Enter Your E-mail

Matthew Hutton MA, CTA (fellow), AIIT, TEP, Presenter of Monthly Tax Review (MTR), highlights some practical issues arising from the introduction of the transferable nil rate band between spouses and civil partners for inheritance tax purposes.

Matthew Hutton

Context

The following points were made in a lecture by Emma Chamberlain at IBC’s IHT and Trusts Conference in London on 22 May 2008. 

What chargeable value can be eliminated? 

The TNRB can be set against ‘the charge to tax on the death of the survivor’ (see FB 2008, clause 8A(3)).  Emma noted that:

(i) this will include tax charged on the survivor's free estate; on any reservation of benefit property included in his estate and on the value of settled property in which he had enjoyed a qualifying interest in possession at death;

(ii) it can also be set against tax on a failed PET (which is tax arising on the death of the survivor) which will take priority over the s4 charge on death.

Example

Roz died in 2003 leaving everything to husband Ron. At Christmas 2007 he stablishes a trust for the benefit of his grandchildren by settling property worth £600,000. He dies shortly afterwards.

The IHT position is as follows: 

(a) The creation of the settlement is an immediately chargeable transfer on which the IHT charge is £600,000 - £300,000 = £300,000 x 20% = £60,000.

(b) On Ron's death the transfer is now taxed at death rates, but Roz's transferred nil-rate band can now be used so that there is no extra charge. BUT NOTE there is no question of recovering any of the tax already paid. So in effect the transferred NRB has provided relief at only 20% not 40%.

(c) Normally the claim will be made by the survivor's PR's, but it does not have to be: for instance, they may have no interest in the matter eg where any transferred amount will be set against a failed PET. In these circumstances the donee could make the claim. See s 8B.

(d) New s 8B(2) caters for the situation where the failure by those entitled to make a claim has a detrimental effect on the amount of allowance that may be claimed on the death of the survivor's second spouse. Suppose Betty dies leaving everything to Bill and then he dies with a chargeable estate of say £200,000 which he leaves to the children. There is no incentive for Bill's executors to claim the nil-rate band of Betty but, if Bill has remarried Brenda, his new spouse might want to maximise the unused NRB. So ideally a claim would be made on Bill's death by Brenda to use Betty's NRB against this £200,000, leaving Bill with a full unused NRB that can be used on Brenda's death. Can this be done or does Bill need to leave assets of £612,000 on his death?  Emma thinks it can.

(Emma Chamberlain lecture notes 22 May 2008)