The nil rate band (NRB) is the cumulative amount an individual can gift on death and within seven years of death without incurring an actual charge to inheritance tax (IHT); for the tax year 2011/12 this amount is £325,000. Technically, the gifts up to £325,000 are subject to IHT albeit at a rate of 0% which, of course, produces no actual IHT charge.
Thus, for example, an individual could make a number of gifts in lifetime (within seven years of death) amounting to £200,000 which would mean that on death another £125,000 could be left by will without a charge to IHT arising on any of the gifts. If the individual died with an estate of £225,000 the lifetime gifts of £200,000 plus the first £125,000 of the estate would be subject to IHT at 0% with the balance of the estate of £100,000 falling subject to IHT at 40%.
In the case of a married couple each spouse is entitled to a NRB. However, unlimited transfers between spouses are normally exempt (ie simply do not fall within the charge to IHT) whether made in lifetime or on death and, as a consequence, unless care is exercised the NRB of one of the spouses may be lost and an increase in the family IHT charge may arise.
H and W each have an estate of £325,000. On H’s death he leaves his £325,000 to W; no IHT as the transfer is exempt.
On W’s death she leaves the whole £650,000 to the children which means that an IHT charge arises equal to [£325,000 x 0% + £325,000 x 40%] ie £130,000.
This aggregate charge would be reduced if H made use of his NRB on his death.
Thus, for example, H might leave the £325,000 on a discretionary trust, the beneficiaries including W plus children, or he could leave the children the £325,000. The transfer of the £325,000 to the trust (or directly to the children) is not exempt but subject to IHT at 0% ie no IHT.
On W’s death she leaves her £325,000 to the children and such a transfer is subject to IHT but at 0% ie no IHT.
Thus, by each of H and W using their own NRB, the aggregate IHT charge on their deaths has been reduced by 40% on £325,000; a significant saving.
However, H may want to leave his £325,000 to W but, as shown in Example 1, this precipitates a significant IHT charge for the family because he is not using his own NRB. Fortunately, this dilemma has now been solved following the introduction of the transferable NRB (TNRB).
The transferable nil rate band
The TNRB applies to married couples (and registered civil partnerships ie not co-habitees) where one or both spouses die on or after 9 October 2007.
What the TNRB does is to allow the surviving spouse (say, W) to use that part of the NRB which was not utilised by the first spouse (ie H) to die; this is in addition to W’s own NRB.
Taking the situation in Example 1:
On H’s death he leaves his £325,000 to W; no IHT as the transfer is exempt. None of H’s NRB has been used.
On W’s death she leaves the whole £650,000 to the children but she has the use of not only her own NRB of £325,000 but also that of H.
Technically, W’s own NRB is increased by the percentage of the NRB of H which was unused; as H used none of his NRB this percentage is 100%.
Hence, W’s NRB is her own NRB (£325,000) plus an increase of 100% of her NRB (ie £325,000) producing a NRB of £650,000.
On W’s death she leaves the £650,000 to her children and such a transfer is subject to IHT but at 0% as her NRB is £650,000 ie no IHT.
It is thus now possible for H and W to agree how their respective estates should be left in their wills without the need to ensure the first spouse to die utilises their own NRB; increased flexibility is therefore .
Two additional points to note:
• a claim must be made to transfer the NRB within 2 years of death of the surviving spouse; and
• the maximum number of NRBs available to an individual is two (ie £650,000).
The claim to transfer the NRB requires supporting documentation; it is important that such documentation is available to executors.
By Malcolm Finney