NIL Rate Band Planning
Current legislation allows any unused nil-rate band on a person's death (no matter what the date of their death) to be transferred to the estate of their surviving spouse or civil partner where they die on or after 9 October 2007 . The rules apply in the same way whether the first spouse or civil partner to die leaves a will or dies intestate.
Example
Joanie and Chachi are married and each has an estate worth £300,000. They have three children.
Chachi dies first leaving his entire estate to Joanie. IHT will not be payable because transfers to UK-domiciled spouses are exempt from IHT.
However, if Joanie then dies (and assuming current values and allowances) while her estate is worth twice what it was her nil-rate band has doubled due to the unused allowance on Chachi's death. The IHT calculation on second death is therefore:
|
£ |
Value of estate on death |
600,000 |
Joanie's 2007/08 nil-rate band* |
(300,000) |
Chachi's unused nil-rate band (100% of 2007/08 threshold)* |
(300,000) |
Value of estate above the nil-rate band |
NIL |
IHT @ 40% |
NIL |
Children’s inheritance (£600,000 - £NIL) |
£600,000 |
* Will account for other components of the aggregate chargeable ‘estate’ on death for IHT purposes, such as assets in trust, or gifts to other people made within seven years of death.
The outcome is exactly the same as if married couples or civil partners had undertaken discretionary will trust planning.
An important point to note is that the amount of unused nil-rate band transferred on first death is not the unused amount in monetary terms, but the unused amount as a percentage. This unused percentage is then applied to the nil-rate band applying at the date of death of the surviving spouse or civil partner.
For example, if on the first death the chargeable estate is £150,000 and the nil-rate band is £300,000, 50% of the nil-rate band would be unused. If the nil-rate band when the survivor dies is £350,000, then that would be increased by 50% to £525,000.
This should account for any growth arising on the transferred wealth, especially as the Chancellor confirmed in his speech that he will consider house prices when increasing the nil-rate band.
Practical issues
Personal representatives won't have to claim for any unused nil-rate band to be transferred at the time of first death. It will need to be claimed on death of the surviving spouse or civil partner.
Those dealing with the survivor's estate will need to submit a claim form to HMRC providing information about the estate, together with a copy of the will and death and marriage certificates.
The deadline for the claim will generally be two years from the end of the month in which the surviving spouse or civil partner died.
Going forward it will be essential to record the proportion of nil-rate band that is unused on first death (in addition to keeping accurate records of lifetime gifts) to help support a claim on the survivor's death.
Advice considerations
The transferable nil-rate band effectively implements discretionary will trust planning for married couples and civil partners. They won't change the effect of existing wills, so people who have a discretionary will trust written into their will won't necessarily have to take any action.
However clients may still benefit from using a discretionary will trust (now or in the future) as it can be used to:
- Ensure wealth passes to those who are intended to benefit e.g. children from first marriages.
- Remove the growth on assets left by the first to die from the survivor's estate. Where all assets pass to the survivor there can frequently be a considerable time before the first and second death. During this period, the investment growth may well outpace the increase in the nil-rate band.
- Protect assets from third party claims such as where the survivor is declared bankrupt.
- Move wealth into the hands of third parties if the survivor is, or is expected to be, incapable of dealing with their own affairs. This could be due to a physical or mental disability, or even simply to old age.
Cohabitants will still need to implement a discretionary will trust if they are to maximise their IHT saving as they do not benefit from a transferable nil-rate band.