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T84 - What happens when we die? – Part 2

(This article appeared in The July 2010 issue of "The Probe" 

This month we look at the Nil Rate Band and how this affects you whether you die intestate or have made a Will.

 Firstly, you really should make a Will. If you do not, your estate will be distributed by the rules of intestacy covered last month and if none of the people the rules list as being able to benefit are alive, it all goes to the Crown! If you die intestate, an administrator will handle your estate  and be responsible for paying any IHT from your estate and once that is done, your estate would be distributed according to the these rules. Now, these rules are not everyone’s cup of tea. For example if you have been living with the same partner for 30 years but are not married or in a civil partnership, you have an older brother you can’t stand and see only at Christmas, and you don’t have any children and your parents have passed away, your estate can go to your siblings and not your partner!  

Inheritance Tax (IHT) is 40% on the estate after the Nil Rate Band (NRB) and there is no IHT on leaving assets to your spouse or civil partner (provided both are UK domiciled for IHT).

 Previously, you used to have to do a bit of tax planning to ensure this was used tax efficiently as if someone left their estate to their spouse/civil partner on the first death and then to the children on the second death, the first to die is wasting their NRB.

 Example:

Mr and Mrs Smith have a joint estate of £650,000. Mr Smith dies and leaves everything to his wife (IHT free). Then Mrs Smith dies and leaves the whole £650,000 (assuming no change) to their children. Only her NRB is available so the excess over £325,000 is taxable at 40%.

 If they had planned better, Mr Smith could have left £325,000 to is children when he died (using his NRB) with the rest to Mrs Smith (IHT free) and she could then leave her £325,000 to the children when she dies, using her NRB. If no free assets available, a “smart” Will to this effect could have been written.

In October 2007 the government introduced new legislation which meant that spouses and civil partners could transfer their spouse’s or civil partner’s unused NRB to them. This makes things easier from an administration point of view but the effect is even better than if one had planned as it gives relief at the rate of NRB on second death (usually higher), rather than at the first death (usually lower) which is what could happen if you plan.

 The transfer of NRB must be claimed on the second death, so when Mrs Smith finally shuffled off, her children would have a period of up to 2 years to make a formal claim to have her deceased spouse’s NRB transferred to her. She would then have two NRBs to use against the estate. The maximum extra NRB that can be claimed is one in addition to your own, so if Mrs. Smith had had a few deceased husbands (each dying in mysterious circumstances perhaps?!), each with unused NRB, the most she could have is one extra NRB. When transferring NRB you must always apply the unused proportion to the NRB in force at the second death. So, if a spouse died many decades ago when the NRB was only £100, if making a claim today (proving it might be difficult due to the documentation required) to transfer his unused NRB, it would be the unused proportion of the NRB on first death, multiplied by today’s NRB.

 There are many other things that can be done to claim for IHT, involving all sorts of strategies, but this is for another day….

  

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This web-site was last updated on 23/04/2012

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