This article provides a summary of the changes introduced on 9 October 2007 relating to transferable nil-rate bands which received Royal Assent in the Finance Act 2008.
The Pre-Budget Report in October 2007 announced changes to the use of individuals’ nil-rate bands (NRBs). The changes allow a claim to be made to transfer any unused UK inheritance tax (IHT) NRB on a person’s death to the estate of their surviving spouse or civil partner* who dies on or after 9 October 2007. These changes affect:
- individuals who are married, or individuals in a civil partnership*, or
- individuals whose spouse or civil partner died before 9 October 2007 and did not use their entire available NRB.
*As defined by the Civil Partnership Act 2004
What this means
The changes enabled the unused NRB to reduce the IHT liability on the surviving spouse or civil partner’s estate.
Mr and Mrs Wright are married. Mrs Wright dies on 1 November 2009 leaving her whole estate to Mr Wright (therefore leaving 100% of the NRB available). Mr Wright dies on 1 February 2016 – his executors have his available NRB and can claim to transfer Mrs Wright’s unused NRB – for tax year 2015/16 this would equate to £650,000 (£325,000 x 2).
Where part of the NRB had been used on the first death, the amount of the NRB available to be transferred will be based on the proportion of the NRB that was unused.
Where a valid claim to transfer an unused NRB is made, the proportion represents the amount unused on the first death. For example, Mr Jones predeceases his wife and the estate is £150,000 and the NRB is £300,000 (2007/08) so 50% of the NRB is used. If the NRB when Mrs Jones, the surviving spouse, dies is £325,000 (2015/16) then that would be increased by 50% to £487,500 ((50% of £325,000) + £325,000).
Unused NRB – maximum amount available
The maximum additional amount available to any individual estate eligible to claim is 100% of the current NRB i.e. the deceased’s NRB plus the unused NRB. Where a person dies having survived one or more spouses or civil partners this limit still applies although it may be accumulated up to 100%. For example, a widow who survives two husbands can utilise any unused NRB from the estate of each deceased spouse up to a maximum of 100% of the current NRB.
Joan marries Jack Johnson. Unfortunately Jack dies leaving 50% of his NRB unused. Joan remarries some years later to Peter Parks. Peter also predeceases Joan leaving 75% of his NRB unused. On Joan’s death, her executors are able to utilise her NRB of £325,000 (2015/16) and 50% of Jack’s and 50% (not 75%) of Peter’s giving a further £325,000 NRB.
How to make a claim for the unused NRB
When completing a claim form there are two parties generally referred to, ’the spouse or civil partner’ and ‘the deceased’.
The following example will help to identify who these parties are.
John and Mary Smith are married. John Smith died on 1 December 2009 only using 40% of the available NRB at that time. For the purposes of this example he would be regarded as ‘the spouse or civil partner’. Mary Smith died on 1 November 2015 with an estate worth £750,000. For the purposes of this example she would be referred to as ‘the deceased’.
Form IHT 400* will be required on the second death (Mary Smith in the example). There will be a requirement to keep sufficient records including copy documents from the first death (John Smith in the example above) to enable a claim to be successfully processed, as any claims to transfer any unused NRB amounts will usually be made by the personal representatives of the estate of the last spouse or civil partner to die when they make an IHT return.
Process and record keeping
To make a valid claim, both IHT 400* and IHT 402* would need to be completed including all supporting documents to make the claim.
The supporting documents would include copies of:
- The death certificate for the first to die.
- The marriage certificate or civil partnership certificate for the couple.
- If the spouse or civil partner left a will, a copy of it.
- The grant of representation (confirmation in Scotland).
- Any deed of variation or similar documentation.
A claim must usually be made within 24 months from the end of the month in which the survivor dies.
For estates where the spouse or civil partner died some time ago, obtaining documents to support the claim may prove difficult. The onus, however, will be on the personal representatives to prove there is a valid claim to be made.
Additional information which would aid any claim by the surviving spouse or civil partner’s personal representatives includes:
- HMRC return for the first spouse or civil partner (IHT 400 or IHT 402 or forms C1* and C5* in Scotland).
- Any valuations of assets that pass under the will (or intestacy) other than to the surviving spouse or civil partner covered by the spouse exemption.
- Any evidence to support the availability of relief (such as agricultural or business relief) where assets pass to someone other than the spouse or civil partner.
In addition to the above, there may be other assets or relief received, about which the personal representatives will need to pass on further information to validate the claim. Previous gifts, life interests in trusts and pension assets are areas which need consideration.
* Available from www.hmrc.gov.uk