The transferable nil rate band (TNRB) is a very useful facility for married couples or civil partners for inheritance tax (IHT) purposes. The relevant provisions (IHTA 1984, ss 8A-8C) broadly allow claims for all or part of an unused IHT allowance (or ‘nil rate band’) on the death of a spouse or civil partner to be transferred to a surviving spouse (nb all references to spouses in this article include civil partners).
The surviving spouse’s nil rate band can be increased by up to 100% (i.e. a maximum of one additional nil rate band). The percentage increase is applied to the nil rate band in operation on the death of the surviving spouse (e.g. £325,000 for 2014/15).
How can it help?
The TNRB facility can help to prevent the nil rate band of the first spouse to die being left unused and wasted.
The most common reason why the nil rate band is likely to be unused on the first death is the IHT exemption for transfers of assets between spouses (IHTA 1984, s 18), which can apply to transfers during lifetime and on death (although this exemption is subject to restriction if the recipient spouse is not domiciled in the UK; see IHTA 1984, s 18(2)). Thus, if a deceased spouse leaves their entire estate to the surviving spouse, then (unless the survivor is non-UK domiciled) the legacy will normally be exempt from IHT, and the estate of the surviving spouse increases accordingly. However, the deceased spouse’s nil rate band would (unless it was used by lifetime transfers in the seven years before death) be unused.
The TNRB facility potentially provides an opportunity for the deceased’s unused nil rate band to be claimed on the death of the surviving spouse.
If the surviving spouse has been married more than once, and his or her deceased spouses did not use up their nil rate bands on death, the survivor’s estate can make a claim in respect of each previous spouse. However, as mentioned above, the nil rate band of the surviving spouse’s estate can only be increased by 100%, or one additional nil rate band (IHTA 1984, s 8A(6)(b)).
Example 1 – That’s your limit!
Anne and Bob were married for many years, until Bob sadly died on 1 March 2003. Bob left £75,000 to their daughter Karen, and the residue of his estate to Anne.
Anne subsequently married her lifelong friend Cameron in 2006. Cameron died on 10 October 2011, leaving £130,000 to his siblings, and the residue to Anne.
Anne died on 31 January 2015, leaving a chargeable estate of £900,000 to Karen.
The percentage of Bob’s nil rate band unused on his death was 70% (i.e. £250,000 nil rate band for 2002/03, less the legacy of £75,000 to Karen). Cameron’s unused nil rate band percentage was 60% (i.e. £325,000 nil rate band for 2011/12, less the legacy of £130,000 to siblings).
On Anne’s death, the unused nil rate band percentages from her two marriages amount to 130% (i.e. 70% for Bob and 60% for Cameron). However, the maximum percentage that can be claimed by Anne’s estate is 100%. A claim is therefore made to transfer 100% of £325,000 (i.e. the nil rate band maximum for 2014/15), to add to Anne’s own nil rate band of £325,000. The total nil rate band available on her death is therefore £650,000.
The IHT payable on Anne’s estate is £100,000 (i.e. (£900,000 – £650,000) x 40%).
Note that in order to make a claim to transfer unused nil rate band, the surviving spouse must have been married to the deceased on the first death (i.e. their earlier divorce would prevent a claim to transfer the deceased’s nil rate band).
Tying the knot
In certain circumstances, an unmarried couple may have up to four nil rate bands available between them.
For example, each individual might have been married previously, and a TNRB may be available from their deceased spouse. By remaining unmarried and leaving their estates to chargeable legatees (e.g. each other), it may be possible to utilise their own nil rate band, and also the transferred nil rate band of their deceased spouse.
However, what might happen if the couple decided to get married?
Example 2 – Let’s get together
David, a 78 year old widower with a son and daughter, inherited his wife’s estate on her death in December 2010. David owns a house and investments, worth £800,000 in total.
Edna, a 75 year old widow with two sons, also inherited her late husband’s estate in January 2012. She owns a house and other assets worth £700,000 in total.
David and Edna have been friends for many years, and in December 2014 decided to live together. They are now considering marriage, and having their wills drafted to leave everything to each other.
However, getting married and leaving everything to each other would result in the nil rate band of either David or Edna being wasted on the first of them to die; the same would apply to the unused nil rate band of the spouse from their first marriage.
Whilst a further unused nil rate band would arise on the first death, it could not be transferred to the survivor, because their maximum nil rate band entitlement had already been reached. The deceased spouse’s TNRB entitlement from their first marriage could not be transferred for the same reason.
If David and Edna did get married in the above example, consideration could be given to having their wills drafted differently. For example, instead of leaving their estates to each other, they could consider leaving legacies to chargeable beneficiaries instead (e.g. to their children) on the first of David or Edna to die, sufficient to use the deceased’s nil rate band plus the TNRB from the individual’s first marriage.
Alternatively, if (say) David died after they were married and left his entire estate by will to Edna, it may be possible to achieve the same result if the will was varied within two years of his death, under IHTA 1984, s 142.
If a spouse (e.g. wife) has survived more than one marriage, her personal representatives may be able to claim additional nil rate band from more than one estate, subject to the overriding 100% maximum mentioned above. A separate claim is required in respect of each estate, within the permitted period for doing so (see IHTA 1984, s 8B(3)).
Whilst this article has focused on preserving the TNRB, there may be other (non-IHT) reasons for using the nil rate band on the first death (i.e. so that there is no nil rate band to transfer), as opposed to leaving everything to the surviving spouse.
For example, some married couples prefer their wills to include a nil rate band discretionary trust on the first death, with a view to sheltering property from care fees, or for asset protection purposes (e.g. in the event of a future marriage breakdown). Such considerations are beyond the scope of this article. Expert professional advice should be sought if necessary.
The above article was first published by Tax Insider (www.taxinsider.co.uk).