December 2009
This month’s article looks at the Inheritance Tax (IHT) issue of the transferable nil rate band (NRB) introduced from 9 October 2007.
Background
Prior to October 2007 the NRB could not be “transferred” between spouses (or civil partners); advice by practitioners was to incorporate a flexible NRB legacy clause on discretionary terms (within each Will) - the surviving spouse/civil partner and children/grandchildren commonly being among the discretionary class to potentially benefit. The basic theme was to ensure that the deceased’s NRB was not “wasted” (which would be the case if the estate passed absolutely to the surviving spouse /civil partner): leaving only the surviving spouse’s /civil partner’s individual nil rate band available on the second death.
The existence of a discretionary legacy clause could provide the means to “divert” assets (up to the maximum amount of IHT free) amongst chargeable beneficiaries –eg children/grandchildren. In order to safeguard the interest of the surviving spouse/civil partner, they were usually appointed as one of the trustees of the discretionary clause, and so could exercise a power of veto (if it was considered there remained insufficiency of (non property) assets available for the widow’s benefit). In the latter case it was then possible to invoke “debt” or “charge” schemes secured against the surviving spouse’s interest in the matrimonial home.
Whilst testators readily understood the reasoning behind such Wills - structured to incorporate Discretionary NRB provisions – it is a fact of life that explaining such (debt/charge) schemes was not straightforward. Indeed many people (wives in particular) felt slightly uncomfortable about the complexity of Wills, incorporating nil rate band discretionary trusts, although they may not have admitted this to their husband!
Many clients have often said to me that such complex drafting may be appropriate for “wealthy individuals” but is such drafting really needed for “middle England” – fair comment. A raft of professional opinion had, over the years, recommended a “transferable” (IHT) nil rate band between spouses but it took politicians twenty-three years to amend the legislation!
Present position
Since 9 October 2007, if the IHT nil rate band remains unused (after allowance given for any chargeable lifetime gifts) under the estate of the first spouse to die, this can be claimed by the personal representatives acting in the estate of the surviving spouse. It is the nil rate band applying at the date of the second death.
The NRB is currently £325,000 (2009-2010) making £650,000 available between married couple or civil partners (assuming both are UK domiciled). The nil rate band is amended each (tax) year as part of the annual Finance Act provisions.
It does not matter when the first spouse died (i.e how far you go back); although care may be needed with certain former Estate Duty cases and professional advice sought. In broad terms the extent of the nil rate band applying under the first death has to be determined – if it was not used at all then the full nil rate band (of the first spouse/civil partner) becomes available to be claimed by the surviving spouse’s personal representatives.
One practical point to arise is record keeping – it will be sensible for widows/widowers to make and keep a record of the extent to which their late spouses had used (or not) the IHT nil rate band. A simple form could be placed with the survivor’s Will summarising the detailed information that will be required by HMRC (capital taxes office) to determine any claim for the “unused” nil rate band to be transferred on the second death. HMRC do not offer this availability – it has to be claimed; HMRC have publicly admitted they do not normally maintain older estate file records –it is up to the taxpayer to maintain the requisite information.
It could prove difficult to determine how much of the nil rate band was actually used in relation to deaths many years ago. As an illustration the nil rate band (Capital Transfer Tax) applying in late 1977 - was £15,000; in 1988 -1989 it was (IHT) - £118,000. Remember, the golden rule is how much of the original nil rate band was used (if any); then to apply that proportion to the (IHT) nil rate band applying at the date of the surviving spouse’s /civil partner’s death – post 9 October 2007.
Next month - applying the new rules to the structure of existing Wills – should they be changed and what action (if any) could be considered to those estates where two years has not yet elapsed since the first spouse/civil partner has died.
Andrew Murdoch
(ACIB, AIFP, Dip PFS, TEP, Solicitor)
