Mark McLaughlin points out that inheritance tax nil rate bands can sometimes be multiplied - or lost inadvertently.
It is said that inheritance tax (IHT) is the UK’s most hated tax. Nevertheless, the transferable nil rate band (TNRB) is a welcome facility for married couples or civil partners (references to spouses in this article include civil partners).
The TNRB provisions (IHTA 1984, ss 8A-8C) broadly allow claims for all or part of an unused IHT allowance (or ‘nil rate band’ (NRB)) on the death of a spouse to be transferred to a surviving spouse.
Extra (‘residence’) NRB is also potentially transferable; for example, where the family home is passed on death to the surviving spouse. However, this article focuses on the ‘standard’ NRB.
The surviving spouse’s NRB can be increased by up to 100% (i.e. a maximum of one additional NRB). The percentage increase is applied to the NRB in operation on the death of the surviving spouse (e.g. £325,000 for 2020/21), so a maximum NRB of £650,000 is available on the surviving spouse’s death.
In order to make a claim to transfer unused NRB, the surviving spouse must have been married to the deceased on the first death (i.e. earlier divorce would prevent a claim to transfer the deceased's NRB).
If someone has been married more than once, and their deceased spouses did not use up their NRBs on death, the survivor’s estate can make a claim in respect of each previous spouse.
However, as mentioned the NRB of the surviving spouse can only be increased by 100%, or one additional NRB.
Popping the question?
In certain circumstances, an unmarried couple may have up to four NRBs available between them.
For example, an unmarried couple (Fred and Ginger) have both been married previously and were widowed. A TNRB may be available to Fred and Ginger from their deceased spouses. By remaining unmarried and leaving their estates to chargeable legatees (e.g. the survivor on the first death), it may be possible to utilise their own NRB, plus the transferred NRB of their deceased spouse. That potentially makes a combined total of four NRBs overall (i.e. £1.3 million).
On second thoughts…
However, what if Fred and Ginger decided to get married? A further unused NRB would arise on the first death. However, if Fred died first, his NRB could not be transferred to Ginger, because her maximum NRB entitlement had already been reached (i.e. her own NRB, plus the TNRB from her first spouse). Fred’s TNRB entitlement from his first marriage could not be transferred to Ginger either.
If Fred and Ginger did get married, consideration could be given to drafting their wills differently. For example, instead of leaving their estates to each other, they could consider leaving legacies to chargeable beneficiaries instead (e.g. to their children) on the first of Fred or Ginger to die, sufficient to use the deceased's NRB plus the TNRB from the individual’s first marriage.
Alternatively, if (for example) Fred died after they were married and left his entire estate by will to Ginger, it may be possible to achieve the same result if the will was varied within two years of his death (under IHTA 1984, s 142).