With the introduction of the Finance Act 2008 the government implemented new rules regarding the nil rate transfer band, making it possible to transfer the Inheritance Tax threshold from a deceased spouse or civil partner to the surviving spouse or civil partner. This had the net effect of raising the Inheritance Tax threshold of the surviving partner from the single-person sum of £325,000 to £650,000. It has also largely replaced the need for spouses to include a discretionary trust in their Wills to reduce Inheritance Tax liability.
The rules for nil rate band transfers have undoubtedly proved to be a good thing for estates and beneficiaries looking to reduce Inheritance Tax liability; however, it has also made the probate process more complicated, increasing the value of reliable probate lawyer advice.
Understanding nil rate transfers
Nearly all estates in the UK are exempt from Inheritance Tax liability up to the value of £325,000 - this sum constitutes the nil rate band.
If a married spouse or registered civil partner has an estate with a value of less than £325,000, or they don't use the entire nil rate band threshold when they die, the surviving partner's executors can then transfer all, or a percentage of, the nil rate band threshold when the second spouse or partner then dies.
However, the transfer must be applied for by the executors – it won't happen automatically.
Making a nil rate band transfer should be a relatively straightforward process. However, the executors or administrators of the recently deceased spouse or civil partner need to certify the process by filling out a claim form from HMRC Revenue & Customs.
The claim form requires information regarding the estate of the first spouse or civil partner to die in order to calculate the unused amount of the nil rate band. This helps calculate the size of the nil rate band which can be applied to the second spouse's estate.
Who is eligible?
Nil rate band transfers are available to estates left behind by "survivors" who died on or after 9 October 2007. For the most part, the date of death of the first spouse is irrelevant to the nil rate band transfer purposes. The exception is cases where the first death occurred before 1975 – in this situation the full nil rate band may not be transferable.
In cases involving civil partners, the death of the first civil partner must have occurred on or after 5 December 2005, the date of enactment of the Civil Partnership Act.
Unfortunately, it is not possible to make a nil rate band transfer if the first death occurs following a divorce.
Does this mean there is no need for a discretionary trust?
If the purpose of a discretionary trust is purely to effectively transfer the nil rate band, it is likely that this arrangement has become obsolete – as such ir may be necessary to modify a Will by codicil. However, if the discretionary trust is designed for some other purpose – for example, to provide for children from a previous relationship or to plan for care home fees – it may still be in the testator's best interest to ensure you the discretionary trust remains in place.
Other considerations
Even if an estate has been left in its entirety to a surviving civil partner or spouse, there may be, for the purposes of Inheritance Tax, other factors which contribute to the aggregate chargeable estate. For example, gifts made within seven years of death or assets in trust.
It is possible these and other considerations might account for some or all of the nil rate band, thereby reducing the amount of unused threshold which is available for transfer.
Multiple spouses or civil partners
The law allows for more than one unused nil rate band transfer. However, this is limited to one additional nil rate band. This means that if a spouse or civil partner survives more than two partners, the nil rate band transfer can only be claimed on the first two deaths. All claims must be submitted and processed separately.
IHT liability above the nil rate band
Inheritance tax is charged at a rate of 40% on the chargeable value of an estate (the rate above the nil rate band) . The chargeable value is calculated by deducting all qualifying liabilities, reliefs and exemptions.
Time limits
Personal representatives of an estate usually have 24 months to claim a nil rate band transfer, beginning from the end of the month in which the surviving spouse died.
If the time limit is nearing, HMRC may allow for a provisional claim to be entered so that the estate can properly organise and collate all the relevant documentation.
Help from Oratto
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