The UK’s tax system features various reliefs, exemptions and allowances, some of which are seemingly designed to encourage couples to be married (or in a civil partnership). For example, gifts between spouses are normally exempt for inheritance tax (IHT) purposes (although the exemption is subject to a restriction if the recipient spouse is non-UK domiciled).
Transferable nil rate band
A further potential IHT advantage for married couples is the facility to transfer unused IHT allowance (‘nil rate band’) between spouses. This facility is available broadly if someone dies leaving a spouse (or civil partner), and there is some unused nil rate band on the deceased’s death (IHTA 1984, s 8A(1)). The nil rate band (for 2020/21) is £325,000.
For example, if a deceased spouse leaves their estate to their UK domiciled surviving spouse, the legacy will normally be wholly exempt from IHT (but the estate of the survivor is increased). On the surviving spouse’s death, their available nil rate band can be increased by a percentage, which is broadly the amount of the deceased’s unused nil rate band divided by the nil rate band on the deceased spouse’s death.
The percentage increase in the surviving spouse’s nil rate band that can be claimed is subject to an overriding maximum of 100%.
Example 1: Transferable nil rate band maximum
Albert and Brenda were married for many years. Albert died in December 1998, leaving his estate to Brenda apart from a legacy of £90,000 to his nephew, Carl.
Brenda subsequently married her lifelong friend David in April 2010. David died in March 2016. In his will, David left £150,000 to his sister Elaine, and the residue of his estate to Brenda. In June 2020, Brenda died.
On Albert’s death, his legacy to Carl used up 40.3587% of his nil rate band at that time (i.e. £223,000), so 59.6413% is unused. David’s legacy to Elaine used up 46.1538% of his nil rate band (i.e. £325,000), so 53.8462% is unused.
The total unused nil rate band percentages for Albert and David amount to 113.4875%. However, Brenda’s personal representatives can only claim a maximum of 100%.
Get married or stay single?
As indicated above, the amount of unused nil rate band that can be claimed on the surviving spouse’s death may be subject to restriction if the surviving spouse remarried following the death of an earlier spouse, and the deceased spouse(s) did not use their nil rate band(s) on death.
In Example 1, Brenda’s personal representatives could claim in respect of both of her previous spouses, but her nil rate band could only be increased by one additional nil rate band.
The above overriding maximum transferable nil rate band of 100% can sometimes cause a dilemma.
Example 2: Living together
Frank and Grace are both aged in their early 70s, and each have adult children. They met via a dating agency for mature singles. They were both married previously, but their spouses died over ten years ago, leaving their estates to the survivors (i.e. Frank and Grace respectively). They recently had new wills drafted, leaving their estates to the survivor on the first death. Frank’s estate is worth £700,000, and Grace’s estate is valued at £800,000.
Having lived together for nearly four years, Frank and Grace are now considering marriage. What is their IHT position?
In Example 2, Frank and Grace presently have available their own nil rate band, plus the unused nil rate bands of their earlier deceased spouses (i.e. four nil rate bands in total). However, if they were to get married, and (say) Frank died first, on Grace’s subsequent death her personal representatives could only claim her nil rate band plus one extra (i.e. Frank’s) unused nil rate band. The unused nil rate bands of Frank’s and Grace’s first spouses would therefore be wasted.
However, if Frank and Grace did marry, they could consider new wills leaving a legacy to (for example) the adult children of the first to die, sufficient to use the deceased’s nil rate band plus the transferred nil rate band from their earlier marriage.
In addition to a ‘standard’ IHT nil rate band, extra (or ‘residence’) nil rate band is potentially available, broadly where the deceased’s home is passed to a lineal descendant on the death of the surviving spouse (IHTA 1984, ss 8D–8M). The residence nil rate band maximum has increased in stages, from £100,000 in 2017/18 to £175,000 in 2020/21 (subject to a tapering reduction if the value of the deceased’s estate exceeded £2 million). Where there is unused residence nil rate band, a claim can generally be made to transfer the unused element (i.e. expressed as a percentage) to a surviving spouse or (civil partner). However, the overriding maximum residence nil rate band available for transfer is 100%, or one additional residence nil rate band. Thus the residence nil rate band may need to be considered carefully as well.
The above article was first published in Property Tax Insider (February 2019) (www.taxinsider.co.uk).