Andrew and Beatrice were married for several years. When Andrew died in 2007/08, he left £90,000 to his children but did not use 70% of the £300,000 NRB. Beatrice remarried Charles who later died in 2011/12 and also failed to use 70% of his NRB. When Beatrice dies, her NRB may be increased to reflect the earlier unused NRBs of Andrew and Charles. The increase is however restricted to 100%. Accordingly, if Beatrice dies when the NRB is £325,000, then it may not be increased beyond £650,000. David and Edith were married for several years. When David died in 2007/08, he left £270,000 to his children but did not use 10% of the £300,000 NRB. Edith remarried Fergus who later died in 2011/12 and failed to use 80% of his NRB. When Edith dies, her NRB may be increased to reflect the earlier unused NRBs of David and Fergus. The increase will be 10% + 80% =90%. Accordingly, if Edith dies when the NRB is £325,000, then it may be increased to £617,500. |
IHT & Estate Planning
Transferable Nil Rate Band: the facts
Last Updated: 6 Apr 24 10 min read
Contents
1. Key Points
2. Background
3. How to claim
5. Non-exempt gifts made by the deceased in the seven years before death
6. Records which should be kept after first death
7. Surviving spouse makes a chargeable lifetime transfer (CLT)
8. Domicile
Learn the practical steps surrounding the transfer of the inheritance tax nil rate band.
Key Points
- It's possible to transfer any unused percentage of the inheritance tax nil rate band from a deceased spouse or civil partner to the surviving spouse or civil partner.
- A formal claim process is in place when the surviving spouse dies and not when the first spouse dies.
- Where there has been more than one marriage, the survivor’s NRB can never be increased by more than 100%.
- Records should be kept after first death to support the subsequent transferable NRB claim.
- Regardless of domiciled status, every individual is entitled to the full NRB. Significant changes to the current rules for non doms will apply from April 2025.
- In Autumn Statement 2022 it was announced that the existing IHT thresholds will be maintained until 5 April 2028. This maintains the NRB at £325,000, the RNRB at £175,000 and the RNRB taper starting at £2m.
Background
Since 9 October 2007, it has been possible to transfer any unused percentage of the inheritance tax (IHT) nil rate band (NRB) from a deceased spouse or civil partner to the surviving spouse or civil partner. The ‘transferable NRB’ is available to survivors of a marriage who die on or after 9 October 2007, regardless of when the first spouse died. For civil partners, the first death must have occurred on or after 5 December 2005, the date the Civil Partnership Act became law in the UK.
No transfer is possible where the first death occurs after the couple have divorced. If first death was before 1975, the full NRB may not be transferable as the amount of spouse exemption was then limited.
For the remainder of this bulletin, any references to marriage, married couples or spouses, will apply equally to registered civil partnerships and civil partners.
The transferable NRB legislation can be found in IHTA84/S8A–C.
HMRC has details of the thresholds back to 1914.
Note that this article doesn’t consider the provisions of the main residence NRB.
How to claim
A formal claim must be made when the surviving spouse dies and not when the first spouse dies. HMRC should not be contacted on first death to agree the transferable NRB.
When the claim is made after second death, the appropriate form is provided by HMRC IHT402.
The time limit for claiming is generally 24 months from the end of the month in which the surviving spouse died. Form IHT402 and the supporting documents will therefore be sent to HMRC by the personal representatives, together with IHT400, after second death.
Where the time limit is approaching, HMRC may allow the personal representatives to make a provisional claim if they are having difficulty getting all the supporting documents. In this regard note that,
- a copy of a grant of representation or confirmation and copy wills are available from the Court Service (for England & Wales, for Scotland and for Northern Ireland; and
- copy death certificates are available from the General Register Office (for England & Wales, for Scotland, and for Northern Ireland).
Where the personal representatives do not make a claim to transfer unused NRB – perhaps because there is no need to take out a grant – any other person liable for tax on the survivor’s death, for example, the trustees of a settlement or the donee of a gift, may make a claim, but only when the initial period for claim by the personal representatives has passed.
Where a valid transfer claim is made, the NRB of the surviving spouse is increased by the proportion of the NRB unused on first death. even if that person has been married on more than one occasion. The size of the estate of the first deceased is irrelevant.
For example, Janet died in 2008/09 when the NRB was £312,000. She left £156,000 to the children and everything else to her husband John who subsequently died when the NRB was £325,000
- 50% of Janet’s NRB was unused.
- John’s NRB may be increased by 50% to £487,500.
Consider also Tom who died in 2007/08 when the NRB was £300,000. The value of his estate was Nil. His surviving spouse Geraldine died when the NRB was £325,000.
- 100% of Tom’s NRB was unused.
- Geraldine’s NRB may be increased by 100% to £650,000.
More than one marriage
The survivor’s NRB can never be increased by more than 100%.
Examples of second marriage and impact on survivor’s NRB
Non-exempt gifts made by the deceased in the seven years before death
On an individual’s death, IHT is calculated in a chronological manner. Accordingly gifts made will eat into the NRB available at death and consequently reduce the amount available for transfer.
