Inheritance Tax

The Pre-budget Announcement

The following is an extract from an HM Revenue & Customs publication on the subject.

  1. In his pre-budget report, the chancellor of Exchequer announced that from 9th October 2007, it will be possible for spouses and civil partners to transfer their nil-rate band allowances so that any part of the nil-rate band that was not used when the first spouse or civil partner died can be transferred to the individual's surviving spouse or civil partner for use on their death.
  2. HMRC will issue more detailed guidance shortly: what follows explains the basics of the scheme. Detailed guidance on other aspects of the IHT rules is available from the HMRC website as usual and should be read in conjunction with this document.


    3. Commencement

  3. The transferable allowance will be available to all survivors of a marriage or civil partnership who die on or after 9th October 2007, no matter when the first partner died/dies.
  4. The claim to transfer unused nil-rate band must be made by the accountable persons when the surviving spouse or civil partner dies and not when the first spouse or civil partner dies.
  5. The increased nil-rate band does not replace the single nil-rate band available to the survivor that determines whether or not their estate is an excepted estate (see paragraph 14 below).


    6. How will the transfer work

  6. Where a valid claim to transfer unused nil-rate band is made the nil-rate band that is available when the surviving spouse or civil partner dies will be increased by the proportion of the nil-rate band unused on the first death. For example, if on the first death the chargeable estate is £150,000 and the nil-rate band is £300,000, 50% of the nil-rate band would be unused. If the nil-rate band when the survivor dies is £325,000, then that would increase by 50% to £487,500.
  7. The amount of the nil-rate band that can be transferred does not depend on the value of the first spouse or civil partner's estate. Whatever proportion of the nil-rate band is unused on the first death is available for transfer to the survivor.
  8. It is important to remember that even if all the assets passing under the Will are left to the surviving spouse or civil partner there may be other components of aggregate chargeable 'estate' on death for IHT purposes (such as assets in trust, or gifts to other people made within 7 years of death). If present, these may use up some or all of the nil-rate band in the normal way, and so reduce the amount of unused nil-rate band that may be available for transfer.
  9. The rules apply in the same way whether the first spouse or civil partner to die leaves a Will or dies Intestate.
  10. The rules allow unused nil-rate band to be transferred from more than one deceased spouse or civil partner, up to a limit of one additional nil-rate band. So if someone has survived more than one spouse or civil partner, then on their death the accountable persons may be able to claim an additional nil-rate band from more than of the one relevant estate. A separate claim form should be completed for each spouse or civil partner who died before the deceased. However the total additional nil-rate band accumulated for this purpose is limited to a maximum of the amount of the nil-rate band in force at relevant time. Below are some examples showing how the scheme works.


    11. Existing Wills

  11. The new rules will not change the effect of existing Wills. So people who have, for example, a nil-rate band trust written into their Will do not have to take any action as a result of this measure. But if someone wants to change their Will to take account of the new rules, Waterfront can advise on appropriate changes for your circumstances.
  12. Where someone dies after 9th October 2007 with a nil-rate band discretionary trust in their Will, an appointment of the trust assets in favour of the surviving spouse or civil partner (before the second anniversary of the death, but not within the 3 months immediately following the death) would normally be treated for IHT purposes as if the assets had simply been left to the surviving spouse or civil partner outright. Ending the trust in this way would me that the nil-rate band was not used on the first death, and so the amount available for eventual transfer to the surviving spouse or civil partner would be increased accordingly.


    13. Immediate post death interests

  13. Where individuals leave assets on trust with a life interest for their surviving spouse or civil partner, with the remainder passing on their spouse or civil partner's death to someone else (for example their children), there is no IHT to pay on the first death because spouse or civil partner exemption applies. So if the entire estate is left in trust to the surviving spouse or civil partner, the nil-rate band would be available for transfer to the estate of the survivor on their eventual death in the same way as if the estate had been left to them absolutely.


    14. Link with reporting 'excepted estates'

  14. Any additional nil-rate band is only relevant in establishing whether or not any tax is payable on the estate of the survivor – it does not replace the individual nil-rate band amount that determines the excepted estate limit for reporting purposes. If when the survivor dies, their gross estate exceeds the individual nil-rate band amount applicable at the time of their death, the estate cannot qualify as an excepted estate. The accountable persons will still need to deliver form IHT200 and make their claim for the transferable nil-rate band on the death of the survivor.

You will note that this is a very complex situation which requires specialist advice, we would be pleased to meet with you to discuss your specific requirements, with no obligation on your part.

 

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