The inheritance tax (IHT) allowance (or ‘nil rate band’) is available to individuals, including each spouse and civil partner. The transferable nil rate band (TNRB) is a helpful facility for married couples and civil partnerships. The TNRB provisions (in IHTA 1984, ss 8A-8C) broadly allow claims for unused nil rate band of a deceased spouse (or civil partner) to be transferred to the surviving spouse.
The survivor’s nil rate band can be increased by up to 100%, or one additional nil rate band. Thus, a surviving spouse’s nil rate band can increase to a maximum (for 2014/15) of £650,000 (i.e. £325,000 x 2).
One nil rate band…or two?
Care is needed when dealing with wills referring to the nil rate band, particularly if a surviving spouse has the benefit of an additional nil rate band available from the first to die.
For example, if the will of a surviving spouse or civil partner leaves a sum ‘that is equal to an amount that will not give rise to an IHT charge’ to (say) a family discretionary trust, in HMRC’s view that amount will include nil rate band that has been transferred (IHTM43065).
HMRC guidance warns that when calculating an IHT ‘exit charge’ of the discretionary trust before its first ten-year anniversary (e.g. if the trust holds investment properties, and the trustees transfer one of those properties to a beneficiary nine years after the trust was created), if the historic value of the trust is greater that the single nil rate band that applies when the property leaves the trust, there will be a positive rate of tax (under IHTA 1984, s 68(1)), and an IHT liability arises on the exit.
The inclusion of the transferred nil rate band from the first death with the survivor’s own nil rate band can also cause difficulties when trying to interpret the survivor’s intentions in their will, such as where a charity is a residuary beneficiary.
Example – Leaving the increased nil rate band
John died in 2008, leaving all his estate to his UK domiciled wife Susan. The spouse exemption for IHT purposes means that John’s nil rate band was unused, and could be transferred to Susan.
Susan wished to leave an amount equal to her own nil rate band, plus John’s transferred nil rate band, to family members. The residue of Susan’s estate is left to her favourite charity.
Susan died in June 2014, with an estate worth £800,000.
Hopefully, Susan’s will is unambiguous in leaving her increased nil rate band of £650,000 to family members, and the balance to charity (i.e. £150,000). Otherwise, the charity may argue that Susan intended to leave only £325,000 to family members, and to leave it the balance of £475,000.
Disputed nil rate band
In Loring v Woodland Trust  EWHC 4400 (Ch), the deceased died on 1 September 2011. Her will included the following nil rate band clause, with residue being left to charity:
“My trustees shall set aside out of my residuary estate assets or cash of an aggregate value equal to such sum as is at the date of my death the amount of my unused nil rate band for Inheritance Tax and to hold the same for such of the following as shall survive me…”
The net value of the deceased’s estate was £680,805. She survived her husband. Her personal representatives were therefore able to claim her husband’s transferable nil rate band in full. The question arose whether the effect of the above will clause was to pass £325,000 (i.e. the deceased’s nil rate band) or £650,000 (i.e. the deceased’s nil rate band, plus her husband’s) to the beneficiaries under that clause, who were members of the deceased’s family. The residuary gift to charity was therefore either £355,805 or £30,805.
The charity contended that the family was only entitled to the deceased’s nil rate band of £325,000, and not her husband’s transferred nil rate band as well. This would increase the gift to the charity. The family argued the opposite, such that the legacy to them was £650,000.
The High Court considered the construction of the above clause in establishing its effect (nb there was no real extrinsic evidence of the deceased’s intentions at the time she made her will). The Court concluded that the clause should be construed to mean that the legacy to the family amounted to £650,000, being the amount of the enhanced nil rate band.
Help from HMRC!
It is interesting to note that in reaching its judgment, the Court considered that the clause was similar to the following specimen clause in HMRC’s guidance at IHTM43065 mentioned above, which HMRC states will allow the “uprated” nil rate band to be transferred:
‘I give free of tax to my trustees such sum as at my death equals the maximum amount which could be given to them by this Will without inheritance tax becoming payable in respect of my estate’
By contrast, HMRC’s guidance gives the following examples of the wording of legacies which have the effect of giving away only a single nil rate band:
- ‘To my trustees such sum as I could leave immediately before my death without IHT becoming payable’
- ‘I give free of tax to my trustees an amount equal to the upper limit of the nil per cent rate band in the table of rates in Schedule 1’.
- ‘To my trustees an amount equal to the nil rate band in force at my death’.However, it should be borne in mind that HMRC guidance is not generally binding in law.
The Loring case illustrates the importance of clear drafting in wills, particularly where ‘nil rate band legacies’ are involved.
In addition, problems can arise if any gifts to charities are not carefully worded (see also RSPCA v Sharp & Ors  EWCA Civ 1474), and care is therefore needed when dealing with charitable gifts.
Have your will prepared by a suitably qualified and experienced professional, and avoid using ‘homemade’ wills.
The above article was first published by Tax Insider (www.taxinsider.co.uk).