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John Whiting outlines LITRG’s campaign to rectify an injustice in the IHT Transferable Nil Rate Band rules where the first death occurred before March 1972.

Introduction

In 2008, the Government introduced a welcome Inheritance Tax relief. When a widow or widower (or bereaved civil partner) dies, their estate can benefit not only from their own tax-free band, but also so much of any tax-free band as remained unused when their late spouse or civil partner died.

But quirks in some old rules mean this relief is not available to many where the earlier death occurred before March 1972. We have challenged this anomaly, but to no avail: ministers have rejected our pleas to reconsider.

Inheritance Tax (IHT) is a tax that worries a lot of people, even if it does not raise a lot of money in the great scheme of things. It is in principle a simple tax: whatever assets you leave behind on death are valued and the total value over a set amount (the ‘Nil Rate Band’) is subject to tax at 40%. There are various exemptions and reliefs (a key one being transfers to a spouse/civil partner) and some lifetime charges; but that simple framework will serve for today.

The Nil Rate Band Transfer

One recent change very much for the better, which allayed a lot of fears and made people feel the tax would operate more fairly, was the ‘Transferable Nil Rate Band’. Under this, from October 2007, a deceased person whose previously-deceased spouse didn’t use all of their IHT Nil Rate Band (NRB) can make use of any unused proportion. So with the NRB currently £325,000, it means a married couple can have the benefit of the first to die leaving everything to the surviving spouse (exempt from IHT) with the survivor being able to anticipate a total effective NRB of £650,000. That has saved a lot of worries and artificial planning.

However, like so many tax issues, this admirable change brought with it some unfairnesses, one key one concerning a small number of elderly people whose spouses died many years ago. Despite our best efforts, we have been unable to persuade the Government to rectify the anomaly and cure the unfairness.

The Unfairness

The situation concerns someone whose spouse died many years ago, whilst Estate Duty was in operation. (Estate Duty was the forerunner of Capital Transfer Tax, itself the forerunner of IHT.) Before March 1972, when a modest spouse exemption was brought in, someone who died and left their property entirely to their surviving spouse was always chargeable to Estate Duty. They used up all of what we today call the nil rate band which means that, under today’s rules, the surviving spouse has no additional Nil Rate Band available on their decease. (The balance was that Estate Duty had a ‘surviving spouse exemption’ but that is of little value nowadays.)

We have come across a small number of individuals affected by this: mainly long-widowed, now elderly ladies, who feel very unfairly treated by the new rules. Had their husband survived until March 1972, in many cases they would not be looking at an IHT bill on their own estate.

Attempting a Cure

LITRG took up the issue and drafted amendments to the Finance Bill 2008 (which put through the transferable NRB rules) to rectify the situation. Although sympathetically received by the Opposition, the Government rejected the change. The main reason seemed to be one of difficulty in sorting out the situation after all these years.

Subsequently we made common cause with Rob Marris MP, who has a constituent affected by the anomaly and who rapidly saw both the unfairness and the ease of fixing it. We have had meetings and correspondence with HMRC and the responsible Minister. Our joint arguments were carefully considered, but no changes resulted.

Reasons for Leaving the Unfairness Alone

The HMRC/Ministerial argument against making a change seems to revolve around the difficulties of opening up old estates. This is true to a degree in that there will be a need to ascertain what happened when the first spouse died... but that is no different from any situation affected by the NRB transfer, only further back in time. Also, they argue that arrangements were made at the time under the rules then applying – but, we say, that’s true of every estate now generating a NRB transfer. Changing things now, say the Government, would create inconsistencies with estates on which tax was paid at the time. We disagree: we are not asking for the 1970 or whenever estate to be reopened: just that they be looked at from 2010 in the same way as other earlier deaths are, i.e. that leaving everything to the spouse at the time leaves a NRB available.

The (non) Result

It seems we are to be left with a handful of elderly widows and widowers, many of whom had to cope as single parents for 40 years, feeling very unfairly treated. Rob Marris’s constituent is a typical example: she was left a few thousand pounds by her late husband, but that has served to mean she can’t leave her house (effectively her only asset) IHT-free to her children.

Of course asking for a tax change that costs the government money at this time is hardly going to be popular. Many would argue that the beneficiaries would be the children, who may or may not be well off now, although all are likely to have had a childhood blighted by the loss of father or mother, perhaps with little money around. The change needed here is simple, would cost a negligible amount and would remove a tarnish from an enlightened and sensible tax measure. Why can’t that change be made?

For More Information

Take a look at LITRG’s short commentary on Understanding Inheritance Tax which gives some useful examples on how to calculate the tax on death, including the transferable NRB.