Maximising the use of the inheritance tax transferrable nil rate band

09 October 2017

On 9th October 2007, Inheritance Tax was revolutionised by the introduction of what was called the transferable nil rate band. Until that time, where a married couple had simple wills, leaving all assets to the survivor when the first spouse died that spouse’s nil rate band would be wasted.  

The effect of the transferable nil rate band was that to the extent that on the death of the first spouse, use was not made of that spouse’s nil rate band, upon the death of the remaining spouse, that spouse’s nil rate band would be uprated. Thus where the surviving spouse took on the entire estate from the deceased spouse, when that surviving spouse dies, 200% of the prevailing nil rate band would be available. 

The introduction of the transferable nil rate band changed how many wills were drafted. The previous planning steps that were required to prevent wastage of a very valuable relief became, in many instances, superfluous.

There remains one group of individuals where extreme care must still be taken so as to prevent possible loss of reliefs and that is those cases where an individual has become a widow/widower and they subsequently remarry. 

The difficulty arising is that under the rules applying to the transferable nil rate band, the nil rate band available upon death can never exceed 200% of the then available nil rate band. The implications of this are perhaps best illustrated by example:

John and Alice had a combined estate of £2.5M. John died in 2013, leaving everything to Alice. 

Because of the transferable nil rate band, we know that on Alice’s death 200% of the nil rate band will be available. 

Let us say that Alice marries Fred, an individual who is himself a widower who had inherited his late wife’s entire estate. 

Both Alice and Fred face issues if they leave their respective estates to or on trust for life for their survivor: both individuals already have an entitlement to 200% of the nil rate band, so if assets pass on Alice’s death to Fred, or vice versa, the survivor does not benefit from any of the nil rate band of the deceased. Based upon the current normal nil rate band this is a potential loss of relief of £260,000!

The general principle that emerges is that where a widow or widower remarries, the general tax planning principles that applied until 9th October 2007 still applies: each spouse should make use of their inheritance tax nil rate band if they are the first to die. This can be done reasonably easily either by drafting wills so as to include what is called a nil rate band discretionary trust or to enter into a deed of variation within two years of death to achieve the same end result. This will ensure that inheritance tax reliefs are not needlessly lost. Of course, quite separately, there is the matter of asset protection and seeking to ensure that whilst tax reliefs are not lost, it is also ensured that the wishes of the testator are met.

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