Inheritance tax

The law allows you to leave an estate worth up to £300,000 (2007/2008) without having to pay any Inheritance Tax upon it. This £300,000 is called the 'Nil Rate Band'. After the first £300,000, or the Nil Rate Band, the remainder of your estate will be charged 40% Inheritance Tax.

From 9 October 2007, spouses and civil partners can transfer their Nil Rate Band allowances so that any part of the Nil Rate Band that was not used when the first spouse or civil partner died is transferred to the individual's surviving spouse or civil partner for use on their death.

The transferable allowance is available to all survivors of a marriage or civil partnership who die on or after 9 October 2007, no matter when the first partner died/dies.

The increased Nil Rate Band does not replace the single Nil Rate Band available to the survivor that determines whether or not their estate is an excepted estate.

How the transfer will work

Where a valid claim to transfer unused Nil Rate Band is made, the Nil Rate Band that is available when the surviving spouse or civil partner dies will be increased by the proportion of the Nil Rate Band unused on the first death. For example, if on the first death the chargeable estate is £150,000 and the Nil Rate Band is £300,000, 50% of the Nil Rate Band would be unused. If the Nil Rate Band when the survivor dies is £325,000, then that would be increased by 50% to £487,500.

The amount of the Nil Rate Band that can be transferred does not depend on the value of the first spouse or civil partner's estate. Whatever proportion of the Nil Rate Band is unused on the first death is available for transfer to the survivor.

Examples of how the new rules will work

Example 1

A dies on 14 April 2007 with an estate of £400,000, which he leaves entirely to his spouse, B. B dies on 17 June 2009 leaving an estate of £600,000 equally between her two children. When B dies the Nil Rate Band is £325,000. As 100% of A's Nil Rate Band was unused, the Nil Rate Band on B's death is doubled to £650,000. As B's estate is £600,000 there is no IHT to pay on B's death.

Example 2

J dies on 27 May 2007, with an estate of £300,000. She leaves legacies of £40,000 to each of her three children with the remainder to her spouse K. The Nil Rate Band when J dies is £300,000. K dies on 15 September 2009 leaving his estate of £500,000 equally to his three children; the Nil Rate Band when K dies is £325,000. J used up 40% of her Nil Rate Band when she died, which means 60% is available to transfer to K on his death. So K's Nil Rate Band of £325,000 is increased by 60% to £520,000. As K's estate is only £500,000 there is no IHT to pay on K's death.

Example 3

R dies on 14 April 2007 with an estate of £450,000, which he leaves entirely to his spouse, S. S dies on 17 June 2009 leaving an estate of £675,000 which she leaves equally between her two children. When S dies the Nil Rate Band is £325,000. As 100% of R's Nil Rate Band was unused, the Nil Rate Band on S's death is doubled to £650,000. This leaves £25,000 chargeable to IHT on S's death.

The proposed changes will not become law until the Finance Act 2008 receives Royal Assent, probably in mid-Summer 2008, albeit that the legislation will have retroactive effect from 9 October 2007.

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