In his pre-budget report delivered on or after the 9th October 2007, the Chancellor announced major changes to the Inheritance Tax rules affecting the Nil Rate Band (the ‘NRB’) which is £300,000 for the tax year 2007/2008. Rising to £312,000 for the tax year 2008/2009.
The new Inheritance Tax rules will only affect married couples and civil partners and not those who are cohabiting. For the purposes of this article ‘spouse’ refer to husband and wife and also civil partners.
The New Rules – Transferable NRB
When the first spouse dies without making full use of their NRB the unused percentage can be transferred to the second spouse when they die provided that the death of the second spouse occurs on or after 9 October 2007. If the death of the second spouse occurs prior to this date then you are unable to claim the unused NRB from the first spouse.
Such a claim can be made by the executors of the second spouse and must be made no later than 24 months after the death of the second spouse. HM Revenue & Customs (HMRC) have produced a form to enable such a claim to be made and they have also produced requirements as to the supporting documentation they require:-
- Death certificate for the first spouse
- Marriage certificate or civil partnership certificate for the couple
- Copy of the grant of representation for the first spouse
- Copy of the will of the first spouse if made
- Deed of Variation or similar documents if relevant
- A copy of HMRC forms IHT200 or IHT205 which are the forms detailing the assets in the deceased’s estate
- Any valuations of assets that pass under will or intestacy other than to the surviving spouse
They also need to know such information as:-
- Whether any assets such as jointly owned assets or assets in trust formed part of the estate of the first spouse
- Whether any gifts or other transfers were made by the first spouse 7 years prior to their death
The transferable NRB will be available to all second spouses no matter when the first spouse died and will be calculated by reference to the NRB in force at the death of the second spouse.
Example 1
Using an example of a married couple - if the NRB is £350,000 at the date of the death of the second spouse then the executors can claim the unused percentage of the NRB from the first spouse (presuming 100% is available). If successful the estate of the second spouse will have a NRB of £700,000 which can be passed to the children before incurring any liability to Inheritance Tax.
If any of the NRB has been used by the first spouse the remaining percentage of the unused NRB can still be transferred to the second spouse.
Example 2
Again using the married couple above - if the first spouse died in the tax year 2001/2002 when the NRB was £242,000 and had left £121,000 to the children, 50% of their NRB remains unused. The second spouse dies in 2010/2011 when the NRB is £350,000 and therefore if the claim for the used NRB is successful the second spouse’s NRB will be increased by an additional 50% to £525,000.
What does all this mean in relation to NRB Discretionary Trust Wills?
The changes in the rules generally do not require any action to be taken. As a matter of general good practice, we recommend that your will is regularly reviewed and updated, especially if there has been a change in family circumstance or the will has not been reviewed for many years.
If you have incorporated a Nil Rate Band Discretionary Trust into your wills purely for tax planning purposes, you may wish to consider the following options:
- Make a new will excluding any NRB Discretionary Trust
- Make a Codicil to remove the NRB Discretionary Trust Provisions
- Wait until the first spouse dies. At that time if the Trustees conclude that there is no benefit to keeping the Trust in place, then the Trust can be wound up in favour of the surviving spouse provided that this is done after the first three months from the death but within two years from death of the first spouse. This will ensure the first spouses NRB will be transferred to the surviving spouse and therefore the 100% will be available on the death of the second spouse.
There may still be very good non-tax reasons for including a Discretionary Trust in your will, for example:
- To make provision for children from a previous relationship or for other family members
- Where there are disabled beneficiaries or beneficiaries in receipt of means tested benefits
- To protect assets in the event of the bankruptcy or divorce of any of your beneficiaries
- Where the assets are considerable, to ensure a slow release of monies
- To minimise any future inheritance tax liability in your own children's estates.
- To ring fence the NRB in order to preserve the estate for the benefit of their children (e.g. if the surviving spouse may need long term nursing care or to protect against the risk of the surviving spouse becoming insolvent or remarrying (or entering into a new civil partnership)
What does this mean if I am already widowed?
If a NRB Discretionary Trust has already been set up either in the will of the first spouse or by a Deed of Variation, the position will depend on the date that your spouse or civil partner died.
- Within two years of the death of the first spouse, the Discretionary Trust can be wound up without affecting the transferable NRB
- If the death was more than two years ago then the trust will need to continue as the NRB will have already been used and will not be available to be transferred upon the death of the second spouse.
Records to be kept
Whether you have a will or not you need to think about the practicalities. The claim to use the balance of the first spouses NRB is not made until the death of the second spouse and it is at this point your executors will have to provide the necessary information to HMRC. Therefore all the documentation and information listed above should be stored safely.
If you have been married (or been in a civil partnership) more than once then you should keep details of previous spouses (partners) as a claim can be made for the unused NRB from previous marriages (or civil partners) and if successful then an additional NRB can be claimed. Please note that only an additional NRB can be claimed on the death of the second spouse.
In the light of these changes, keeping track of lifetime gifts and transfers is very important and you should therefore keep accurate records so that your executors will be able to ensure that the correct proportion of the unused NRB is claimed on the death of the second spouse.
Storage service
We offer a storage service for the documents your executors will need. If you wish to take advantage of this service then please feel free to contact us.
Gifts and transfers made within seven years of death will have the effect of eating into your NRB thereby reducing the amount of unused NRB available to your surviving spouse. If you are planning on making any lifetime gifts or transfers then you should seek professional advice to ensure that this is appropriate IHT planning for your personal circumstances.
This article is for general guidance only and only a summary of the recent changes to Inheritance Tax rules and its affect on the NRB and does not constitute advice of any sort. You should not act on it without seeking professional advice. The information is accurate as at 16 January 2008 but may be subject to change by legislation at any time.
