The Pre-Budget Report announced changes to inheritance tax through the introduction of “transferable nil rate bands” between spouses (and civil partners). Everyone has a nil rate band (NRB) of £300,000 which is tax-free on death.

If the first spouse to die does not use this, (eg because the estate is less than the NRB, or the estate is exempt because it is left to the surviving spouse or civil partner) then, when the survivor dies, the unused portion can be added to the survivor’s own NRB.

By way of illustration,

  • When Mr A dies the NRB is £300,000.
  • He leaves £150,000 to his children and the remainder of his estate to Mrs A.
  • He has used 50% of his NRB.
  • When Mrs A dies the NRB is £350,000.
  • Total NRB available on her death is £350,000 + 50%, ie £525,000

If enacted as announced, the proposals apply if the survivor dies on or after the 9 October 2007 irrespective of the date of the first partner’s death. They only apply to transfers on death, not lifetime gifts. The amount of the NRB which can be transferred is capped at 100% of the maximum NRB at the date of death of the survivor. There are provisions for those who have had two or more spouses.

HMRC is already giving effect to the proposals where the second partner died on or after 9 October 2007, and will require evidence of the estate of the first partner to die. This may not be readily available. If you are a surviving partner you should try to assemble the required information now to avoid difficulties on your death.

For some couples, although by no means all, the proposals will mean their Wills can be simplified. A discretionary trust of the nil rate band, with all its intricacies, may not now be needed. However the very flexible structure of a discretionary trust means that it can be dismantled after a death if it is not required.

The proposals are also likely to mean that most provisions in Wills which only allow a spouse to inherit if he or she survives for a month or some other period of time (survivorship provisions) are not needed. Indeed, if the estate of the first partner to die is more than the NRB and the surviving partner’s estate is less, and the couple die together, survivorship provisions will now result in more inheritance