Inheritance tax & transferable nil rate band FAQs

What is Inheritance Tax?

Inheritance Tax (“IHT”) is charged on the value of a person’s assets on death. It includes everything they owned at the date of their death plus the value of any gifts they made within seven years of their death.

Do I have a tax free allowance?

Yes each individual currently has a tax-free band, commonly called the nil rate band, of £325,000, this is deducted from the value of the estate and IHT is charged on the balance at 40%

What is the transferable nil rate band?

It is quite common for husband and wives to draw up a Will leaving everything to each other. On the first death no matter whatever the value of the estate no IHT would be payable as there is no tax between a husband and wife (“the spouse exemption”).

In those circumstances the nil rate band on the first death was wasted because the estate was being left to someone who did not have to pay IHT.

In July 2008, the Transferable allowance was introduced whereby any unused part of the nil rate band on the first death could be transferred and added to the nil rate band of the second to die.

How does it work?

What is transferred is the unused percentage of the first to die’s nil rate band.

Example 1

Mr Adam dies on the 1 July 2001 and leaves everything to his wife, Mrs. Adam. At the time of his death the nil rate band was £242,000.

Mrs Adam dies on the 1st April 2010 at the date of her death the nil rate band was £325,000.

As Mr Adam used none of his nil rate band then 100% is transferable but at the level at the time of Mrs Adam’s death so her estate will receive a nil rate band of £650,000.

Example 2

The same facts as above but Mr Adam left legacies to his children of £121,000 and the remainder to his wife. No IHT was paid on his death as the legacies were within the nil rate band of £242,000 and the remainder of his estate passes to Mrs Adam which is spouse exempt.

When Mrs Adam dies on the 01 April 2010 she has her own nil rate band of £325,000 and the unused 50% of Mr Adam’s nil rate band can be added giving Mrs Adam’s estate a nil rate band of £487,500.

What do you need in order to make the claim to transfer the nil rate band?

You will need to produce

  1. Copy of the marriage certificate
  2. Copies of the death certificates
  3. Copy of the Will of the first to die and their grant of probate
  4. If they did not leave a Will a copy of the grant of letters of administration
  5. Any other evidence to show how the estate was distributed on the first death

I do not have any of the above documents – can you help?

Many people don’t as the events might have happened many years previously but we would be able to assist in obtaining the documents from the relevant public registers