Inheritance Tax Nil Rate Band

Nil Rate Band


For individuals of UK Domicile everybody has the ability to leave up to £325,000 in their Will to whoever they wish, completely free of Inheritance Tax.  Therefore, for a married couple we’re talking about a total exemption of £650,000 i.e., £325,000 each. 


However, prior to the Budget speech of 2007 if a husband or wife left their estate to their surviving spouse it meant that one nil rate band to IHT was effectivley lost. To illustrate that point, for a couple whose estate was worth £650,000 on the death of the first spouse with everything passing to the survivor, on second death only the surviving spouses nil rate band of £325,000 was available. This rather depressing fact gave rise to many elaborate IHT planning initiatives designed to effectively harness two nil rate bands.

Transferrable Nil Rate Band


This all changed in the budget of 2007 where it was announced that from 8th October 2007 any living widow or widower could potentially claim any unused part of their deceased spouses nil rate. In the light of the new rules, if you made provision under the pre Budget 2007 rules, you may like to consider reviewing your plans now.


Reclaiming the Transferrable Nil Rate Band


On the surface this seemed like great news for the taxpayer! However, as with many apparently good looking Government initiatives, the devil is in the detail!


In order for the Estate to benefit from two nil rate band exemptions the Personal Representatives (PR's) of the Estate need to physically reclaim the transferrable nil rate band. For widows or widowers alive on the 9th October 2007 the nil rate band or proportion of the nil rate band could be reclaimed however long ago their spouse died. It should be noted that going forward any transferrable nil rate band has to be reclaimed within two years of death.


Whilst it sounds relatively easy in order to claim the second nil rate band the PR's would effectively have to prove that the first spouse to die had left everything to their surviving spouse. Depending on how long ago the first spouse died and the integrity of the records that had been kept if any, would determine if it could be proved beyond doubt that everything had passed to the surviving spouse after death.


Proportion of the Nil Rate Band


Two whole nil rate bands can only be used if the first spouse to die left 100% of their estate to the surviving spouse. If for example the first spouse to die left a legacy to someone else in their Will with the balance of the Estate going to the spouse, the transferrable nil rate band available to reclaim would be proportionally reduced accordingly.


Transferrable Nil Rate Band in Practice


Whilst on the surface it would appear that the Governments apparent "benevolence" in allowing the use of the transferrable nil rate band, in practice the process is much less straightforward than one would imagine. Furthermore, there are no guarantees that the transferrable nil rate band initiatiative will not be scrapped in a future budget.


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