first spouse to die, to the surviving spouse.

Married Couples (and Civil Partners)

The transfer is possible where one or both spouses die on or after 9 October 2007. Thus, no transfer is possible where both spouse deaths occurred prior to 9 October 2007.

Example 1 – Saving £130,000

Pre-TNRB Era

Bob and Jackie Fraser are married with three children. Bob’s estate is worth £600,000. Jackie’s estate is worth £50,000. Bob and Jackie’s wills leave everything to each other, failing which their children.

Assuming Bob dies first in 2008/09 his £600,000 estate passes to Jackie under his will IHT-free due to the inter-spouse exemption.

On Jackie’s death in 2009/10 her now £650,000 estate passes to the children. Of this amount the first £325,000 is subject to IHT at 0% and the balance (i.e., £325,000) is liable at the 40% rate giving a liability of £130,000.

Post-TNRB Era

On Bob’s death, none of his NRB has been utilised, i.e., 100% of his NRB has not been utilised.

On Jackie’s death, the £650,000 estate passes to the children. However, at the date of Jackie’s death she is entitled to her own NRB (£325,000) plus that fraction of it which was not utilised by her husband on his death - i.e., 100%.

Jackie’s NRB is thus equal to:

£325,000 + 100% of £325,000 = £650,000
(In essence Jackie becomes entitled to twice her own NRB).

On leaving the £650,000 estate to her children under her will, no IHT is charged and a saving of £130,000 arises compared to the same circumstances in the pre-TNRB era.

Multiple Marriages

For those who marry more than once, and who survive their respective partners, there is a cap on the maximum amount of TNRB.

Irrespective of the number of marriages the surviving spouse is entitled to only one additional NRB.

Non-Spouses

The TNRB is available, however, only to married couples and registered civil partnerships; it is therefore inapplicable to co-habitees, divorcees and single individuals.

For such individuals the same IHT saving is possible but involves the first spouse to die leaving the equivalent of their NRB on discretionary trust for their surviving spouse and/or children. Slightly more complicated but still effective.

Don’t Forget to Claim!

On the surviving spouse’s death the TNRB must be claimed (Form IHT 402) and certain documentation needs to be provided concerning the first spouse if the claim is to succeed (e.g., will, death certificate, copies of Form IHT 205, IHT 400 etc.). It is therefore important that all documentation associated with the first spouse to die is retained.

The above article is taken from TaxInsider, TaxationWeb's own publication specifically for our Taxpayer visitors. TaxInsider is a monthly magazine containing numerous tax tips, articles, questions and answers from leading tax experts, aimed at helping taxpayers to save and reduce tax liabilities.    

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