Transfer of nil rate band to surviving spouse
Written by Ray Coman
When a person passes away, the estate is valued for inheritance tax purposes. The excess of chargeable estate over the nil rate band is charge to inheritance tax. At the time of writing the nil rate band is £325,000 and inheritance tax is 40%. However, certain transfers are outside exempt from inheritance. These include transfers to a charity and transfers to a spouse. The unused part of the nil rate band is available for use by the surviving spouse.
The most common situation in which transfer of nil rate band occurs is when most or all assets are gifted to the surviving spouse on death. Since the gifts are covered by the spousal exemption, the nil rate band is left intact. Let us say that someone leaves cash of £200,000 and property is worth £850,000 to the surviving spouse in the will, and makes small dispositions totalling £50,000 to other family members. An exempt amount of (£325,000 less £50,000) £275,000 has not been used by the deceased. On the death of the surviving spouse the available nil rate band is (£325,000 plus £275,000) £600,000. The transfer rule was introduced to prevent the practice of artificial and other Trust arrangement to prevent wastage of nil rate band.
If the nil rate band has increased between the date of the transferor’s death and the transferee’s death, the unused amount is increased in proportion to the increased in the nil rate band. Continuing the same example, let us say that the nil rate band had increased to £400,000 by the time that the second spouses passes away, the transferred nil rate band would be (275,000 x 400/325, or) £338,462.
It is a requirement for the surviving spouse to have died on or after 9 October 2007. However, there is no requirement for the second of the pair to have passed away after a specific date. The unused nil rate band transfers even if the surviving spouse remarries.