Every individual has an exemption from Inheritance Tax, currently that threshold, also known as the ‘nil rate band’ is £325,000. The threshold is due to remain at this level until 2019.
In October 2007, the ‘transferable nil rate band’ was introduced. This allows the transfer of any unused Inheritance Tax threshold from a late spouse/civil partner to the surviving spouse/civil partner. This has the effect of increasing the available nil rate band for the survivor from £325,000 to as much as £650,000, depending on the circumstances.
Assets passed between UK domiciled married couples and registered civil partners either during their lifetime or on death are exempt for Inheritance Tax. This is known as the spouse or civil partner exemption.
Therefore, if someone leaves everything they own to their surviving spouse/civil partner not only is it exempt from Inheritance Tax but it also means they have not used any of their nil rate band.
The unused nil rate band becomes transferable and can be used to increase the Inheritance Tax threshold of the second spouse/civil partner when they die, giving an effective nil rate band of up to £650,000.
Example 1; Dave and Sue are married, they jointly own a house valued at £250,000, they have £40,000 each on deposit (including ISAs) and £100,000 each invested. Dave dies and leaves all of his assets to his wife, Sue. This transfer is exempt under the spouse exemption and therefore no IHT is payable. However, Dave had not used his nil rate band on his demise and therefore 100% of his threshold is transferable. Sue’s estate is now valued at £530,000. On her demise, no matter who she leaves her estate to, no IHT is due as her Executors are able to use the transferable nil rate band from Dave to effectively provide an IHT threshold of £650,000.
Example 2; A few years after Dave’s death, Sue remarries, to Roy. Sue sells her house and moves in with Roy, whose property is valued at £300,000. Other than his property he has £25,000 in cash. Their joint estate is now valued at £855,000 (Sue has £530,000 and Roy has £325,000). Roy has a nil rate band of £325,000. Despite being remarried, Sue’s Executors can still use Dave’s transferable nil rate band and benefit from an IHT threshold of £650,000. With careful consideration and planning within their Wills Sue and Roy could pass on assets up to £975,000 with absolutely no Inheritance Tax liability. However, if they just leave assets to each other there could be an Inheritance Tax liability of up to £82,000 based on the current value of their estate!
To find out more about the transferable nil rate band, please read part 2 (June 2013). To discuss the transferable nil rate band in more detail, please contact one of our Chartered Financial Planners at Springfield Financial Services on 01772 729742.