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Transferring unused inheritance tax nil-rate band

A question that often comes up when it comes to inheritance tax planning is how to transfer any unused nil rate band.

It has been possible to transfer the unused percentage of the nil rate band from a deceased spouse or civil partner to the surviving spouse or civil partner since 9th October 2007.

Whilst the transferable nil rate band is available to survivors of a marriage who die on or after 9th October 2007, regardless of when the first spouse died, in the case of civil partners the rules are slightly different and the first death must have taken place on or after 5th December 2005. The date on which the first Civil Partnerships were formed under UK Law.

If the first death in a marriage or civil partnership happens after the couple are divorced, then no transferable nil rate band is available.

If the first death happened before 13th November 1974, then the full nil rate band may not be transferable. This is because the amount of the spouse exemption was limited before 1975.

It is really important to remember that the transferable nil rate band isn’t automatically applied, so it needs to be claimed.

The time to claim is following the second death, not when the first spouse or civil partner dies. Claims are made by the Executors when filling in HM Revenue & Customs form IHT402.

There is a time limit for claiming the transferable nil rate band, generally two years from the end of the month in which the second spouse or civil partner died. In order to claim, personal representatives will need to send form IHT402 and any supporting documents to HM Revenue & Customs.

This is a helpful example provided by HMRC: “A spouse died when the threshold was £250,000. They left legacies totaling £125,000 to their children with the remainder to the surviving spouse or civil partner. The legacies to the children would use up half of the threshold, leaving the other half (50%) unused. On the deceased’s death, the threshold was £325,000, so their threshold would be increased by 50% to £487,500. If the surviving spouse’s estate isn’t worth more than £487,500 there’ll be no Inheritance Tax to pay on their death. If it is, there’ll be Inheritance Tax to pay on the value above that figure.”

Introduced in April 2018, the new residence nil rate band adds a significant increase to the amount of an estate that can be passed free of Inheritance Tax. This too can also be transferred between spouses and civil partners in the same way as the standard Nil Rate Band. The unused percentage of the residence nil rate band is also claimed on the death of the second spouse or civil partner.

Unlike transferring the unused nil rate band, with the residence nil rate band the transfer can take place regardless of when the first death happened.

In fact, the unused percentage of the residence nil rate band can be used even if no residential property was owned at their time of death. There will always be an additional 100% residence nil rate band, with the exception of cases where the first spouse or civil partner’s estate was valued at more than £2 million.

You can find out more about Inheritance Tax by downloading our FREE guide here

Jon DoyleTransferring unused inheritance tax nil-rate band