This note is for the assistance of clients who may be concerned as to the extension of the Nil Rate Band, following the publication of the 2007 Pre-Budget Report on 9 October 2007.
Who is most likely to be affected?
Married couples, widows/widowers and civil partners in the first instance. Following the death of any individual comprising the groups mentioned, his or her personal representative may be required to take appropriate action.
What does the legislation intend?
With effect from 9 October 2007, a claim can be made to transfer any unused IHT 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. This relief will apply where the IHT Nil Rate Band of the first deceased spouse or civil partner was not fully used in calculating the IHT liability of their estate. When the surviving spouse or civil partner dies, the unused amount may be added to their own Nil Rate Band. It does not matter if the estate of the first spouse (or civil partner) to die was negligible, the claim to transfer the unused IHT Nil Rate Band will still apply.
Is there a “cut off” date as to the death of the first spouse, or civil partner, to die?
Whilst inheritance tax legislation has applied since 18 March 1986, it appears, if applicable, that a death of the first spouse, prior to 18 March 1986, would also apply.
What is the position where part of the IHT Nil Rate Band was utilised on the death of the first spouse or civil partner?
The amount of the Nil Rate Band potentially available for transfer will be based on the proportion of the Nil Rate Band that was unused when the first spouse or civil partner died. The following examples will illustrate the position:
(a) On the first death, none of the original Nil Rate Band was used because the entire estate was left to the surviving spouse. Then if the Nil Rate Band, when the surviving spouse dies is £300,000, that would be increased by 100% to £600,000.
(b) If on the first death the chargeable estate had been £150,000 and the Nil Rate Band then applying was £300,000, then 50% of the original Nil Rate Band would be unused. Subsequently, if the Nil Rate Band when the surviving spouse dies is £350,000, then that would be increased by 50% (viz, £175,000) making a total Nil Rate Band available to the surviving spouse of £525,000.
Who is responsible for making the claim?
Where these new rules have an effect, the personal representatives do not have to claim, for the unused Nil Rate Band to be transferred, at the time of the death of the first spouse or civil partner to die. Any claims for transfer of unused Nil Rate Band amounts will be made by the personal representatives of the estate of the second spouse or civil partner to die when the personal representatives render an IHT account for probate purposes (CAP Form 200 or 205).
Summary
The practical effect of this legislation is that for those widows/widowers (and civil partners since December 2005), they can now claim (through their personal representatives) the IHT Nil Rate Band that may have been unused on the death of the first spouse or civil partner. The key point to understand is that no matter when the first spouse or civil partner died it is the Nil Rate Band applying at the date of death of the second (surviving) spouse or civil partner.
The Nil Rate Band applying for 2007/2008 is £300,000 and this will rise to £350,000 with effect from 6 April 2010.
The maximum amount of the Nil Rate Band applying to a surviving spouse or civil partner would be £600,000 for tax year 2007/2008 rising to £700,000 for tax year commencing 6 April 2010.
This is a positive saving and should take out of the chargeable IHT “net” a sizeable proportion of the estate or, alternatively, reduce significantly the balance of the survivor’s estate that may be chargeable to IHT.
For further information please contact Andrew Murdoch, Associate Solicitor on am@lockharts.co.uk.
