In his 2007 Pre-Budget Report, the Chancellor announced that in future married couples and civil partners would be able to carry forward any inheritance tax (IHT) nil rate band that was unused on the death of the first partner, allowing this to reduce the tax on the death of the second to die.

This was hailed by some as the answer to most people’s IHT problems. As new partner Elizabeth Neale explains, however, the transferable nil rate band may not be quite as simple, or always quite as beneficial, as it may first seem. Second marriages, and international situations, may need particular care. Anyone who relies on the ‘transferable’ nil rate band to solve their problems, without checking that it really does suit their personal, tax and financial circumstances, may find that they have lost out.

First, the reason ‘transferable’ is in quotation marks in the last sentence is that, despite the name that is being given to it, what has been introduced is not a general ability to transfer the nil rate band between spouses, or between civil partners (this article will refer to ‘spouses’ for simplicity). All that the ‘transferability’ amounts to is that any nil rate band that is left unused on the death of the first to die can be used against the estate of the second to die. Lifetime giving can be a very effective form of estate planning, and the transferable nil rate band is no substitute for this.

The transferable nil rate band can be very helpful for the kind of couple at which it was probably aimed: a couple with a house that, despite the current economic problems, is worth far more than they would once have expected (maybe £½m), and who perhaps also have a good pension but relatively little else in the way of capital. It was regarded as unfair that, because of the fact that the surviving spouse would want to go on living in the home, the assets of both spouses would be charged jointly on the second death, rather than separately on each death, and so as a result the benefit of the nil rate band of the first to die would be lost. The transferable nil rate band solves that particular problem reasonably well, but most people’s lives are not that simple, and that is rarely the only point that needs to be considered.

For example, the spouses may have unequal wealth. It can then be important to consider carefully the precise drafting of the Wills, otherwise if the spouses die in the ‘wrong’ order, the benefit of the transferable nil rate band can be wholly – and possibly unexpectedly – lost.

When the transferable nil rate band was first announced, the immediate reaction of some was to say that this meant the end of the nil rate band trust. Until then, a high proportion of Wills that were made professionally for couples would include a discretionary trust of an amount equal to the IHT nil rate band: not to make use of the nil rate band in some way was equivalent to making a present of tax to the Chancellor of about £120,000. Some individuals (though not all) can now achieve that tax saving simply by relying on the transferable nil rate band, but each case needs to be examined to see whether there were practical advantages in having the nil rate band trust that are still important: these include protection of the assets against possible future nursing home fees, protection of a spouse who is financially inexperienced or naïve, making sure that certain assets pass to particular members of the family, and also possibly as an attractive way to deal with assets expected to rise significantly in value.

Where the Will includes an outright gift of an amount equal to the nil rate band, rather than a trust of the nil rate band, the new transferable nil rate band relief may make existing Wills operate in an unexpected fashion, particularly where one or both partners has been married before. Such Wills may benefit from review.

Second marriages are a classic case of a situation where a difficult balancing act can be needed to make sure both that the surviving spouse is properly provided for and also that any children of earlier marriages feel that the arrangements are just and fair. The existence of the transferable nil rate band may mean that a different approach is now needed to the drafting of both spouses’ Wills in order to achieve this. Fairy tales are full of wicked stepmothers such as Cinderella’s, but the story would have taken on a wholly new meaning if, following the death of Cinderella’s father, the wicked stepmother had been able to use Cinderella’s father’s nil rate band to benefit the children of her subsequent marriage to a Wicked Prince! In the real world this kind of ‘misuse’ of the transferable nil rate band is not likely to be brought about by any deliberate unkindness, but it could easily happen unintentionally if the point is not addressed.

Those whose lives have an international dimension – this might be owning property abroad, living abroad temporarily, or having a foreign domicile – will always have known that they needed to take particular care over estate and other tax-planning. The introduction of the transferable nil rate band introduces a new dimension into estate planning, and existing arrangements may need to be reviewed. In short, the transferable nil rate band will be a boon for the group of individuals where the Government recognised it was in some sense unfair that their assets should have been caught in the IHT net. It will also help the families of those who failed to take advantage of the tax-planning opportunities available to them. The majority of readers of this newsletter will, however, probably benefit from a careful evaluation of whether they should be looking this particular gift horse rather more closely in the mouth, and considering other approaches to testamentary taxplanning.

Allied to the massive upheaval in IHT over the last two years, this could be a good time to reconsider your Will.