Transferring an unused Inheritance Tax allowance
The Transferable Nil Rate band was brought in from October 2007, and you can now transfer any unused Inheritance Tax threshold from a late spouse or civil partner to the second spouse or civil partner when they die. This can increase the Inheritance Tax threshold of the second partner – from £325,000 to as much as £650,000 if the maximum transferable nil rate band is available. As we have said elsewhere, if IHT is involved, you would do well to consult specialists, such as the many economical contacts we have, to avoid overpaying – or worse, underpaying and ending up paying tax penalties personally.
Horrendous increases in Probate Fees as from a yet to be announced date (with threatened Court fees of up to £20,000) mean that Lifetime Planning is critical, even if it is fairly last minute. Our resident experts can help.
How does the transferable nil rate band work?
Everyone’s (well, nearly all UK domiciled folk) estate is exempt from Inheritance Tax up to a certain threshold: £325,000 at present. This threshold is also known as the ‘nil rate band’.
Married couples and registered civil partners are also allowed to pass assets to each other during their lifetime or when they die without having to pay Inheritance Tax. It doesn’t matter how much they pass on – as long as the spouse receiving the assets has their permanent home in the UK. This is known as spouse or civil partner exemption.
If someone leaves everything they own to their surviving spouse or civil partner in this way, then it is exempt from Inheritance Tax at that point. It also means they haven’t used any of their own Inheritance Tax threshold or nil rate band. This transferable nil rate band can be used to increase the Inheritance Tax threshold of the second spouse or civil partner when they die – even if the second spouse has remarried. Their estate can be worth up to £650,000 before their death causes an Inheritance Tax liability.
To transfer the unused threshold, Transferable Nil Rate Band of Inheritance Tax, the executors or personal representatives of the second spouse or civil partner to die need to send certain forms and supporting documents to HM Revenue & Customs (HMRC). HMRC calls this ‘transferring the nil rate band’ from one partner to another. With civil partners, the transferable nil rate band is only available if the first partner died on or after 5 December 2005, when the civil partnership laws came into force.
The threshold can only be transferred on the second death, which must have occurred on or after 9th October 2007 when the transferable nil rate band was introduced. It doesn’t matter when the first spouse or civil partner died. However, if it was before 1975 the full nil rate band may not be transferable as the amount of spouse exemption was limited then. There are some situations when the threshold can’t be transferred but these are quite rare. See below.
How to make the claim for Transferable Nil Rate Band of Inheritance Tax
When the second spouse or civil partner dies, the executors or personal representatives of the estate should take the following steps to claim the additional transferable nil rate band.
Step 1: Work out what percentage of the nil rate band threshold you can transfer
The size of the first estate doesn’t matter. If it was all left to the surviving spouse or civil partner, 100 percent of the threshold was unused. You can transfer the full percentage when the second spouse or civil partner dies even if they die at the same time.
It isn’t the unused amount of the first spouse or civil partner’s nil rate band that determines what you can transfer but the unused percentage becomes the transferable nil rate band.
If the deceased made gifts to people in their lifetime that weren’t exempt, the value of these gifts must first be deducted from the threshold. You can then work out the percentage available to transfer. You may also need to establish whether any of the assets that the first spouse left could have qualified for Business or Agricultural Property Relief.
To see examples of how the unused nil rate band can be transferred follow the link below.
Step 2: Assemble documents from the first death to support a claim for the Transferable Nil Rate Band
You will need all of the following documents from the first death:
- a copy of the first will, if there was one.
- a copy of the grant of probate (or confirmation in Scotland), or the death certificate if no grant was taken out.
- a copy of any ‘deed of variation’ if one was used to vary (or change) the will.
If you need help finding these documents get in touch with the relevant court service or general register office for the country you live in. The court service may be able to provide copies of wills or grants; the general register offices may be able to provide copies of death certificates.
Step 3: Complete and send in the relevant forms.
You must make the claim within 24 months from the end of the month in which the second spouse or civil partner dies.
The forms you’ll need to fill in depends on the following:
- how much of the unused threshold is being transferred to the second spouse or civil partner.
- the value of the estate when the second spouse or civil partner dies.
100 percent of the unused Inheritance Tax threshold to transfer and the value of the estate is less than twice the threshold.
