Inheritance Tax (IHT) is chargeable on assets held at death and certain lifetime gifts which are over and above the 0% threshold known as the “nil-rate band” (NRB). The rate of tax on death is 40%, subject to any available reliefs and exemptions.
Given, however, that the NRB is currently frozen at £325,000 until tax year 2017/18, and it has been estimated that an extra 5,000 estates will be brought into the IHT net as a result, this article provides a reminder of the importance of establishing whether or not a ‘transferable NRB’ can be claimed.
What is the transferable NRB?
The Finance Act 2008 introduced legislation to allow a claim to be made to transfer any unused NRB on a person’s death to the estate of a surviving spouse or civil partner who dies on or after 9 October 2007, irrespective of when the first spouse or civil partner died.
The amount that can be transferred is the percentage of unused NRB on first death, and this percentage is then applied to the value of the then NRB when the survivor dies.
The maximum percentage of unused NRB that can be claimed is 100% (which would double the NRB available) and this allowance can be built up from the estates of more than one deceased spouse or civil partner, subject to the overall 100% limit not being exceeded.
So, if 100% can be claimed and a surviving spouse dies when the NRB is still £325,000, their own NRB will be doubled to £650,000.
Claiming the additional NRB
On second death, the personal representatives of the surviving spouse or civil partner will need to submit a form, IHT402 to HMRC together with form IHT400 to claim the amount of unused NRB that is available for transfer.
These claim forms have to be submitted within 24 months from the end of the month in which the survivor dies, together with a copy of the following documents:
• If a Will was made, the Will of the first to die and the grant of probate
• If no Will was made, details of how the estate was devolved under the intestacy rules and the grant of letters of administration.
• Deed of variation (if applicable).
Valuations of the following, where relevant, would also be required in order to complete the IHT402 form:
Any potentially exempt and chargeable lifetime transfers which the first to die had made in the 7 years before their death
• Any gifts with reservation made by the first to die
• Any assets held in trust to which the first to die was beneficially entitled
• Any assets owned personally by the deceased on first death, including their share of any jointly held assets, that passed to a non-exempt beneficiary (e.g. to children)
• Any assets that passed on first death in to a discretionary will trust
• Any assets that passed on first death into an ‘interest in possession’ trust if the beneficiary with the IIP was anyone other than their spouse; and
• Any other IHT exemptions and reliefs (such as business property relief) that may apply.
Whilst this might not seem to be an onerous process, it is therefore important that the relevant documentation on first death, including evidence of the value of any gifts made in the 7 years before first death is recorded, and kept, in order to make this claim.
It is possible in some cases that the personal representatives may find themselves in a position where they could make a claim but are unable to do so simply because these documents have not been retained or have been misplaced.
It is also important to remember though that whilst NRB planning is no longer necessary for most people following the introduction of the ‘transferable NRB’ from 9 October 2007, there will still be circumstances where NRB planning using a Discretionary Will Trust (rather than leaving all the assets outright to the spouse or civil partner absolutely) may still be appropriate.
• Married couples with substantial estates that already exceed the combined NRB, or whose estates do not yet exceed the combined NRB, but it is expected that, following first death, the subsequent growth in assets will exceed the combined NRB on second death
• Either or both spouses already have an increased or the maximum additional NRB to claim from a former deceased spouse; and/or
• It is desired to avoid the full value of the combined estate, including the family home, from being assessed as assets of the surviving spouse for long term care purposes. Any assets held in a discretionary will trust should also be protected from third parties in the event that the surviving spouse is made bankrupt, or subsequently re-marries and gets divorced.
When considering Inheritance Tax it is important to take account of the possible availability of a ‘transferable’ NRB, but even if there is one, there may still be circumstances where leaving assets in trust on death may still be suitable. As ever, it always makes sense to take advice before putting any IHT planning in place and we would be happy to make recommendations based on your individual circumstances.
The Financial Conduct Authority does not regulate taxation advice
The tax treatment depends on the individual circumstances of the investor and may be subject to change in the future.
This article is for information purposes only and by no means should be construed as advice. You should contact an independent financial adviser to clarify any of the issues raised. Quest Financial Solutions do not take any responsibility for actions taken as a direct result of reading this article.