Transferable Nil Rate Band

By | 30 November 2009

The introduction of the Inheritance Tax (IHT) transferable nil rate band facility in Finance Act 2008 has made life much easier for married couples (and civil partners) in terms of enabling the nil rate band to be utilised on the first death.

In certain circumstances, up to four nil rate bands may be available. For example, a co-habiting couple who have been married before may each have their own nil rate band, and also an unused nil rate band from their deceased spouses. However, the position could worsen if the co-habiting couple decides to marry.


Edith is a widow who inherited an estate of £750,000 from her husband. Frank had also inherited his late wife’s estate of £800,000. Edith and Frank met whilst on holiday, and set up home together. If they remain together but do not marry, there are potentially four IHT nil rate bands available, i.e. their own nil rate bands and those of their deceased spouses.

In the above example, what if Edith and Frank decided to get married? Frank wishes to make an IHT-efficient will. He has a ‘double’ nil rate band, but cannot pass this to Edith, who already has the additional nil rate band transferred from her first husband. Frank will waste his double nil rate band if he leaves his estate to Edith. 

Frank could consider including a legacy to chargeable beneficiaries on the first death (e.g. to other family members and/or a discretionary trust), sufficient to use his own nil rate band plus the transferred nil rate band from his first marriage.

If Frank’s double nil rate band passes to a discretionary trust, it should be remembered that such trusts attract IHT charges (e.g. 10 year anniversary and exit charges). The trust could only benefit from a single nil rate band for the purposes of calculating these charges. Frank may therefore wish to create ‘pilot’ trusts (i.e. trusts set up with a nominal amount of cash) during his lifetime. He could then leave funds to those trusts in his will.

Pilot trusts

The potential benefit of pilot trusts is that each trust may have its own nil rate band. Subject to the value of the trust property, it may be possible to avoid IHT charges arising within them. This is because of the way in which IHT is computed for ‘relevant property’ trusts, particularly where a settlor has a full nil rate band available.

However, care is needed when creating pilot trusts, for example to avoid the IHT rules regarding ‘related settlements’ in IHTA 1984, s 62 (i.e. settlements created by the same settlor on the same day). Thus two or more pilot trusts could be created consecutively with nominal sums over a period of time. If further funds are subsequently added to the pilot trusts on the same day (e.g. under Frank’s will on death, in the above example), the IHT rules for ‘added property’ provide that the availability of the nil rate band in each pilot trust should be unaffected (IHTA 1984, s 67(3)(b)(i)).

As mentioned, it is important to ensure that the settlor’s nil rate band is unused when the pilot trusts are created, and also that no further gifts or transfers are made between the trusts being created and death, because of the way in which IHT charges operate for trusts. Specialist advice is recommended, based on the specific circumstances.

The above article is reproduced from ‘Practice Update’ (November/December 2009), a tax Newsletter produced by Mark McLaughlin Associates Ltd. See the Newsletters section.