If 100 percent of the unused threshold is being transferred and the value of the estate is less than twice the threshold when the second spouse or civil partner dies (£650,000 in 2011-21) the estate may be classed as an ‘excepted estate’. Follow the link below though to find out the other qualifying conditions for excepted estates. If the estate does qualify as an excepted estate, you’ll need to complete form IHT 217 to claim the unused threshold. Return this together with form IHT 205 and the forms you need for probate (or confirmation in Scotland).
What qualifies as an ‘excepted estate’ for Inheritance Tax?
100 percent of the unused Inheritance Tax threshold to transfer and the value of the estate is more than twice the threshold
You’ll need to complete form IHT402 to claim the unused threshold. Return this together with form IHT400 and the forms you need for probate (or confirmation in Scotland) if both of the following apply:
- 100 percent of the unused threshold is being transferred.
- the value of the estate is more than twice the threshold when the second spouse or civil partner dies (£650,000 in 2011-12).
Less than 100 percent of the unused Inheritance Tax threshold to transfer or the estate doesn’t qualify as an ‘excepted estate.’
You’ll need to complete form IHT402 to claim any unused threshold. Return this together with form IHT400 and the forms you need for probate (or confirmation in Scotland) if either of the following applies:
- there is less than 100 percent of the threshold to transfer.
- the estate doesn’t qualify as an ‘excepted estate’.
No unused Inheritance Tax Nil Rate Band to transfer
If there is no unused threshold to transfer you’ll only need to complete form IHT400 and the forms you need for probate (or confirmation in Scotland).
What qualifies as an ‘excepted estate’ for Inheritance Tax?
In the following two cases, the rules for transferring a threshold are different:
- if the estate of the first spouse or civil partner had qualified for relief on woodlands or heritage property.
- If the surviving spouse or civil partner had an unsecured pension as the ‘relevant dependant’ of a person who died with an Alternatively Secured Pension.
The rules are complicated and you might want to contact the Probate and Inheritance Tax Helpline for advice.
Property Nil Rate Band of IHT
The Property Nil Rate Band of inheritance tax is designed to help the beneficiaries of folk leaving assets to direct descendants. It is potentially of benefit to people whose assets, including their home are above the Inheritance Tax (IHT) threshold (or nil-rate band) of £325,000. It will mean many people with taxable estate need to review their estate planning.
The Property Nil Rate Band adds extra nil-rate band when a residence is passed on death to a direct descendant. Of course, it isn’t quite as simple as that, but this is just an outline. We will be pleased to give more detailed advice as part of an Inheritance Tax Review, one of our specialist services. Anyway, this is how the additional property nil rate band grows:
It will be:
- £100,000 in 2017 to 2018.
- £125,000 in 2018 to 2019.
- £150,000 in 2019 to 2020.
- £175,000 in 2020 to 2021.
It should then grow in line with Consumer Prices Index (CPI).
Unused nil-rate band can be transferred to a surviving legal spouse or civil partner. Usefully, the extra nil-rate band will still be available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equal value, up to the value of the extra nil-rate band, are passed on death to direct descendants.
For estates with a net value of more than £2 million, the property nil rate band will be cut by £1 for every £2 over £2 million.
The existing nil-rate band stays at £325,000 from 2018 to 2019 until the end of 2020 to 2021 and will then increase in line with CPI.
Only one residential property will qualify but personal representatives will be able to nominate which one if there is more than one. A property which was never a residence of the deceased, such as a buy-to-let property, will never qualify.
What is a “direct descendant” for Property Nil Rate Band purposes?
A child, step-child, adopted child or foster child of the deceased and the lineal descendants of such children.
A claim will have to be made on the death of a person’s surviving spouse or civil partner to transfer any unused proportion of the additional nil-rate band unused by the person on their death, in the same way that the existing nil-rate band can be transferred.
If the net value of the estate (after deducting any liabilities but before reliefs and exemptions) is above £2 million, the extra nil-rate band will be tapered away by £1 for every £2 that the net value exceeds that amount. The taper threshold at which the additional nil-rate band is gradually withdrawn will rise in line with CPI from 2021 to 2022 onwards.
The legislation will also extend the current freeze of the existing nil-rate band at £325,000 until the end of 2020 to 2021, after which it should increase with CPI.
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