Inheritance Tax: Transferable Nil Rate Bands explained
Everyone has an allowance which they can leave free of Inheritance Tax on their deaths. This amount is referred to as the Nil Rate Band and is currently £325,000.
Furthermore, no tax is payable when an Estate is left to a spouse or civil partner.
The transferrable Nil Rate Band was introduced in the Finance Act 2008 and is available where someone has died on or after 9 October 2007, even if their spouse or civil partner died before this date.
Where a married couple leave everything to each other in their Wills it is now, not only exempt from Inheritance Tax but it means they have not used their own Nil Rate Band and it can be transferred to their surviving spouse or civil partner. Where there have been gifts to other family members or friends on the first death, which are below the Nil Rate Band, it is possible to transfer the unused part of the Nil Rate Band to surviving spouse or civil partner.
For example if the first spouse had left £162,500 to their children and the remainder of their Estate to their spouse there would still be half a Nil Rate Band to transfer to the surviving spouse.
Prior to October 2007 a married couple who left everything to each other wasted one of their Nil Rate Bands and so it was common for them to include a Discretionary Trust in their Wills to make sure both Nil Rate Bands were used. There are still situations where these Discretionary Trusts are useful, such as where there are children from a previous marriage, or if you want to plan for potential care fees. However, they are no longer necessary to save Inheritance Tax. If you do have a Nil Rate Band Discretionary Trust in your current Will, you may want to consider reviewing it.
It may be helpful to demonstrate the way the transferrable Nil Rate Band works by way of an example: Mr X has assets worth £325,000 and Mrs X has assets of £325,000. Mr X died and left everything to Mrs X.
Pre October 2007
There was no Inheritance Tax payable on the death of Mr X as the gift was below the Nil Rate Band and exempt from tax in any event as the gift was to a spouse. When Mrs X died she had assets worth £650,000 and there was Inheritance. Tax to pay of £130,000 as she only had one Nil Rate Band.
Post October 2007
There was no Inheritance Tax payable on the death of Mr X as the gift was below the Nil Rate Band and exempt from tax in any event as the gift was to a spouse. When Mrs X died she had assets worth £650,000 and there was no Inheritance Tax to pay as she had two Nil Rate Bands.
This is a complex area of the law and difficult to explain in a short article. If, having read this, you would like to discuss your circumstances, please make an appointment; the initial consultation is free. For further information, please contact Rachel Conroy on 01772 258321.
My first wife died intestate in 1992 and all went to me. There were no significant joint assets and she made no recent gifts. Although the documentation no longer exists, can I expect to receive a 100% transferable nil rate band (NRB)?
I’ve now married a younger woman and am making my will. If I were to pass £300K in legacies when pre-deceasing my wife, would she get a 100% transferable NRB from me?
I would appreciate your advice.
Yes, as long as you are domiciled in the UK you would receive a 100% nil rate band (£325,000.00 at present) from your late Wife, provided she left everything to you.
HMRC may require past bank statements and a copy of her Will (if there was one) to prove that your late wife did not make any gifts. Copies of bank statements can be obtained from the bank if they have been lost. There would probably be a fee for this.
Anything you leave to your new Wife would be free from Inheritance tax, so you could in theory leave up to £650,000 in additional legacies or lifetime gifts to other beneficiaries tax free.
If you gave legacies of only £300K, your new Wife would only inherit a portion of your nil rate band as the current nil rate band is £325,000. If you were to leave £325,000 in legacies i.e. use up one nil rate band, then your executors could claim 100% of the transferable nil rate band available. Please note that the total additional nil-rate bands accumulated is limited to a maximum of the amount of the nil-rate band in force at the relevant time.