Tony Wickenden: Why the transferable nil-rate band is so important

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For some time now those interested in inheritance tax planning have been following (and complaining about) the evolution of the legislation on the new residence nil-rate band – strictly, the residence nil-rate amount. The core legislation can be found in the Finance (No.2) Act 2015. The latest swathe (on the downsizing provisions) can be found in the recently enacted 2016 Finance Act.

And, yes, it is complicated, as is the whole of the legislation on the residence nil-rate band given the initially expressed simple aspiration of having no family home liable to IHT if the estate was below £1m. The most obvious way to achieve this would have been to increase the ordinary transferable nil-rate band to £500,000. But it was not to be.

The nil-rate band stands at £325,000, as it has for some time now. But let’s not forget it is transferable. And the transferable nil-rate band, for married couples and civil partners, forms an important part of overall IHT planning capabilities.

So I thought a reminder of how the transferable nil-rate band works would be helpful (in case you had forgotten, with all the concentration on relentless new legislation).

For deaths occurring on or after 9 October 2007 it is possible for the personal representatives of the deceased to make a claim for any unused portion of a former spouse’s or civil partner’s nil-rate band, irrespective of when that person died.

The amount of nil-rate band available for transfer will be based on the proportion of unused nil-rate band at the time of death of the first spouse, but at the rate applicable at the time of death of the survivor.

A maximum 100 per cent of the nil-rate band will be available, although it can be accumulated on more than one occasion; for example, if a person dies having survived more than one spouse.

Example one

Brian died in October 1992 when the nil-rate band was £150,000. His will left £75,000 to his children with the balance of his estate to his wife Katherine. Thus, Brian used 50 per cent of his nil-rate band.

If Katherine dies in December 2016 (assuming she has made no lifetime transfers in the preceding seven years) her personal representatives will be able to claim an additional £162,500 (50 per cent of £325,000) in respect of Brian’s unused-nil rate band, bringing the total nil-rate band available in respect of Katherine’s estate to £487,500.

Example two

Greg dies in June 1992 when the nil-rate band was £150,000. His will left £60,000 to a discretionary will trust with the balance passing to his wife Alison.  Thus, Greg used 40 per cent of his nil-rate band.

Alison later married Derek, who died in June 2007, also leaving 60 per cent of his nil-rate band unused. If Alison dies in November 2016 (assuming she made no lifetime transfers in the preceding seven years) then – although a combined total of 120 per cent of Greg and Derek’s nil-rate bands are unused – her personal representatives will only be able to claim an additional £325,000 (100 per cent of the nil-rate band in 2016/17) in respect of both their unused nil-rate bands (limited to a maximum of the nil-rate band), bringing the available to £650,000.

The claim must be made using form IHT402. This form must be sent to HM Revenue & Customs no later than 24 months after the end of the month in which the deceased died. For example, if the deceased died on 10 September 2015, the form would need to be sent no later than 30 September 2017.

There are various documents that need to accompany the form. These are:

  • A copy of the grant of representation regarding the spouse’s estate (confirmation in Scotland). If there is no grant, a death certificate is required.
  • A copy of the first spouse’s will.
  • A copy of the deed of variation or any similar document executed to change the people who inherited under the spouse’s will.

HMRC has made it clear the original documents or official copies do not have to be provided. Certified copies are acceptable. HMRC is looking at all claims submitted and will reject them if the information is incomplete.

Copies of certificates can be obtained from the General Register Office, and wills and grants from the Court Service. It may well be that, in the case of deaths many years ago, such records will not be available. HMRC has said it will be understanding in such circumstances.

Tony Wickenden is joint managing director of Technical Connection. You can find him Tweeting @tecconn