Records which should be kept after first death
After first death the personal representatives should calculate how much of the NRB is transferable, and advise the surviving spouse accordingly. Records to be kept in support of that claim may comprise of:
- a copy of the IHT200/400, IHT205 (C5 in Scotland) or full written details of the assets in the estate and their values
- death certificate
- marriage certificate
- copy of the grant of representation (Confirmation in Scotland)
- copy of the will, if there was one
- a note of how the estate passed if there was no will
- a copy of any deed of variation or other similar documents where appropriate
- any valuations of assets that pass under Will or intestacy other than to the surviving spouse or civil partner
- the value of any other assets that also passed on death (e.g. jointly owned assets, assets held in trust in which the deceased had a qualifying interest in possession and gifts made in the seven years prior to death
- any evidence to support the availability of relief (such as agricultural or business relief) where the assets pass to someone other than to the surviving spouse.
Although HMRC do not expect taxpayers to provide all this material in support of a claim, it will nevertheless be easier to make the claim if these documents are gathered.
Where the first death was many years ago, the supporting evidence may not always be available. Where records don’t exist, personal representatives are entitled to complete the claim to the best of their ability and based on the information available. Provided there is no evidence that any other assets were chargeable, HMRC can accept the claim.
Surviving spouse makes a chargeable lifetime transfer (CLT)
Consider a surviving spouse who makes a lifetime transfer into a discretionary trust exceeding the NRB. As the gift exceeds the NRB, lifetime IHT at 20% will be due on the excess. It is not possible to reduce lifetime tax payable by claiming that the NRB is higher due to a transferable NRB from first death.
Unused NRBs can only be transferred against the survivor’s estate on death.
Domicile
It is very important to be aware of the Spring Budget 2024 announcement that the government considers the concept of domicile is outdated and incentivises individuals to keep income and gains offshore. The government is therefore modernising the tax system by ending the current rules for non-doms, from April 2025. The government is introducing a new residence-based regime taking effect from April 2025.
Liability to IHT also depends on domicile status and location of assets. Under the current regime, no IHT is due on non-UK assets of non-doms until they have been UK resident for 15 out of the past 20 tax years. The government will consult on the best way to move IHT to a residence-based regime. To provide certainty to affected taxpayers, the treatment of non-UK assets settled into a trust by a non-UK domiciled settlor prior to April 2025 will not change, so these will not be within the scope of the UK IHT regime. Decisions have not yet been taken on the detailed operation of the new system, and the government intend to consult on this in due course.
In due course this article will be updated when appropriate.
The following text reflecting the current position was written prior to the Spring Budget 2024 announcement.
Regardless of domiciled status, every individual is entitled to the full NRB.
The availability of the transferable NRB where the first to die is non-UK domiciled is calculated only by reference to property that is potentially subject to UK IHT. Assets held outside the UK, by a person not domiciled, or deemed domiciled in the UK, regardless of the devolution of those assets are not taken into account when calculating the available unused NRB.
Example of first to die being a non-UK domicile
Abdul was domiciled abroad. His only asset situated in the UK was a property valued at £162,500. He left this and the remainder of his estate to his son, Jamil who lives in the UK. After the death, his wife, Soroya, moved to the UK to live with Jamil and died domiciled in the UK. The assets situated outside the UK are not liable to IHT. The UK property used up 50% of his nil rate band. So although the whole estate passed to Jamil, £162,500 was chargeable to IHT, leaving half the nil rate available for transfer on Soroya’s death. Had there been no assets subject to IHT, e.g. the sole UK asset was a foreign currency bank account, Soroya would have a full nil rate band available. |
The exemption for transfers between spouses and civil partners is restricted where the transferor is domiciled within the UK but the transferor’s spouse or civil partner is neither domiciled nor treated as domiciled in the United Kingdom. Where the transfer is on or after 6 April 2013, the exemption is limited to the NRB that applies at the date of the transfer (previously limited to £55,000).
Currently, if the entire estate passed to the surviving spouse, anything over £325,000 is a chargeable legacy. Where the net estate is above the NRB plus £325,000 there will be no NRB to transfer.
Note incidentally that Finance Act 2013 contains provisions which allow a person who is not domiciled in the UK, but is, or has been, married to or in a civil partnership with another person who is domiciled in the UK, to elect to be treated as if they were domiciled in the UK.
If no election is made, and the net estate is less than the NRB plus £325,000, there will still be an amount of NRB available to transfer. This example shows how both the amount that the net estate is below the nil rate band, and limited spouse exemption combine to produce the amount of nil rate band available to transfer.
Example of second to die being a non UK domicile
Oscar died in 2015/16. He left an estate worth £617,500 all to his wife Petra who is domiciled in Sweden. NRB in 2015/16 of £325,000 + the limited spouse exemption of £325,000 = £650,000. £32,500 of NRB was unused £32,500 / £325,000 = 10% On Petra’s death, the NRB on her death would be uprated by 10%. This approach will be appropriate where:
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