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When a person dies, they can pass on a proportion of their estate tax free. If they do not use up the full entitlement, then this can be transferred over to their spouse or civil partner and is known as the transferable nil rate band. The transferable nil rate band was introduced in the Finance Act 2008. The effect of the transferable nil rate band is that where a surviving spouse or civil partner dies, their nil rate band will be increased by the amount that was not used on the earlier death of their spouse or civil partner. Here we will look at the practicalities and consequences surrounding the transferable nil rate band.

What Is the Nil Rate Band?

The nil rate band is the tax-free allowance that every person is entitled to be applied to their estate after they die. No inheritance tax is due on the part of their estate that is below this threshold. The rate currently stands at £325,000, and it is only once an estate exceeds this value that any inheritance tax will be owed. The rate is currently frozen, though it could at some point increase in the future.

On the date of a person's death, their entire estate is valued. This includes everything that they owned, as well as assets with a beneficial interest. So, a person's estate includes property, assets, bank accounts, investments and insurance policies.

Once the estate has been valued, it is necessary to calculate if there is any inheritance tax due. First of all, it must be determined if any exemptions can be applied to the estate to reduce the amount of inheritance tax that will be payable. Various tax exemptions can be applied at this point, including gifts to exempt beneficiaries, for example, a spouse or civil partner (spousal exemption). Any inheritance paid to these parties will not incur any inheritance tax.

Where a gift is made to any other beneficiary that is not exempt, any assets that fall above the nil rate band that do not qualify for any other exemption (such as a charitable donation) will have inheritance tax applied to it at a rate of 40%.

What Is the Transferable Nil Rate Band?

Everyone is entitled to a nil rate tax band for inheritance tax calculations. The executors of a deceased’s estate can claim to transfer any unused basic threshold where the spouse or civil partner dies.

Where a person leaves their entire estate to their spouse or civil partner, they will not use any of their nil rate band since the recipient is an exempt beneficiary. The deceased's nil rate band can then be "passed" onto their spouse or civil partner for them to use together with their own, in effect giving the surviving spouse or civil partner a £650,000 tax-free allowance.

While the benefit of the unused nil band rate passes to the estate of the surviving spouse or civil partner, it is not actually necessary for assets to have passed to the spouse or civil partner on the first death. This means that the nil band rate can still be transferred where the value of the estate is below the nil band rate at the time of the first death, even where assets are passed to different beneficiaries. Where a person leaves some of their estate to non-exempt beneficiaries (children any other relatives or friends), but the value is below the nil band rate, the remaining value can be passed to the surviving spouse or civil partner. For example, where a person leaves 25% of their estate to non-exempt beneficiaries and 75% to their spouse or civil partner (the exempt beneficiary), then only £342,750 (75%) of the nil band rate will be transferred to the surviving spouse, giving them a total of £568,750 once they add this to their own nil rate band.

What Are the Conditions of the Transferable Nil Rate Band?

Transferable nil rate bands only became possible after 9th October 2007. The death of the second spouse or civil partner has to be after this date for the exemption to apply. However, it does not matter when the first spouse in the relationship died. For civil partners, the first death must have occurred after the 5th December 2005, which is when the Civil Partnership Act became law in the UK. The surviving spouse or civil partner must also have been domiciled in the UK.

Where a marriage or civil partnership ends due to divorce or dissolution of the civil partnership and one of the parties then dies, any unused nil band rate will not be transferable to their former spouse or civil partner. It is only possible to transfer any unused nil rate band where the relationship ends due to the death of the partners in the relationship.

Any lifetime gifts or assets that were chargeable on the first death (ie: within seven years leading up to the death) will use up the nil rate band in the usual way, reducing the amount that can be transferred.

The relevant paperwork must be completed and submitted to HMRC within 24 months of the second person passing away (taken from the end of that month) for the exemption to be applied. The executor or personal representative of the deceased person needs to provide the relevant documentation to show that the exemption applies.

  • For more on inheritance tax planning, read our article on How To Reduce Your Inheritance Tax Bill’ here.

Contact Lewis Nedas Inheritance Tax Planning Solicitors in London

At Lewis Nedas, our specialist tax solicitors are regularly involved in helping clients organise their estate, to reduce its liability to pay inheritance tax. We provide a service that offers legal advice reflecting your needs. Our team understand and have vast experience navigating the complex and changeable legal framework concerning tax. We will work with you to make sure you understand how the tax laws will impact you, and discuss the options that would suit your particular circumstances. If you have any questions regarding estate planning or inheritance tax issues, please contact us.

For further information or to speak to our solicitors, please telephone us on 020 3811 6784, complete our online enquiry form.

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