Avoiding Inheritance Tax by using the 'Transferable Nil Rate Band'
Background
Before 9th October 2007 if spouses had by Will left the whole estate of the first to die to the surviving spouse, although there would be no liability to Inheritance Tax (IHT), due to the unlimited ‘spouse exemption’, there would be only a single tax-free allowance (called the ‘Nil Rate Band’ or NRB for short) available upon the second death.
This means that, at current rates (2009/2010), there would be a charge to IHT at a rate of 40% on the value of the estate of the second spouse to die before it passes to the parties’ children, in so far as the combined estates exceed the NRB of £325,000. The IHT liability on an estate of £650,000 would therefore have been £130,000 (ie 40% of £325,000).
How the transferable NRB helps to avoid IHT
However, since the Finance Act 2007 it has been possible to carry forward a proportion of the NRB that was not used when the first spouse died and to use it when the second spouse dies. To use this 'transferable nil rate band' the first death can occur at any time, but the second death must occur after 9th October 2007. So if the entire estate on the first death passes to the surviving spouse, and the NRB is therefore wholly unused, it can be used on the second death to double the NRB available at that time. In such cases the IHT liability on an estate of £650,000 would, at current rates, be zero! However if the survivor’s estate exceeds the NRB in force at that time by any amount there will usually be at least some IHT saving.
The problem
There is a strict time limit within which the executors of the Will of the second spouse to die must claim the NRB of the first spouse to die, and it may be very difficult for the executors (who may include your children) to collate all of the necessary documents within the time allocated unless they are prepared and collated soon after the first death. The problem is that the surviving spouse may not realise that there is a need for these documents unless it is necessary for a Confirmation of the estate to be obtained from the Court. It is only in cases where a Confirmation is obtained that all of the required documents are generally prepared, although even then it is important that these are collated and kept together safely until required.
How we can help
We can help the surviving spouse by advising on the documents and information that is required and, if necessary, obtain any valuations of assets, and collate these in a special ‘Executry-Pack’. This can help to avoid delay and expense that would otherwise arise upon the second death, and our fees for doing so are extremely reasonable – particularly in light of the potential tax-saving of up to £130,000 at current rates.
If you have any enquiries please contact a member of our team who will be pleased to assist you.
Contact Chris Wallace
