The Nil Rate Band

For 2007/2008 the nil rate band was £300,000 and this rose to £312,000 for 20/08/2009 and to £325,000 from 6 April 2009.

The nil rate band (NRB) is the proportion of your estate which will not be subject to any inheritance tax. Inheritance Tax will be levied at 40% on the remainder of your estate following deduction of the NRB from the total value of your estate, (unless your entire estate is left to your surviving spouse/civil partner, in which case they will take all of it free of tax).

Your estate is made up of all of your assets at the date of your death less all of your liabilities. Included are your share of any joint assets, certain assets in trust and any lifetime gifts you may have made within seven years of your death.

It is common among married couples and civil partners to leave their entire or most of their estate to their spouses/civil partners which means that there will be little or no inheritance tax to pay on the first death. Until recently, the disadvantage of this was that the NRB was regarded as a personal entitlement and the surviving spouse/civil partner could not benefit from the unused part of the first spouse/civil partners NRB upon their death i.e. only the second spouse/civil partner’s NRB could be used against all of the accumulated assets and income in their estate. This was considered unfair as the benefit of one NRB was, in essence, completely lost unless provisions for a NRB discretionary trust had been incorporated into the Wills.

Transferable Nil Rate Bands

In its 2007 pre-budget report, the Government announced proposals for a transferable NRB and put these proposals into effect immediately. Many in the media misconstrued the proposals as a doubling of the NRB, but this is not the case. We have summarised some of the actual changes below.

Where the second spouse/civil partner died (or dies) on or after 9 October 2007, the proportion of the NRB which was not used on the death of the first spouse/civil partner will be added to the second spouse/civil partner’s NRB. For example:

The first spouse died on 10 May 1998 with an estate worth £489,200 when the NRB was £223,000. He left £400,000 of this to his wife and the remainder (£89,200) to his children:

• The wife would take the £400,000 free of tax
• The children would also take the £89,200 free of tax, as this was within the NRB.
• The unused NRB would be £133,800 or 60% of the NRB.

If the wife then died 11 June 2008, then the remainder of the first spouse’s NRB is calculated as a proportion of the NRB available on the survivor’s death and can be added to her NRB of £312,000.

Calculation:-
60% x 312,000 = £187,200

Giving a total NRB of £499,200 which could be applied to the wife’s estate.

The process
The transfer of the NRB is never automatic. To transfer a NRB, a claim by the personal representatives must be made at the time they submit the surviving spouse or civil partner’s Inheritance Tax Return to HMRC and this must occur within 2 years of end of the month in which the second spouse or civil partner died.

A claim form will need to be filled in to calculate how much of the NRB is available for transfer and various supporting documents will need to accompany the claim form, including:

• The marriage or civil partnership certificate
• The death certificate of the first spouse/civil partner
• The Will of the first spouse/civil partner if they had one and any codicils or deeds of variation
• A copy of the Grant of Probate/Confirmation of the first spouse/civil partner.

The claim form will shortly become part of the new Inheritance Tax Return. All documents relating to the death of the first spouse/civil partner should therefore be carefully stored in case they are required at some point in the future. Where we are instructed in a probate matter, we ensure that any documents of significant importance are stored carefully so that these are readily available if any claim needs to be made.

Existing Nil Rate Band Trusts

Where a NRB trust is already in existence following the death of the first spouse/civil partner and more than 2 years have passed, there is little that the second spouse can do as terminating the trust may give rise to a liability for inheritance tax, however this is something that should be discussed in further detail with us.

Where less than 2 years have passed since the death of the first spouse/civil partner and the NRB trust has yet to be formally established, an appointment of the trust assets to the surviving spouse/civil partner’s benefit (before the second anniversary and not within three months immediately after of the first spouse/civil partner’s death), will usually be treated as if the assets had been left to the surviving spouse outright. In doing so, if there is any unused NRB then this can be transferred and added to the surviving spouse’s NRB upon their death.

The changes do not mean that those couples who have provision for a NRB trust should immediately change their Wills, because there are certain very good reasons why the inclusion of a NRB trust in the Will may still be appropriate and we would be happy to discuss these with you.

To determine whether and how the new IHT rules affect you, we recommend that you seek tailored advice from our Private Client team.