The inheritance tax regulations changed in 2007 when the “transferable nil rate band” was introduced. Everyone is entitled to a nil rate band for inheritance tax. The nil rate band is currently £325,000. Assets that pass from one spouse or civil partner are exempt from inheritance tax. So if on death someone leaves everything they own to their spouse or civil partner it is exempt from inheritance tax and they have not used any part of their nil rate band. That unused nil rate band can now be transferred to their surviving spouse or civil partner and be used in working out their inheritance tax liability when they die.
For example if Mr Smith died in 2011 and Mrs Smith had died in 1988 leaving all her estate to Mr Smith then on Mr Smith’s death he could claim Mrs Smith’s nil rate band in addition to his own. The additional nil rate band he receives is the one current on his death not the one that applied on Mrs Smith’s death. When Mrs Smith died in 1988 the nil rate band was only £110,000. On Mr Smith’s death it was £325,000. Mr Smith’s estate can therefore claim £325,000 as the transferable nil rate band of Mrs Smith and will automatically receive his own nil rate band of £325,000 meaning that his estate would only pay inheritance tax on amounts over and above £650,000.
If Mrs Smith had died in 1988 leaving part of the nil rate band to her children then Mr Smith’s estate would be able to claim the remaining part on his subsequent death. So for example if Mrs Smith had left £55,000 to her children on her death this was half of the nil rate band at the time. Mr Smith’s estate could claim the remaining half at current rates (£162,500) and would automatically have his own of £325.000. Mr Smith’s estate would only pay inheritance tax on amounts over and above £487,500.
The above rules will apply even if Mr Smith had remarried.
Claiming the transferable nil rate band on the second death can help reduce the inheritance tax payable and this is particularly important bearing in mind that the nil rate band has been frozen.
There are time limits on applying for the transferable nil rate band after the death of the second spouse and certain documents have to be submitted to the Inland Revenue on the second death in order to claim the transfer. It is therefore important to take legal advices.
If you would like advice on the above or feel that your Will may need to be reviewed following the change in regulations in 2007 then contact David Mead on 01425 621515 or Helen Stewart or Natasha Kenway on 01425 279222 or Paul Moores on 01425 673994 or email helen@dixonstewart.com
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