Kirkham Legal Logo
View more blogs

Inheritance Tax – the importance of spouses understanding the nil-rate band

We recently met with a client who was interested in giving away her house to her children, and upon discussing matters further with her, it became apparent that she was only considering this significant step because she was concerned about the amount of Inheritance Tax that her children would ultimately pay upon her death.

Of course, the individual circumstances of each client differ, but with this client, it soon became clear that she had nothing to worry about and could avoid the potentially problematical situation of giving away her house.  The reason for this is that she had not been aware of the changes that had been introduced by the Finance Act 2008 relating to the transfer of any unused Inheritance Tax nil-rate band between spouses.

Currently, each individual has a nil-rate band of £325,000.00, which simply means that if you die with an estate under that figure then Inheritance Tax is not payable. If your estate exceeds £325,000.00, then only anything above £325,000.00 is taxed, currently at the rate of 40%.  There are other exceptions and reliefs, such as the one exempting transfers between spouses or civil partners from IHT.

In this case, the lady’s husband had already passed away, leaving his estate to her.  Whilst her estate was now valued at considerably more than £325,000.00, we were able to advise that, as her total estate was less then £650,000.00 there would not be any IHT payable by her children on her estate at her death (subject of course to her estate not increasing further in value).  The reason for this is that the basic tax-free threshold available when a wife, husband or civil partner dies can be increased to as much as £650,000.00 if none of the initial £325,000.00 threshold was used when the first of the couple died.  If the first to die used up part of his or her basic threshold (for example by leaving some legacies to his or her children before leaving the balance to their spouse), then the threshold that is available to their estate is increased by the percentage of the threshold that was not used when the first person died.

The transfer of the unused nil-rate band from a deceased spouse or civil partner, irrespective of the date of death of the first to die, may be made to the estate of the surviving spouse or civil partner if they die on or after the 9th October 2007.

The executors of the estate of the second to die must claim to transfer the unused basic threshold, so it is important that, if these circumstances may be pertinent to you, that you are aware of these rules, as otherwise a significant amount of unnecessary IHT may end up being paid.  We therefore advise our client to keep details of the estate of the first to die, for future use.  This should include a copy of the death certificate, the grant of probate (if one was obtained) and details of and the value of assets passing at that time.  The claim is made by the Executors at the same time they apply for the Grant of Probate or Letters of Administration, and is done by completing an additional form.

Interestingly, this relief is not available to people who cohabit so, unless they plan to get married, such a couple should consider other possible ways of minimising their potential tax liability upon death.

If any of the above is of relevance to you, then please do not hesitate to contact us at Kirkham Legal to discuss.

We are regulated by the CLC

Our Practice Licence Number is 11250.

Kirkham Legal

Kirkham Legal