Twice nothing is worth a lot
The proposal to allow spouses and civil partners to transfer their inheritance tax (IHT) nil rate bands has been one of the bright spots of Alastair Darling's so far brief and troubled Chancellorship. The change means that where a surviving spouse or civil partner dies on or after 9 October 2007, their executors may be able to claim not only the nil rate band available to them (£312,000 for 2008/09) but also the proportion of the nil rate band unused on the death of the first spouse or civil partner.
For example, if the first spouse or civil partner dies in 2008 and leaves all their estate to the surviving spouse or civil partner who dies in 2011, then, on the second death, the estate of the survivor may have a nil rate band of say £350,000, plus another £350,000. This represents the full nil rate band of the first spouse or civil partner that was unused on their death.
If the first spouse or civil partner had made transfers to their children of say £156,000 on their death, then 50% of the nil rate band would be available and the total nil rate band due on the second death would be £525,000 (£350,000 + £175,000).
One of the real bonuses of the rules is that whilst they only apply where the surviving spouse or civil partner dies on or after 9 October 2007, the date of death of the first spouse or civil partner is irrelevant. This means that some significant tax savings can be made.
Supposing the first spouse or civil partner died in January 1995. The nil rate band then was £150,000. If they made no chargeable transfers then the unused proportion, 100% of the nil rate band, becomes available to the estate of the survivor but at the current rate, effectively turning £150,000 into £312,000!
Documentary evidence
HMRC have said that they will require information to support a claim for the transfer of a nil rate band. This will include:
- the marriage certificate or civil partnership registration of the couple;
- the death certificate of the first spouse;
- the Will of the first spouse;
- probate details of the first spouse.
This information should be retained on future deaths and, given the advantages of the additional nil rate band, it may also be important to do some research to make sure that all of this information is available in respect of deaths before 9 October 2007.
Seven year rule
One point to be careful of is that, although the terms of the Will of the first spouse or civil partner may leave everything to the survivor and the full nil rate band appears to be intact, the operation of the IHT rules on the first death may have meant that some or all of the nil rate band may actually have been used. For example, gifts made in the seven years before death may have become chargeable and so used up part of the nil rate band.
Obviously, these rules are not straight forward. Please do get in touch if you would like any help with IHT planning.
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