Mark McLaughlin looks at an inheritance tax pitfall and planning point surrounding the inheritance tax transferable nil rate band.
The inheritance tax (IHT) allowance (or nil rate band) is available to every individual. In addition, the transferable nil rate band (TNRB) is a helpful facility for married couples and civil partnerships.
Transferable nil rate band
The TNRB rules broadly allow claims for unused nil rate band of a deceased spouse (or civil partner) to be transferred to the surviving spouse. The survivor's nil rate band can be increased by up to 100%, or one additional nil rate band. Thus, a surviving spouse's nil rate band can increase to a maximum (for 2022/23) of £650,000 (i.e., £325,000 x 2).
‘Residence’ nil rate band can potentially contribute to an effective IHT threshold of £1 million per married couple (or civil partnership) in total (i.e., £325,000 plus £175,000 per individual). Unused residence nil rate band is also transferable to a surviving spouse upon a successful claim being made. However, this article focuses on the ‘standard’ TNRB.
The TNRB facility can help prevent the nil rate band of the first spouse to die being left unused and therefore wasted. A common reason why the nil rate band is likely to be unused on the first death is that a deceased spouse leaves their entire estate to the surviving spouse, which is exempt from IHT due to the spouse exemption (albeit the exemption may be restricted if the recipient spouse is non-UK domiciled).
TNRB only applies on death, so the surviving spouse should not try to set it against a chargeable lifetime transfer (e.g., a gift to a discretionary trust). However, if the survivor dies within seven years of a chargeable lifetime transfer, the extra nil rate band might then be available to reduce any additional IHT on the lifetime gift.
Previous marriages, etc.
If a surviving spouse was married more than once and their deceased spouse(s) did not use up their nil rate bands on death, the survivor’s estate can generally make a claim in respect of the previous spouse(s).
However, the nil rate band of the surviving spouse’s estate can only be increased by 100%, or one additional nil rate band.
Tie the knot – or not?
In some cases, an unmarried couple may have up to four nil rate bands available between them.
For example, both individuals might have been married before, and a TNRB may be available in each case from their respective deceased spouse. By remaining unmarried and leaving their estates to chargeable legatees (e.g., each other), it may be possible to utilise their own nil rate band plus the transferred nil rate band of their deceased spouse (i.e., £650,000 each).
By contrast, if the couple decided to get married and (for example) they had wills leaving everything to each other, this would result in the nil rate band potentially being wasted on the first of them to die; the same would apply to the nil rate band of the deceased’s spouse from their first marriage. This is because the surviving spouse’s maximum TNRB entitlement from their first spouse had already been reached.
Practical tip
However, if the couple did get married, consideration could be given to leaving legacies to chargeable beneficiaries (e.g., their children) on the first death, sufficient to use the deceased's nil rate band plus the TNRB from that individual’s first marriage.
