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These articles gives a general overview only and the legal position at the time of writing them. It cannot be relied upon in any particular case. Specific legal advice must always be considered to include consideration as to whether the legal position contained in this article has changed since going to print.

Inheritance Tax - Transfer of the Nil Rate Band

Under UK legislation, on death, the value of each individual’s assets less liabilities outstanding at the date of death, and funeral costs is calculated, and is aggregated with any gifts made in the seven years pre-death (subject to various exemptions). The first tranche of this value is chargeable at 0% - called the Nil Rate Band (NRB), the balance over the NRB is then subject to tax at the rate of 40%. The NRB for 2009-10 is £325,000.

Since October 2007 it has been possible to transfer any unused portion of the Nil Rate Band (NRB) of the first spouse/civil partner to die.

In order to utilise the NRB prior to October 2007, it had been common practice to ensure that assets were held as tenants in common, so that they could pass via the Will and not by survivorship, thus allowing the first to die to create a NRB Discretionary Trust and utilise the NRB on death. The surviving spouse would normally be included in the class of beneficiaries.

The NRB trust would have been able to make a loan to the surviving spouse or partner, but on his or her death, that loan would have to be repaid to the first Estate, and thereafter distributions would be made to the other beneficiaries.

This still remains sensible planning, particularly when there are children from a previous marriage. However, it may be worth considering revisiting the Will and removing the NRB discretionary trust clause, especially if the parties to the marriage/civil partnership are relatively young, as this would potentially release more NRB on the second death.

As an illustration:

First spouse dies in January 2001, when the NRB was £234,000, leaving sufficient assets to take up the whole of the NRB, residue to surviving spouse. No tax would have been payable.

The surviving spouse dies in 2012, when the NRB is (say) £400,000. As the full NRB was utilised on the first death, there is only £400,000 available on the second. If, however, there had been no NRB discretionary trust created on the first death, but all assets left to the spouse, there would be a full NRB to transfer, thus the full exemption on the second death would have been £800,000 – potentially “saving” tax of £66,400 (400,000 – 234,000 @ 40%).

If only part of the NRB is utilised on the first death, then the proportion that this bears to the NRB in force at that time, is applied to the NRB on the second death.

For example:

First spouse dies in October 2005 when the NRB was £275,000, leaving an Estate worth £400,000, of which £100,000 were legacies left to family members, and the residue to the surviving spouse. There is no tax due, as the £100,000 is covered by part of the NRB, the balance is exempt. The proportion of the unused NRB is 63.64%. On the surviving spouse’s death in January 2010, whose Estate is worth £600,000, there is a full NRB of £325,000 + £206,830 (63.64% x £325,000), which leaves chargeable £68,170 @ 40%.

It is still possible to prepare a Deed of Variation where on the first death, there is a NRB discretionary trust created, although this must be done within 2 years of the date of death, in order to release the full unused NRB to be used on second death.

If there are concerns about ensuring, say, the welfare of children of a former marriage, it is possible to provide for them by creating other trusts, but at the same time ensuring all the tax exemptions are available.

It is also worth revisiting Wills which were prepared pre-October 2007 and which contain a clause cresting a NRB discretionary trust. Even where it is desired to keep this, the wording may need to be reviewed, as an unintended result may be the giving of a double NRB.

As ever, specialist advice should be sought.

September 2009

This article gives a general overview only and the legal position at the time of writing this article. It cannot be relied upon in any particular case.  Specific legal advice must always be considered to include consideration as to whether the legal position contained in this article has changed since going to print. For further information and advice, please contact Deirdre Moss or Gail Leece on 0800 135 7917 or alternatively by email on Deirdre.Moss@lemon-co.co.uk or Gail.Leece@lemon-co.co.uk.

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<p><strong><a href="http://www.lemon-co.co.uk/article_inheritance-tax09.php">Inheritance Tax - Transfer of the Nil Rate Band</a></strong><br /> Under UK law, on death, the value of an individualís assets (less liabilities and funeral costs) is calculated and aggregated....</p>

 

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