How it works
Everyone has a nil rate band of £325,000 meaning that the first £325,000 of a person’s estate is not subject to inheritance tax (‘IHT’) provided that no lifetime gifts have been made in seven years leading up to their death.
Assets passing upon death, or by lifetime gift, to a spouse or civil partner attract spousal exemption. Therefore, if on the death of the first spouse their estate passes to the second spouse, the first spouse has not made use of their tax free nil rate band.
Under S8A of the Inheritance Tax Act 1984 any unused nil rate band of the first spouse can be used by the second spouse on their death.
The transferable nil rate band is calculated on a percentage basis. Therefore, if on the death of the first spouse their entire estate passes to the second spouse, then the first £650,000 of the second spouse’s estate will be free from inheritance tax. However, if, for example, only 20% of the estate passes to the second spouse then on the death of the second spouse they will only benefit from an additional 20% of a tax free nil rate band (£65,000).
There is no similar provision for unmarried couples.
Conditions for bringing a claim for the transferable nil rate band:
- For married couples the death of the second spouse must have occurred after 9 October 2007
- For civil partners the first death must have occurred after the Civil Partnership Act came into force in the UK on 5 December 2005
- The first spouse or civil partner must have been married to the surviving spouse or civil partner at the date of death of the first spouse
- A claim to utilise the transferable nil rate band must be brought within 24 months from the end of the month of the second spouse’s death
- The surviving spouse or civil partner must have been domiciled in the UK
If the surviving spouse or civil partner remarries following the death of the first spouse or civil partner, it is still possible for the personal representatives, on the death of the second spouse, to bring a claim to transfer any of the first spouse’s unused nil rate band.
This is best illustrated by the following example:
On the death of ‘A’ their entire estate passes to spouse ‘B’. B subsequently remarries C. On the death of B, the personal representatives of their estate may claim a transferable nil rate band. Therefore, the first £650,000 of B’s estate is free from IHT.
If a person has been married more than once and has survived more than one spouse or civil partner, the maximum amount that may be claimed by any married individual is one additional nil rate band.
To bring a claim for the transferable nil rate band the following information and documentation will need to be provided to HMRC:
- Personal details of the predeceased spouse such as their last known address and date of death;
- The net value of the estate of the first spouse and details of any lifetime gifts made in the seven years prior to their death;
- If a grant of representation was obtained in the estate of the first spouse then a copy of this should be submitted;
- A copy of the first spouse’s will if one was made;
- If neither of the above are applicable then you should provide a copy of the death certificate of the first spouse; and
- You will also need details of the marriage such as the date, the name of the church or registry office and the locality in which the marriage took place (these details can be found on the marriage certificate).
Main residence nil rate band
As previously discussed the main residence nil rate band came into force and will affect deaths after 6 April 2017. Like the nil rate band, any unused main residence nil rate band can also be transferred to a surviving spouse. This will mean that home-owning married couples will have a tax free allowance of up to £1 million by April 2020.
As with the existing nil rate band, unmarried couples do not benefit from any similar provision. Therefore, an unmarried individual will only benefit from a single nil rate band of £325,000.