Last week I looked at the fundamentals of how the transferable nil-rate band works. This week, I would like to remind you how it is claimed.
For many married couples and civil partners, the inheritance tax reforms introduced by the Finance Act 2008 suggested a return to much simpler estate planning.
There may still be legitimate reasons for one of a married couple or civil partnership to make outright gifts on the first death to children or a will trust not covered by the spouse exemption.
However, for most, especially those who have combined taxable estates of up to £650,000, it is comparatively easy to avoid IHT on the second death by leaving all assets on the first death to the survivor and for their personal representatives to claim the nil-rate band of the first to die. In the right circumstances, this gives a 100 per cent uplift to the survivor’s nil-rate band (£325,000 for 2016/17).
The legislation allows for a claim for the transfer of any unused nil-rate band on a person’s death to the estate of their surviving spouse or civil partner, who dies on or after 9 October 2007, irrespective of the date of death of the first spouse/civil partner.
Families that wish to rely on the transferable nil-rate band in their planning will need to keep detailed documentation, perhaps for many years, and be alert to the necessity for their personal representatives to make any claim within the prescribed timeframe.
In this respect, clients will need to bear in mind any claim by their personal representatives that relies on using part of the transferable nil-rate band of a previous spouse/civil partner would be subject to a formal claim being made.
Such a claim must be made within 24 months from the end of the month in which the survivor died and will be made by the personal representatives (or somebody who suffers an IHT liability on that estate).
Certain documents may need to be provided in support of the claim and will include the death certificate for the first person to die, a copy of any will and any grant of representation, together with the marriage or civil partnership certificate for the couple.
Other evidence may also be required by the personal representatives and HM Revenue & Customs, including:
- Any documents submitted in support of the application for the grant on the first death and the return to HMRC (form IHT205 or IHT400); and
- Details of any other assets that were chargeable and which did not pass under the grant. This could include assets jointly owned with another person or held in trust.
For example, assets owned in joint tenancy will pass directly to the surviving joint owner. Furthermore, an individual who has a life interest under a trust which is an IPDI or a pre-22 March 2006 interest in possession will be regarded as owning the trust assets for IHT purposes. If entitlement to these assets passed on the first death to somebody other than a surviving spouse/civil partner (or charity), that transfer would use up a part of the deceased’s nil-rate band.
A copy of any deed of variation which changed the terms of any relevant will or the intestacy provisions is also likely to be required, as are details of any lifetime gifts to persons other than the spouse/civil partner which were made by the first to die in the seven years before their death. Evidence of the valuation of these gifts may also be required.
Further, any gifts caught by the gift with reservation of benefit rules will use all or part of the nil-rate band, which would otherwise be potentially transferable. Details of these gifts will also be required.
As will be apparent, the survivor’s personal representatives will need to know full details of the assets likely to affect the transferable nil-rate band available, along with supporting valuations, in addition to details of any exemptions or reliefs taken into account in arriving at the chargeable values on the first death.
In light of the above, it would seem sensible such information and documents are held by the surviving spouse/civil partner with their will. This will usually be kept by the family’s lawyers. As such information may not be required for many years, it seems sensible that, in any case where a future claim for the transferable nil-rate band might need to be made, lawyers are instructed to compile and retain that information following the first death. This could potentially save considerable expense and delay on the survivor’s death.
Tony Wickenden is joint managing director of Technical Connection. You can find him Tweeting @tecconn